Category: Antitrust & Trade Regulation

DOJ, FTC Announce New Antitrust Guidance for Recruiting and Hiring; Criminal Enforcement Possible

handcuffs, criminal enforcementMany companies—and the HR professionals and other executives who worked for them—have found out the hard way that business-to-business agreements on compensation and recruiting can violate the antitrust laws and bring huge corporate and personal penalties.

Last week, the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ) jointly issued antitrust guidance for anyone who deals with recruiting and compensation. The guidance is written for HR professionals, not antitrust experts. It avoids jargon and applies antitrust basics in plain English. It expands on those basics by providing short and direct answers to real-life questions.

The guidance comes in the wake of several actions in recent years by the federal antitrust agencies against so-called “no-poaching” or “wage-fixing” agreements entered by companies competing for the same talent. It announces that DOJ will prosecute criminally some antitrust violations in this space. While the new guidance is explicitly aimed at HR professionals, senior executives should understand it as well.

The guidance starts with the basics: The antitrust laws establish the rules for a competitive marketplace, including how competitors interact with each other. From an antitrust perspective, firms that compete to recruit or retain employees are competitors, even if they do not compete when selling products or services. Therefore, agreements among employers not to recruit certain employees (no-poaching) or not to compete on various terms of compensation (wage-fixing) can violate the antitrust laws.

To be illegal, these agreements need not be explicit or formal. Evidence of exchanges of information on compensation, recruiting, or similar topics followed by parallel behavior can lead to an inference of agreement. Intent to lower a company’s labor costs is no defense. Also, there is no “non-profit” defense: while they might not compete to sell services, non-profits are considered competitors for the staff they hire.

The potential costs of antitrust violations are huge: fines by the agencies; treble damages for injured actual or potential employees; and intrusive regulation of basic company operations from consent decrees and judgments. In addition, the DOJ used this guidance to announce that it will now prosecute criminally any naked wage-fixing or no-poaching agreements. According to DOJ, these naked agreements—“separate from or not reasonably necessary to a larger legitimate collaboration between the employers”—harm competition in the same irredeemable way as hardcore price-fixing cartels. So now, any executives involved in such agreements—whether HR professionals or not—face personal consequences, including threats of potential jail time.

Even unsuccessful attempts to reach an anticompetitive agreement on these topics can be illegal in the eyes of the regulators. As the guidance makes clear, so-called “invitations to collude” have been and will continue to be pursued by the FTC as actions that might violate the Federal Trade Commission Act.

Some of these information exchanges and agreements do not automatically violate the antitrust laws and there is nothing in this new guidance that suggests otherwise. If the agreements are reasonably necessary to an actual or potential joint venture or merger, legitimate benchmarking activity, or other collaboration that might help consumers, their net effect on competition would need to be judged. In prior actions, the agencies also have recognized as legitimate certain no-poaching clauses in agreements with consultants and recruiting agencies. Even such common uses as employment or severance agreements might not run afoul of the antitrust law’s prohibitions.

The guidance does not—and really cannot—go into all the detail necessary to determine when any particular effort will pass antitrust muster. It does refer readers to the earlier Health Care Guidelines but those helpful tips relate only to information exchanges. The guidance also provides links to the many prior civil actions taken by the agencies on these types of matters. It is accompanied by a two-sided index card entitled Antitrust Red Flags for Employment Practices that could be part of an effective compliance program.

ARTICLE BY Steven J. Cernak of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

OFAC Allows Joint Medical Research with Cuba

OFAC Medical ResearchThe Department of the Treasury, Office of Foreign Assets Control (OFAC), has modified the Cuban Assets Control Regulations (CACR) (31 C.F.R. Part 515) to allow joint medical research between persons subject to U.S. jurisdiction and Cuban nationals. In the context of the CACR, a “person subject to U.S. jurisdiction” includes any non-U.S. entity owned or controlled by a U.S. person or company directly or indirectly.

It is important to note that the focus of this rule is the development and sale of Cuban origin pharmaceutical products into the United Sates and not the sale of U.S. origin products into Cuba. The changes published today have no impact on the sale of U.S. origin pharmaceutical products into Cuba, and the modified rules do not eliminate the need for sales into Cuba to be licensed by the U.S. Department of Commerce and/or the Department of the Treasury.

As a result of this rule change, effective October 17, 2016, U.S. pharmaceutical companies and their foreign subsidiaries, as well as U.S. nationals, are authorized to engage in various types of transactions “incident to obtaining approval from the U.S. Food and Drug Administration (FDA) of Cuban origin pharmaceuticals, including discovery and development, pre-clinical research, clinical research, regulatory review, regulatory approval and licensing, regulatory post-market activities, and the importation into the United States of Cuban-origin pharmaceuticals,” as well as the “marketing, sale, or other distribution in the United States of FDA-approved Cuban-origin pharmaceuticals, including the importation into the United States of Cuban-origin pharmaceuticals.”

In its most recent Portfolio of Opportunities for Foreign Investment, Cuba identified the biotechnology and pharmaceutical sector, where BioCubaFarma has been producing vaccines and drug products for years, as one of the targets of foreign investment through strategic partnerships. Specifically, the Cuban government stated that it was promoting joint R&D projects, distribution and representation arrangements and technology transfer arrangements that complemented domestic projects in the sector. This week’s changes to the CACR will facilitate participation in these types of investments and activities in Cuba by U.S. companies.

ARTICLE BY Joan Koenig & Mollie D. Sitkowski of Drinker Biddle & Reath LLP

©2016 Drinker Biddle & Reath LLP. All Rights Reserved

Election 2016: Trump on Antitrust

Donald Trump AntitrustWhile antitrust policy and enforcement has not received much attention from Donald Trump on the campaign trail, Mr. Trump has made a few notable statements regarding antitrust law that provide hints as to potential antitrust enforcement priorities for a Trump administration. Mr. Trump’s history as both a plaintiff and defendant in antitrust litigation is also notable and unprecedented.

In his 2011 book Time to Get Tough: Making America #1 Again, Mr. Trump addressed the Organization of the Petroleum Exporting Countries (OPEC) specifically in the context of antitrust law. Under the heading “Sue OPEC” Mr. Trump wrote:

We can start by suing OPEC for violating antitrust laws. Currently, bringing a lawsuit against OPEC is difficult. . . . The way to fix this is to make sure that Congress passes and the president signs the “No Oil Producing and Exporting Cartels Act” (NOPEC) (S.394), which will amend the Sherman Antitrust Act and make it illegal for any foreign governments to act collectively to limit production or set prices. If we get it passed, the bill would clear the way for the United States to sue member nations of OPEC for price-fixing and anti-competitive behavior. . . . Imagine how much money the average American would save if we busted the OPEC cartel.

More recently, in a May 2016 interview with Sean Hannity, Mr. Trump made a notable reference to antitrust law in connection with a discussion of Jeff Bezos and Amazon:

[Jeff Bezos is] using the Washington Post for power so that the politicians in Washington don’t tax Amazon like they should be taxed. He’s getting absolutely away. He’s worried about me and he’s, I think he said that to somebody, it’s in some article, where he thinks I would go after him for antitrust, because he’s got a huge antitrust problem because he’s controlling so much, Amazon is controlling so much of what they’re doing. And what they’ve done is, he-he bought this paper for practically nothing, and he’s using that as a tool for political power against me and against other people and, I’ll tell you what, we can’t let him get away with it. . . . So what they’re doing is that he’s using that as a political instrument to try and stop antitrust, which he thinks I believe he’s antitrust, in other words what he’s got is a monopoly and he wants to make sure I don’t get in. So, it’s one of those things. But I’ll tell you what, I’ll tell you what, what he’s doing is wrong and the people are being, the whole system is rigged – you see a case like that, the whole system is rigged. . . he’s using the Washington Post, which is peanuts, he’s using that for political purposes to save Amazon in terms of taxes and in terms of antitrust.

In addition to his statements, there is also Mr. Trump’s personal history as an antitrust litigant to be considered. In January 2016, former FTC Chairman Bill Kovacic was quoted as observing that “Donald Trump is the only presidential candidate in my lifetime to be a plaintiff in an antitrust case.

Indeed, as detailed in the American Bar Association’s Antitrust Source earlier this year, Mr. Trump was involved in three significant antitrust proceedings in the late 1980s and early 1990s. First, in 1988, Mr. Trump paid a $750,000 civil penalty to settle charges brought by the US Department of Justice (DOJ) and Federal Trade Commission (FTC) that he had violated the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) by acquiring stock in two companies without making timely HSR filings. Around the same time, Mr. Trump, as one of the owners of the New Jersey Generals US Football League team, was involved in a private antitrust suit against the National Football League (NFL)—a case that resulted in a jury verdict that the NFL had willfully acquired or maintained monopoly power in a market consisting of major league professional football in the United States, in violation of Section 2 of the Sherman Act. Damages of $1, trebled to $3, were awarded. US Football League v. Nat’l Football League, 842 F.2d 1335 (2d Cir. 1988). Finally, Mr. Trump, in connection with his Atlantic City casinos, was sued by Boardwalk Properties, Inc. on numerous grounds including allegations that he had attempted to monopolize casino gambling and had conspired to suppress competition. After a lengthy legal battle, Mr. Trump prevailed.

While we can only speculate as to how a Trump administration would approach antitrust policy and enforcement, Mr. Trump’s commentary regarding Amazon suggests that he would not be shy about pressing for aggressive investigation and potential enforcement action against those he perceives to be running afoul of antitrust laws. While it appears likely that Amazon would find itself under the microscope of a Trump administration, it is unknown whether Mr. Trump would direct enforcement towards other particular domestic companies or industries. It is also uncertain if Mr. Trump would maintain the Obama administration’s increased rate of merger challenges.

With respect to international enforcement, Mr. Trump’s comments on OPEC, coupled with his campaign focus on trade issues, suggest that he would be in favor of aggressive antitrust enforcement actions focused on foreign companies—and, potentially, against foreign governments (though some of Mr. Trump’s strategies may first require legislative action by US Congress before they can be pursued). Mr. Trump’s litigious history on both sides of antitrust laws demonstrates his familiarity and experience with the legal system, and further suggests that a President Trump would not hesitate in pressing for antitrust action against foreign actors. Mr. Trump underscored this point in Time to Get Tough favorably quoting a former Reagan and Bush advisor who, commenting on antitrust enforcement against OPEC, stated “isn’t starting a lawsuit better than starting a war?”

It is possible that a President Trump would ultimately do little to shake up the antitrust enforcement status quo, given other pressing national and international issues that have been focal points of the Trump Campaign. On the other hand, it is equally possible that, given his comments and litigation history, Mr. Trump would adopt a very aggressive antitrust investigation and enforcement policy against perceived wrongdoers, resulting in antitrust issues becoming central to a Trump administration’s economic and trade policies.

ARTICLE BY Emre N. Ilter of McDermott Will & Emery
© 2016 McDermott Will & Emery

Espionage and Export Controls: iPhone Hack Highlights New World of Warfare

iPhone HackLast week, researchers at Citizen Lab uncovered sophisticated new spyware that allowed hackers to take complete control of anyone’s iPhone, turning the phone into a pocket-spy to intercept communications, track movements and harvest personal data. The malicious software, codenamed “Pegasus,” is believed to have been developed by the NSO Group, an Israeli company (whose majority shareholder is a San Francisco based private equity firm) that describes itself as a “leader in cyber warfare” and sells its software — with a price tag of $1 million – primarily to foreign governments. The software apparently took advantage of three previously unknown security flaws in Apple’s iOS software, and was described by experts as “the most sophisticated” ever seen on the market. Apple quickly released a patch of its software, iOS 9.3.5, and urged users to download it immediately.

Citizen Lab learned about Pegasus from Ahmed Mansoor, a UAE human rights activist, who received text messages baiting him to click on a link to discover “new secrets about the torture” of Emirati prisoners. Mr. Mansoor had been prey to hackers before, so he contacted Citizen Lab. When researchers tested the link, they discovered software had been remotely implanted onto the phone, and brought in Lookout, a mobile security firm, to reverse-engineer the spyware. Citizen Lab later identified the same software as having been used to track a Mexican journalist whose writings have criticized Mexico’s President. Citizen Lab and Lookout also determined that Pegasus could have been used across Turkey, Israel, Thailand, Qatar, Kenya, Uzbekistan, Mozambique, Morocco, Yemen, Hungary, Saudi Arabia, Nigeria, and Bahrain, based on domains registered by NSO.

NSO Group, the architect of Pegasus, claims to  provide “authorized governments with technology that helps them combat terror and crime,” insisting that its products are only used in lawful ways., NSO spokesperson Zamir Dahbash told reporters that the company “fully complies with strict export control laws and regulations.” The Citizen Lab researcher who disassembled the malicious program, however, compared it to “defusing a bomb.” All of which raises the question – what laws or regulations govern the export of cyber-weapons by an Israeli firm (likely controlled by U.S. investors) to foreign governments around the world?

Cyber weapons are becoming increasingly interchangeable with traditional weapons. Governments (or terrorists) no longer need bombs or missiles to inflict large-scale destruction, such as taking down a power grid, since such attacks can now be conducted from anywhere there is a computer. Do export controls – which have long been used as foreign policy and national security tools, and which would regulate the transfer of traditional weapons – play any real role in regulating the transfer of weapons of cyber-surveillance or destruction? In fact, the legal framework underlying current export controls has not caught up (and maybe never will) to the capabilities of technological tools used in cyberwarfare. Proposals to regulate malware have been met with resistance from the technology industry because malware technology is often dual-use and the practical implications of requiring licenses would impede technological innovation and business activities in drastic ways.

The Wassenaar Arrangement

The Wassenaar Arrangement (WA) was established in 1996 as a multilateral nonproliferation regime to promote regional security and stability through greater transparency and responsibility in the transfer of arms and sensitive technologies. The United States is a member. Israel is not, but has aligned its export controls with Wassennaar lists.

In December 2013, the list of export controlled technologies under WA was amended to include commercial surveillance software, largely to curb human rights abuses by repressive governments’ use of spyware on citizens. Earlier this year, the Department of Commerce issued recommendations that the definition of “intrusion software” in the WA be modified to encompass the concept of “authorization” so that malware such as Pegasus, in which the user does not truly understand the nature of the consequences, would be controlled. Those proposals have not been implemented.

U.S. Export Controls of Malware

In 2015, following data breaches at the Officer of Personnel Management and several private companies, the Department of Commerce published proposed rules to harmonize concepts embedded in the WA into the U.S. regulatory framework for export controls. One critical proposal was a definition of “intrusion software” to require a license for the export and use of malware tools. But the definition covered much more than malware. Cybersecurity experts were alarmed by the rule’s over-inclusive and vague language. The rules would have impeded critical business activities, stifled international research and cross-border exchanges of technology, and hindered response to cyber threats.

NSO Group has been described by researchers as “incredibly committed to stealth, and  reportedly has close partnerships with other Israeli surveillance firms that seek to sell spyware, suggesting an inevitable increase in cyber mayhem. As malware becomes more sophisticated, widespread, and threatening, the need for strictly tailored export controls is not going to go away.

Regulating software is challenging at least in part, because there is no workable legal definition of what constitutes a cyber weapon. Because malware is largely dual-use, the only way to determine whether particular software constitutes a cyber weapon is retroactively. If software has been used as a weapon, it is considered a cyber weapon. But that definition arrives far too late to control the dissemination of the code. Moreover, controlling  components of that software would likely be over-inclusive, since the same code that can exploit flaws to break in to devices can also have benign uses, such as detecting vulnerabilities to help manufacturers like Apple learn what needs patching. Another challenge is that requiring  export licenses can take months, which, in the fast-moving tech world is as good as denial.

The revelation of the Pegasus iPhone spyware highlights questions that have perplexed national security and export control experts in recent years. As the use and sophistication of malware continue their explosive growth, not only must individuals and governments face the  chilling realities of cyber warfare, but regulators must quickly understand the technological issues, address the risks, and work with the cyber security and technological communities to find a path forward.

ARTICLE BY Fatema K. Merchant & Laura E. Jehl  of Sheppard, Mullin, Richter & Hampton LLP
Copyright © 2016, Sheppard Mullin Richter & Hampton LLP.

Considerations for Travel to Iran to Explore Relaxed Trade Opportunities

travel trade opportunities IranBefore booking your airfare, be mindful of these potential issues.

In light of liberalized trade with Iran made possible by the Office of Foreign Assets Control’s (OFAC’s) General License H and the relaxation of US secondary sanctions, personnel of a non-US company, whether or not owned or controlled by a US parent, may be considering travelling to Iran to explore potential business opportunities. Here are some key points to consider as you make your plans.

Travel to Iran by US Persons Is Permitted

An OFAC General License provided in 31 CFR § 560.210(d) authorizes travel to Iran from the United States or by US Persons (US citizens and US permanent resident aliens]) from outside the United States to do market research or gather business opportunity information. This authorization includes

  • importation or exportation of accompanied baggage for personal use;

  • maintenance within Iran, including payment of living expenses;

  • acquisition of goods or services for personal use in Iran; and

  • arrangement or facilitation of such travel, including air, sea, or land voyages.

US State Department Warning for Travel to Iran

On August 22, the US Department of State (State Department) reissued a travel warning for Iran that reiterates and highlights US citizens’ risk of arrest and detention, particularly dual national Iranian Americans. Iranian officials continue to detain or prevent foreigners (in particular, dual nationals of Iran and western countries, including the United States) from leaving Iran. The State Department says US citizens traveling to Iran should very carefully weigh the risks of doing so and consider postponing their travel. The State Department additionally instructs US citizens who reside in Iran to closely follow media reports, monitor local conditions, and evaluate the risks of remaining in the country.

The State Department advises that Iranian authorities continue to unjustly detain and imprison US citizens, including students, journalists, business travelers, and academics, on charges that include espionage and posing a threat to national security. Iranian authorities have also prevented a number of Iranian American citizens who traveled to Iran for personal or professional reasons from departing, in some cases for months.

The US government does not have diplomatic or consular relations with Iran, and therefore cannot provide protection or routine consular services to US citizens in Iran. The Swiss government, acting through its embassy in Tehran, serves as a protecting power for US interests in Iran. The Foreign Interests Section at the Swiss Embassy provides a limited range of consular services that may require significantly more processing time than at US embassies or consulates.

The Iranian government does not recognize dual citizenship and will not allow the Swiss to provide protective services for US citizens who are also Iranian nationals. The Iranian authorities determine a dual national’s Iranian citizenship without regard to the dual national’s personal wishes. Consular access to detained US citizens without dual nationality is often denied as well.

Loss of Visa Waiver Privileges for Entry into the United States by Non-US Citizens

The US Visa Waiver Program (VWP) Improvement and Terrorist Travel Prevention Act of 2015 (the Act), which took effect in January 2016, has adversely affected some travelers to Iran who wish to enter the United States. Under the Act, travelers in the following categories are no longer eligible to travel or be admitted to the United States under the VWP:

  • Nationals of VWP countries who have traveled to or been present in Iran, Iraq, Sudan, or Syria on or after March 1, 2011 (with limited exceptions for travel for diplomatic or military purposes in the service of a VWP country)

  • Nationals of VWP countries who are also nationals of Iran, Iraq, Sudan, or Syria

These individuals will still be able to apply for a visa using the regular immigration process at US embassies or consulates.

As of January 21, 2016, travelers who currently have valid Electronic System for Travel Authorizations (ESTAs) and who have previously indicated that they hold dual nationality with one of the four countries listed above on their ESTA applications will have their current ESTAs revoked.

The US Department of Homeland Security’s secretary may waive these restrictions if he determines that such a waiver is in the law enforcement or national security interests of the United States. Such waivers will be granted only on a case-by-case basis. As a general matter, categories of travelers who may be eligible for a waiver include

  • individuals who traveled to Iran, Iraq, Sudan, or Syria on behalf of international organizations, regional organizations, and subnational governments on official duty;

  • individuals who traveled to Iran, Iraq, Sudan, or Syria on behalf of a humanitarian nongovernmental organization on official duty;

  • individuals who traveled to Iran, Iraq, Sudan, or Syria as a journalist for reporting purposes;

  • individuals who traveled to Iran for legitimate business-related purposes following the conclusion of the Joint Comprehensive Plan of Action (July 14, 2015); and

  • individuals who traveled to Iraq for legitimate business-related purposes.

The Department of Homeland Security does not specifically define what travel to Iran for “legitimate business-related purposes” means, how the department applies the definition, or what evidence is necessary to sustain such a claim and successfully receive relief. Anecdotal evidence suggests that administrative avenues for relief from the Act’s provisions to enter the United States after travel to Iran for “legitimate business-related purposes” are obscure. Travelers to Iran who want to enter the United States and require a visa to do so should apply through the routine visa application process at their appropriate US embassy or consulate and not expect rapid administrative agency relief for the effects of the Act.

ARTICLE BY Louis Rothberg, Margaret M. Gatti & Marynell DeVaughn of Morgan, Lewis & Bockius LLP
Copyright © 2016 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Made in the USA (For the Most Part)

made in the USANewspaper headlines report a new economic trend—manufacturing is returning to the United States. The country’s industrial production grew by 0.7 percent in July, its biggest jump since November 2014. This number represents everything made by factories, mines, and utilities. Before companies start slapping “Made in the USA” labels on their wares, they need to make sure they are familiar with the legal requirements to do so.

The Federal Trade Commission (the FTC) monitors the marketplace and aims to keep businesses from misleading consumers. Within the FTC’s jurisdiction is regulating “Made in the USA” claims.

If a product is labeled as “Made in the USA,” without any qualification, it must be “all or virtually all” made in the United States. “[A]ll significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no – or negligible – foreign content.” The FTC contemplates the site of final assembly or processing, the proportion of manufacturing costs paid to the U.S., and how detached the foreign material is from the finished product. For many businesses, this standard can be hard, if not impossible, to meet.

Since January 2015, the FTC has issued 46 letters to companies asserting misleading U.S. origin claims on a wide range of products, such as cookware, snow blowers, auto parts and pet products.

For example, the FTC recently determined that Shinola—a Detroit-based manufacturer of high-end watches, bicycles, and leather goods—did not meet it. Shinola advertises its products with the slogans “Built in the USA” and “Built in Detroit.” But in June of this year, the FTC called this labeling misleading because “100 percent of the cost of materials used to make certain watches . . . [and] more than 70 percent of the cost of the materials used to make certain belts” goes to imported materials. For example, Shinola’s watches incorporate Swiss-made timekeeping components.

Shinola’s founder had a good reason for why his company incorporated foreign parts:  many of the components are unavailable in the U.S. The components are imported to Detroit where Shinola’s 400 employees assemble watches in the company’s factory. The FTC, however, applied its “net impression” analysis and determined that Shinola’s slogans contradict reality. Shinola’s advertisements will now read “Built in Detroit using Swiss and Imported Parts.”

In light of the FTC’s stance on U.S. origin claims, companies should follow FTC decisions and exercise caution when saying “Made in the USA.” There is no bright line rule for whether a product is “all or virtually all” made in the USA. Companies should consider how their products fit within the FTC’s framework and only then decide whether their merchandise has, according to the FTC, been “Made in the USA.”

ARTICLE BY Brittany Robbins of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

Switching Consumer Device to Ad-Supported Environment Is Not Deceptive under New York Law

Slingbox AdvertisingIf your company sells a smart device to a consumer, can it later turn the device into a paid advertising platform? Can it do so without advanced disclosure?  A recent court ruling suggests the answer is “yes,” at least in New York.

In In re Sling Media Slingbox Advertising Litig., No. 15-05388 (S.D.N.Y. Aug. 12, 2016), consumers who purchased a “Slingbox” claimed they bought the device solely to “sling” their cable television service from one place (their home) to another device located anywhere (e.g., a vacation rental, office, etc.) over the Internet, but the manufacturer began adding its own advertising to the internet transmission.  The consumers claimed that, in addition to the ads already included in the feed pre-slinging, Sling Media inserted ads that played before (or alongside) the post-slinging feed in the form of banner advertisements that appeared on the edge of the screen (and which, purportedly, would disappear if the user viewed the streamed content in full screen mode or purchased a certain app for an ad-free experience).   Plaintiffs portrayed Sling Media’s imposition of ads as the beginning of a parade of horribles in which various “smart” devices—from cars to dishwashers—suddenly begin “forc[ing]” drivers, passengers, etc. to watch “unwanted” ads.  The consumers asserted the alleged unilateral insertion of ads violated the consumer protection laws of forty-eight states, including New York General Business Law (GBL) § 349.

The district court dismissed the claims, finding that New York law governed and that the allegations did not describe any misleading or deceptive conduct or actual injury.

The court first found that there were no viable claims of fraud or deceit. For example, there was no allegation that Sling Media actually stated the slinging functions would be “ad free.”  Likewise, the court observed that the lead plaintiffs failed to allege whether they bought their devices after Sling Media allegedly formed its intent to insert ads and before Sling Media launched the new feature (thereby disclosing the intent).

Critically, the court rejected the assertion that it is necessarily deceptive to sell a consumer a device meant to do one thing—transmit programming separately purchased by a consumer from his or her cable operator—and then use it for an additional function—transmitting advertising for which Sling Media was being paid. The court found that there was no allegation that the lead plaintiffs themselves subjectively expected an “ad-free experience” when they purchased a Slingbox, let alone plausible allegations that objectively reasonable consumers care about the insertion of ads by Sling Media such that the company’s alleged failure to disclose a future plan to disseminate advertisements was a “material” deception.

The court also found that the consumers failed to allege “injury.” The plaintiffs implied that Sling Media’s “use” of the plaintiffs’ property was itself an injury (like a private version of a “takings” claim).  But the court ruled that, to allege injury, the plaintiffs would have to plead facts showing that Sling Media’s ad insertions somehow prevented consumers from using the device to watch television or made it more expensive to do so.  Ultimately, the court ruled that the complaint was devoid of any allegations regarding how the insertion of ads, “which may be beneficial, detrimental or of no consequence based on consumers’ personal tastes, likes, or dislikes, constituted or caused Plaintiffs’ the type of harm that might qualify as an ‘actual injury’ within the meaning of GBL § 349.”  The court also underscored that, in New York, alleged “deception” itself is not “injury.” (See Op. at 11, n. 15 (citing Small v. Lorillard Tobacco Co., Inc., 94 N.Y.2d 43, 56 (1999) (consumers who buy a product that they would not have purchased absent deceptive conduct, without more, have not suffered injury)).

Lastly, and importantly for the “smart” device industry, the court noted that plaintiffs could not establish that ad insertion impaired any “legal right established by contract.”  The software needed to use the Slingbox was only licensed to consumers and the license did not reference advertising one way or the other.  Moreover, the license allowed Sling Media to modify the software (for example, to insert additional advertisements).

The impact of the Sling Media decision is tempered by the fact that it was a decision on a motion to dismiss (and allowed plaintiffs to move for leave to amend).  And it was decided under New York’s consumer fraud statute, not California’s potentially more liberal laws.  That said, the decision stakes out several key points to consider in switching a consumer device (or paid service) from an ad-free to an ad-supported environment:

  • Have affirmative representations been made about ads one way or the other?

  • Is there evidence about whether consumers view the addition of ads as a benefit? Or whether they care at all?

  • Does the addition of ads interfere with any core functions of the device or service?

  • Does the addition of ads actually make it more costly to use the device or service?

Finally, as always, consider whether you have an effective dispute resolution provision covering the device and/or any service or software, including class action waivers (to the extent permitted by law).

ARTICLE BY Jennifer R. Scullion of Proskauer Rose LLP

© 2016 Proskauer Rose LLP.

Federal Trade Commission Continues to Scrutinize Social Media Influencer Programs

Social Media Influencer ProgramsThis week, as part of its ongoing focus on influencer programs, the Federal Trade Commission (FTC) settled charges against Warner Brothers Home Entertainment, Inc. regarding its use of such a campaign to market the video game Middle Earth: Shadow of Mordor. This investigation of Warner Bros. was brought under the FTC Act, which prohibits deceptive marketing, and requires that endorsers “clearly and conspicuously” disclose any “material connection” to the brand they are endorsing.

In late 2014, Warner Bros. and its advertising agency, Plaid Social Labs, LLC, hired “influencers” (i.e., individuals with large social media followings) to create videos and post them on YouTube, and promote the videos on Twitter and Facebook.  One of the influencers hired for the program, PewDiePie, is the most-subscribed individual creator on YouTube, with more than 46 million followers. Warner Bros. paid each of the influencers from a few hundred to tens of thousands of dollars for the videos, in addition to providing free copies of the game. Under these contracts, Warner Bros. had the ability to review and approve the videos.

The FTC alleges that Warner Bros. failed to require sponsorship disclosures clearly and conspicuously in the video itself, where viewers were likely to notice them. Instead, Warner Bros. instructed influencers to place the disclosures in the description box below the video. Warner Bros. also required the influencers to include other information about the game in the description box, so most of the disclosures appeared “below the fold,” visible only if consumers clicked on the “Show More” button. Additionally, when influencers embedded the YouTube videos on Facebook or Twitter, the description field (and thus, the disclosure) was completely invisible.  Some of the disclosures also only mentioned that the game was provided free, and did not disclose the payment.

This continues the FTC’s focus on influencer programs with insufficient disclosures. In March, the FTC settled charges against national retailer Lord & Taylor related to its use of an Instagram influencer program with insufficient disclosures, where the influencers were paid and provided with a free dress. The influencers were required to make a post with the hashtag #DesignLab, and tagging @LordandTaylor, but were not instructed to disclose the payment or the free goods. At the same time, Lord & Taylor placed a paid article in Nylon, an online magazine, and purchased a paid placement on the Nylon Instagram account. Neither the post nor the article indicated they were paid advertising.

Likewise, in September 2015, the FTC settled charges against Machinima, an online entertainment network. Microsoft, through its advertising agency, hired Machinima to promote its Xbox One gaming console and video games. The  FTC alleged Machinima gave pre-release versions of the console and games to influencers, as well as payments of tens of thousands of dollars in some cases, in exchange for their uploading and posting endorsement videos.  Machinima did not require that the influencers disclose the sponsorship.

In each of these cases, the FTC entered consent agreements that require the brands to closely monitor and review its influencer content for appropriate disclosures, and terminate influencers who fail to accurately and conspicuously disclose their paid endorsements. The brands must keep records of their compliance and the FTC may review them at any time—with penalties of $16,000 per violation.

As marketing teams continue to try to reach consumers in new and creative ways, the FTC continues to signal its intention to closely scrutinize each development. As these methods evolve, brands should be conscious of their obligations to ensure appropriate disclosures in every format and to monitor for compliance.

ARTICLE BY Katherine Dennis Nye of Neal, Gerber & Eisenberg LLP

© 2016 Neal, Gerber & Eisenberg LLP.

Failure to Comply with Hart-Scott-Rodino Act Just Got More Expensive

FTC Hart-Scott-Rodino AntitrustLast November, President Obama signed into law an amendment to the Federal Civil Penalties Inflation Adjustment Act (Sec. 701 of Public Law 114-74). The amendment requires federal agencies to adjust the maximum civil penalties for violations of the laws they enforce no later than July 1, 2016.

On June 29, 2016, the Federal Trade Commission revised its Rule 1.98 to reflect the new higher levels for maximum civil penalties. The new maximums will apply to civil penalties assessed by the FTC after August 1, 2016. They include civil penalties for violations that occurred prior to the effective date. (Going forward, the maximums will be adjusted for inflation each January.)

Of particular significance to corporations that acquire, sell, or merge with other businesses, the penalties for violating the premerger reporting and waiting requirements under the Hart-Scott-Rodino Act have been increased from $16,000 per day to $40,000 per day, an increase of 150%.

As most businesspersons know, under the HSR Act, the parties to mergers and acquisitions that meet the dollar thresholds of the Act and are not otherwise exempt must file a premerger notification form, pay the appropriate fees, and wait 30 days (or possibly more) prior to closing the transaction. Failure to file the required notification or to observe the mandatory waiting period will subject the parties to civil penalties, which are now significantly higher.

Note that for continuing violations of the HSR Act, each day is a separate violation. As a result, the maximum civil penalty may be multiplied by the number of days for each violation of the applicable statute or order. (For example, a company or individual that is required to report but fails to do so for one year would be facing a fine of up to $14.6 million under the new levels.)

But statutory maximums are not automatically imposed. Before levying a civil fine, the Commission considers various factors in determining whether the maximum should be mitigated. Those factors include:

  1. Harm to the public

  2. Benefit to the violator

  3. Good or bad faith of the violator

  4. The violator’s ability to pay

  5. Deterrence of future violations by this violator and others

  6. Vindication of the FTC’s authority

Why does it happen that a company or individual fails to make the required HSR filing? The FTC reports that it frequently sees two specific scenarios:

  1. Company executives who acquire company voting shares through exercising options or warrants may fail to aggregate the value of such shares with the value of the company shares they already hold and therefore do not realize that they have satisfied the HSR size of transaction threshold test.

  2. Sometimes companies or individuals who have qualified for the “investment-only” exemption in the past may erroneously continue to rely on that exemption even though they have become active investors in the company or their holdings in the company have increased above 10%.

Other recurring scenarios can also trip up acquirers. For example, companies may not realize that patent and other IP licenses are in certain circumstances treated as the acquisition of an asset for HSR Act purposes.

ARTICLE BY William M. Hannay of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

U.S. Designations Targeting a Major Panamanian Money Laundering Organization Not Aided by the Panama Papers Leak

Yesterday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced designations against the Panama-based Waked Money Laundering Organization, including its leaders, network of supporters and associates, and companies. According to press reports, Colombian law enforcement arrested the organization’s leader, Nidal Ahmed Waked Hatum, at a Bogota airport the day prior to the designations.

In total, OFAC added 8 individuals and 68 business entities to the List of Specially Designated Nationals (SDN List) pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act). Narcotics traffickers have used these businesses to obscure the source of drug money through a variety of means, including trade-based money laundering, bulk cash smuggling, real estate development, and illicit financial services.  The designation of Balboa Bank & Trust is particularly noteworthy, as it reflects Treasury’s continued willingness to use the Kingpin Act against financial institutions.  As noted in a previous entry, OFAC had not designated a bank pursuant to the Kingpin Act prior to November 2015.

OFAC clearly anticipates that these designations will cause significant disruptions, as it concurrently issued three General Licenses authorizing certain wind down transactions involving a hotel, newspapers, and a shopping mall.  U.S. persons should carefully consider the scope and expiration dates of these licenses prior to engaging in any dealings with these designated companies.

The designations do not signal the beginning of United States government actions in response to the Panama Papers leak.  Any potential use of those documents will be limited by the legal ethical issues surrounding the use of intentionally disclosed materials likely protected by the attorney-client privilege.  In addition to the legal ethical limitations, the evidentiary which serves as the administrative record for the designations would have required several months for investigation, drafting and interagency approval.  OFAC could not have finalized such an extensive package of designations within one month of the leak.

Article By Jeremy P. Paner of Holland & Hart LLP
Copyright Holland & Hart LLP 1995-2016.