Archive for October, 2009

Last week the Federal Trade Commission published new guidelines on using testimonials and endorsements in advertising.  The new Revised Endorsements and Testimonials Guide ads new restrictions to using testimonials and endorsements in advertising.

Consumer Testimonials – The Demise of “Results not Typical”

Now, advertisements that use a consumer to tell about his experience with a product or service as typical when that is not the case, will be required to clearly disclose the results that consumers can generally expect.  Under the old rules, the phrase “results not typical” could be added to protect the advertiser from liability.  No longer.  If your consumer’s results are not typical, then you will have to explain what results are typical to avoid liability for false advertising.

Bloggers and Other On-line Marketers Now Endorsers

The new rules also expand the universe of endorsers, and require that the advertiser disclose any “material connection” with the endorser.  “Word-of-mouth” endorsers, such as bloggers and viral marketers are now considered endorsers, and if a blogger is paid cash or receives products to provide an endorsing review, the “connection” must be disclosed.

Research Company Ties Must be Disclosed

If an advertisement refers to the findings of a research organization that conducted research sponsored by the company, the advertisement must disclose the connection between the advertiser and the research organization.

Endorsers May be Liable for False Advertising

Advertisers and endorsers can be liable under the FTC Act for statements they make in an endorsement.  The new guides clearly confirm FTC case law, stating that both advertisers and endorsers may be liable for false or unsubstantiated claims made in an endorsement – and for failing to disclose material connections between the advertiser and endorsers.  Most endorsers have little knowledge about the details of the products they endorse, or the claims made in an advertisement, and the possibility of liability for claims made by an advertiser is likely to substantially reduce the number of potential endorsers available to advertisers.

No More Celebrity Covert Endorsements

Paid celebrity endorsers can no longer endorse products outside the context of traditional advertising, unless they disclose that they are a paid endorser.  For example, a celebrity can no longer go on a talk show, blog, Twitter or other social media and promote a product for pay, unless they disclose that the endorsement is a paid endorsement.  This rule alone may significantly reduce Paris Hilton’s income.


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The SEC announced that smaller public companies must begin reporting on effectiveness of internal controls in 2010.  The SEC has granted several extensions to non-accelerated filers (smaller public companies – those with less than $75 million public float) for complying with Section 404(b) of Sarbanes-Oxley, which requires auditors to attest to the effectiveness of a public company’s design and implementation of accounting controls.  The previous extension gave small public companies until December 15, 2009 to begin reporting, so that the SEC’s Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance.  However, that study was only recently published and the SEC believed it would be fair to grant additional time for small companies to get up-to-date on the study and guidance.

Small public companies whose fiscal years end on or after June 15, 2010 must include reporting on Sarbanes Section 404(b) compliance.  Although this is the sixth delay on implementation of 404(b) for smaller public companies, the SEC Chairman said that there will no more extensions.

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In Shames-Yeakel v. Citizens Financial Bank (U.S.D.C., Northern District of Illinois, Case No. 07-c-5387) the court held that a couple whose bank account was hacked over the Internet can sue their bank for its failure to implement state-of-the-art Internet security measures.  Marsha and Michael Shames-Yeakel of Crown Point, Ind. lost $26,000 from their home equity account to an on-line hacker who breached the bank’s security system and looted their account.   In what must be one of the worst customer-service decisions in recent memory, the bank tried to make the Shames-Yeakel’s pay the bank for the loss, and when they refused, the bank reported them as delinquent to the credit reporting bureaus and threatened to foreclose on their home.

Predictably, the Shames-Yeakel’s sued the bank for everything their lawyer could think of, including negligence for failing to maintain a reasonable on-line security system.   Although, the judge dismissed several of the other claims, she allowed the negligence claim against Citizens to stand.  Citizens’ security used only passwords and user names, the same as logging into an e-mail account.  This security method is known as “single-factor identification”, and the Federal Financial Institutions Examination Council had previously published a paper titled “Authentication in an Internet Banking Environment” which said that single-factor identification is not adequate on-line security for banking activities.  The Shames-Yeakel’s, relying in part on the FFIEC guidance, argued that Citizens should have utilized “multifactor identification” which checks against multiple data points to identify a user logging on to the service, and uses “token” technology which generates a new pass code for every log-in or identifies a user’s specific computer.

The Court held that “in light of Citizens’ apparent delay in complying with FFIEC security standards, a reasonable finder of fact could conclude that the bank breached its duty to protect plaintiffs’ account against fraudulent access.”

Banks who have delayed updating their Internet banking security systems are now advised that they may well be liable for negligence if their customers’ accounts are compromised.

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This is an update to my article of August 3, 2009 titled ARE YOUR CONTRACTORS REALLY EMPLOYEES? NEW COLORADO LAW IMPOSES HARSH PENALTIES IF THEY ARE.  The Wage and Hour law blog reports that a Massachusetts court recently held that topless dancers who pay the house $35 per night to dance and earn tips, are employees and not independent contractors.

Chaves v. King Arthur’s Lounge Inc. demonstrates the lengths governments are going to in their efforts to increase revenue by classifying independent contractors as employees.  In that case a Massachusetts court ruled that so-called exotic dancers who performed in a local strip club were employees, not independent contractors.  Thus, the lounge should have paid them state minimum wages and overtime compensation, and the lounge should have been paying withholding and head tax to the state and local governments.

It is apparently common practice in the exotic dancing business for the house to charge the performers a fee to perform, and their income is restricted to tips.  In spite of the lists of factors in state and federal tax statutes used to determine whether a worker is an employee or a contractor, it seems axiomatic (and common sense) that if you have to pay to work someplace, you are a contractor and not an employee.   The judge held that “the dancers were an integral part of the company’s business and were therefore more likely to be employees than independent contractors.”  The judge continued, holding that “in an age of electronic and Internet access to a wide variety of adult media, exotic dancing is unlikely to offer a commercial opportunity – over the long term—that would rise to an independently established trade or occupation.”

This case provides another reminder that employers must carefully evaluate each engagement of individuals who perform services.  If the services are an integral component of the employer’s business, or if too much control is exerted by the employer, or the individual does not perform these services for anyone else, then that individual is likely an employee, not an independent contract – even if they pay the employer for the opportunity to work!

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