ABA Consumer Protection January 2007 Update

1. ABA Consumer ProtectionJanuary 2007 Update Davis Wright Tremaine LLP Alan Middleton Maurita Coley Ronnie London

2. Agenda • FTC Update • State Attorneys General Update • Private Litigation Update • National Advertising Division Update

3. FTC Update: Health Products • Settlement with four weight-loss pill marketers reported last month • Xenadrine EFX, CortiSlim/CortiStress; TrimSpa; One-A-Day WeightSmart • Further implementation

4. FTC Update: Debt consolidation • Leshin d/b/a Express Consolidation • Action filed January 8 in S. District of Florida • Alleged violations of FTC Act and Telemarketing Sales Rule • False claim to nonprofit status; fees misrepresented; claimed savings overstated; claim to improve credit unsubstantiated

5. FTC Update: “Free” Software CDs • FTC v. Think All Publishing (E.D. Tex.) • Marketing practices of internet operation that advertised “free software CDs” but billed consumers’ credit cards for them without authorization • Free CD • Additional CDs; fee charged if not returned within 10 days • “Continuity program” • FTC charged violation of FTC Act and Unordered Merchandise Statute • Magistrate recommends entry of preliminary injunction

6. FTC Update: Dietary Supplements • 2000 FTC order requiring Lane Labs, Inc. and its officers to have competent and reliable scientific evidence to substantiate ad claims and prohibiting deceptive claims about tests, studies, or research (D. N.J.) • 2007 action for civil contempt, same case • FTC charges defendants violated order by claiming dietary supplement “Fertil Male” enhanced male fertility • Also charges defendants violated order by claiming AdvaCAL, a calcium supplement also sold as AAACa, is superior to other calcium products and on par with or superior to prescription drugs used to fight osteoporosis • Action contends claims are based on flawed scientific studies

7. FTC Update: CDs • Sony BMG Music Entertainment • Sold CDs without telling consumers that CDs: • Contained software limiting devices on which the music could be played • Restricted number of copies that could be made • Contained technology that monitored listening habits to send them marketing messages • Software also exposed consumers to significant security risks and was unreasonably difficult to uninstall • Settlement: • Requires Sony BMG to clearly disclose limitations on consumers’ use of music CDs • Bars Sony BMG from using collected information for marketing • Prohibits installation of software without consumer consent and requires Sony BMG to provide means of uninstalling software • Requires Sony BMG to allow consumers to exchange the CDs through June 31, 2007, and to reimburse consumers up to $150 to repair damage to their computers

8. FTC Update: X-Rated Spam • 2005 lawsuit against TJ Web Productions (D. Nev.) • Alleged violations of FTC’s Adult Labeling Rule and CAN-SPAM Act • Rule and Act require commercial e-mailers of sexually explicit material to use phrase “SEXUALLY EXPLICIT:” in the subject line • Also to ensure that the initially viewable area of the message does not contain graphic sexual images • Rule and Act also require that unsolicited commercial e-mail contain opportunity for consumers to opt out • Settlement includes injunctive relief and payment of $465,000 civil penalty

9. FTC Update: Franchises • Updated Franchise Rule • Closer alignment with state disclosure laws, UFOC Guidelines • Greater disclosure to franchise purchasers than UFOC: • Lawsuits filed by franchisor against franchisees • Franchisor’s use of “confidentiality clauses” in lawsuit settlements • Warning when there is no exclusive territory • Clear explanation of “renewals” • Trademark-specific franchisee associations • Less disclosure than UFOC: • No “risk factors” • No franchise broker information • No extensive information about computer system franchisee must purchase

10. FTC Update: Nursery Guides • FTC retains Guides for the Nursery Industry substantially unchanged • Promulgated in 1979; amended • FTC undertook cost/benefit review • Notice published in Federal Register retaining Guides substantially unchanged

11. FTC Update: Endorsement Guides • FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising • Comments sought on • Costs/benefits, conflicts with other laws, impact of changes in technology • FTC-commissioned studies on effect of consumer testimonials in context of dietary supplements • Consumer expectations regarding celebrity compensation • Comments due March 19

12. FTC Update: Appliance Labeling • Seeking comments on proposed amendments to the Appliance Labeling Rule (16 CFR Part 305) • Proposed amendments include new design for the EnergyGuide label and changes to labeling requirements for heating and cooling equipment

13. FTC Update: Amicus Briefs I • Leegin Creative Leather Prods., Inc. v. PSKS, Inc. (US S. Ct.) • Joins DOJ in urging that all vertical minimum resale price maintenance agreements be judged under rule of reason • Urges overruling of Dr. Miles

14. FTC Update: Amicus Briefs II • Credit Suisse First Boston v. Glen Billing (US S. Ct.) • Class action alleging agreement to require payment of additional fee for allocation of IPO shares • Clash of securities and antitrust laws • District Court dismissed based on implied antitrust immunity; Court of Appeals reversed, narrowly construing immunity • FTC joins DOJ in arguing that proper result falls between trial and appellate courts, that securities laws shield collaborative conduct “specifically authorized” and “inextricably intertwined with permitted collaboration”

15. State AG Update: Bayer Corp. • Thirty-state settlement with Bayer Corp. • Allegations that Bayer did not adequately disclose safety problems associated with its product, Baycol, a drug used to lower cholesterol (withdrawn from market in 2001) • Settlement bars Bayer from making false and misleading claims about its products and requires Bayer to pay total of $8 million to settling states

16. State AG Update: Refund Loans • California AG settled claims against Jackson Hewitt, Inc., nation’s second-largest tax prep firm • Alleged violation in marketing high-cost refund anticipation loans (RALs) mainly to low-income customers • Inadequately disclosed fees forced some consumers to pay interest exceeding 200 percent • Failure to characterize advances as “loans” • Misleading consumers into believing they would receive cash quicker than simply waiting for IRS refund • Settlement requires Jackson Hewitt to pay $5 million, including $4 million in consumer restitution

17. State AG Update: Internet Age Verification • Connecticut AG calling for MySpace age verification • Claims coalition of 39 states; Kansas AG refers to MySpace Multi-State Working Group • Plans unclear; undefined legal action threatened

18. State AG Update: Debt Collection • Illinois AG filed suit against two debt collection services, Arrow Financial Services and Leading Edge Recovery Solutions • Alleges violations of Illinois Consumer Fraud and Deceptive Business Practices Act • Attempts to collect on time-barred debts • Attempts to collect on debts discharged in bankruptcy or settled • Abusive practices including use of profanity, failure to provide proof of debt, contacting debtors’ families and workplaces, withdrawal of money without authorization from debtors’ accounts, misrepresenting consequences if consumers failed to pay

19. State AG Update: Online Diplomas • Indiana AG filed suit against noveltyworksdegrees.com • Alleged sales of fake diplomas, transcripts

20. State AG Update: Cellphone Spam • Illinois AG filed lawsuit against C & C Global Enterprises, www.resortsellers.com, others • Alleges defendants sent millions of unsolicited text messages to Illinois consumers and wireless phones across the country • Illinois residents received receiving unsolicited text messages alerting them that “We have someone interested in buying or renting your Time Share” and directing the recipient to logon to www.webuyresorts.com or www.resortsellers.com for more information • Violation of the federal Telephone Consumer Protection Act and the state Consumer Fraud and Deceptive Business Practices Act

21. State AG Update: Annuities • Minnesota AG filed suit against Allianz Life Ins. Co. • Allianz allegedly sold deferred annuities to senior citizens that were unsuitable for their financial needs • Allegedly failed to disclose that seniors could have limited savings tied up for 15 years, could not cash in annuities early without paying hefty surrender penalties, and payments advertised as “immediate” bonuses were not payable for up to 15 years

22. State AG Update: Katrina Insurance • Mississippi AG announced settlement with State Farm • Settlement terms: • Full disclosure of claim files • Independent reevaluation of claims • Minimum offer on slabs • Pay costs of arbitration • Provide annual notice clearly explaining that storm surge is not covered

23. Private Litigation Update – Decisions • Medtox Scientific v. Tamarac Medical and ESCA Tech., 2007WL37793 (D. Mn. Jan. 4, 2007) • Provider of lead testing supplies for blood tests Medtox sought P.I. against ESCA, manufacturer of patent-pending “D-Lead” waterless soap and “D-Wipes” that remove lead from skin before blood tests, and Tamarac, distributor of D-Lead/D-Wipes under exclusive license from ESCA • Medtox alleged Tamarac references to patent application in ads and communications unfairly suggested no other company could market D-Lead and D-Wipes, even though Medtox occasionally uses D-Lead and D-Wipes when required by its customers • D. Minn. granted preliminary injunction, holding that: • Though Tamarac/ESCA license granted exclusive contract right, pending patent application cannot confer monopoly on Tamarac • Accordingly, statements that rights of exclusivity are protected by patent application are false and inclusion of “U.S. patent applied for” directly following exclusivity claims are false by implication

24. National Advertising Division Update • Isomil Advance • Nestle challenged claims by Abbott Laboratories subsidiary Ross Products about Isomil Advance baby formula that: • it made babies go from crying, gassy and uncomfortable to smiley, happy and satisfied, and reduced fussiness, gas and spit-up, in three days • no other formula has been shown to relieve symptoms faster • clinical evidence supported the claims • NAD subjected claims to “careful scrutiny” due to formula possibly being sole source of nutrition for end-user (babies) and vulnerability of target audience (parents of infants)

25. National Advertising Division Update • Isomil Advance (cont’d) • NAD noted ads’ main claim that symptoms will be eliminated contradicted establishment claim that switch to Isomil would reduce symptoms and package disclaimer that symptoms may be from causes other than formula • While NAD found test subjects of proper age and enrolled based on doctor recommendations for formula switch, study was flawed and insufficient for strong performance claims: • Ross did not test advertised product but rather prior formulations • Studied symptoms more severe than those highlighted in ads and not representative of most babies • No testing of competing brands despite references to them • NAD recommended Ross discontinue claims and though Ross disagreed, it will follow out of “respect” for NAD and the self-regulatory process

26. National Advertising Division Update • CherryPharm All Natural Cherry Tart Juice • As part of “ongoing monitoring program,” NAD challenged CherryPharm, Inc. online claims that it: • facilitated “less muscle damage, less pain, faster recovery” • is “scientifically shown” to reduce pain and strength loss • has a “unique formulation” that “predicts” inflammation and targets it for relief “pro-actively and re-actively” • has cherries that are “nature’s pain relief” without side effects • CherryPharm updated website to bifurcate claims: those related to cherries and those pertaining to the product

27. National Advertising Division Update • CherryPharm All Natural Cherry Tart Juice (cont’d) • NAD found that, once claims about cherries and CherryPharm were separated, that: • studies provided reasonable basis for claims about reducing pain- and strength-loss and recovery from intensive exercise • evidence did not support “prevents muscle damage” claim • while there have been interesting findings regarding cherries and/or cherry juice generally, claims regarding pain relief and anti-inflammation effects were over-stated • In response to NAD suggestion to discontinue unsupported claims, CherryPharm expressed commitment to compliance with ad laws and to ensuring “marketing of all cherry industry products adhere to the same . . . high standards”

28. National Advertising Division Update • NFL Network • CSC Holdings, Inc. (Cablevision) challenged printed claims by NFL that viewers will miss live and/or playoff-critical games if they do not subscribe to the NFL Network, arguing the NFL: • Overstated number of missed games as NFL Network carries only one a week not otherwise aired on broadcast or ESPN • Failed to account for local broadcast carriage that airs even if game otherwise is restricted to NFL Network • Predicted late-season games would be significant to playoffs when that could not be known at time ads appeared

29. National Advertising Division Update • NFL Network (cont’d) • NAD determined claims were truthful but additional qualifying information, provided in newspapers but not other peripherals (door-hangs, mailers, etc.) was necessary to make them so • Claim citing missed games was truthful and accompanied by detailed disclosure of games restricted to NFL Network • Where disclosure of NFL Network schedule not accompanied by statement of local simulcast possibility, suggesting all NFL Network games would be missed was misleading • Games status as “best” and playoff relevance are subjective and not susceptible to objective meaning or substantiation • NFL had already discontinued peripherals and will take NAD recommendations into account in future advertising

30. National Advertising Division Update • Extra Strength Tylenol Rapid Release Gels • Wyeth Consumer Health Care challenged claims by McNeil Consumer Health Care that: • Laser-cut holes in Rapid Release Gels are “one of the biggest breakthroughs in pain relief” and represent the “latest technology” • Development allows medicine to be released from the pill into user’s system to reach pain “faster than ever before” • NAD held “main message” was Rapid Release Gels provide faster pain relief rather than just more rapid release but tests proved only the latter, not the former • Claims that comparison was to only other Tylenol gel-coated products, not all Tylenol or pain-relief, was not evident • Touting “breakthrough” and “latest” technology supported, but should limit as compared to other gel-coated Tylenol

31. National Advertising Division Update • Pledge Anti-Dust formula • Colgate-Palmolive (maker of Murphy Soft Wipes) challenged S.C. Johnson’s claims that Pledge’s “anti-dust formula” keeps wood less dusty longer and allows for less frequent dusting • NAD determined that two studies S.C. Johnson conducted (one on wood, the other on a variety of surfaces) measured Pledge’s effect on the appearance of dustiness, not its ability to actually remove dust, and thus were insufficient to support claims relating to the actual amount of dust on surfaces • S.C. Johnson disagreed with NAD assessment as to the what the claims implied but agreed to take findings into account for future ads and toe make modifications in accordance with NAD recommendations to discontinue the claims

32. National Advertising Division Update • Shout Stain Remover • Reckitt Benckiser (maker of Spray ‘n’ Wash) challenged S.C. Johnson’s claims that Shout is better on “greasy” stains • NAD found S.C. Johnson’s testing was sufficient to support a claim that Shout removes more stains better than Spray ‘n’ Wash, but dramatically overstates its superiority with respect to “greasy” stains • S.C. Johnson indicated its appreciation that NAD affirmed the ability to advertise Shout as superior to Spray ‘n’ Wash and, while disagreeing with NAD’s conclusions regarding “greasy” stain claims, stated its support of the self-regulatory process and willingness to take NAD concerns into consideration for future advertising

33. National Advertising Division Update • Cortaid Advanced 12-Hour Anti-Itch Cream • Pfizer Inc. (maker of Cortizone-10 1% hydrocortisone cream) challenged Johnson & Johnson’s claims that that Cortaid works for 12 hours, that no other OTC hydrocortisone cream did so, that Cortaid is strongest available without prescription, and that Cortaid includes “major scientific breakthrough” that makes it superior to other OTC hydrocortisone creams • NAD determined that results of controlled, randomized, investigator-blinded, head-to-head study of more than 70% of OTC cortisone creams provided reasonable basis for J&J’s claims regarding Cortaid

34. National Advertising Division Update • Dyson, Inc. • Euro-Pro challenged Dyson claims that its vacuum cleaners never lose suction have no loss of suction and “no clogging” and Dyson’s video on Youtube.com comparing Dyson vacuums to Euro-Pro’s Shark Infinity, Hoover’s Windtunnel and Kenmore's Progressive vacuums • NAD closed case because claims were subject to litigation were subject to pending litigation and Dyson had permanently discontinue used of the challenged Youtube video

35. National Advertising Division Update • Spitz Sunflower Seeds • ConAgra Foods challenged Spitz’s claims of status as “#1 sunflower seed” and being “all-natural” • ConAgra claimed its David brand sunflower sees were #1 in sales and volume share, and certain Spitz ingredients were not natural under informal FDA policy • Spitz refused to participate in NAD self-regulatory forum • NAD referred to FTC and FDA