On January 31, 2019, e.l.f. Cosmetics, Inc. (“ELF”) agreed to pay $996,080 to settle its potential civil liability for 156 apparent violations of the North Korea Sanctions Regulations (NKSR). Elf is a cosmetics company headquartered in Oakland, California.

(Stephan)

ELF appeared to have violated § 510.201(c)1 of the NKSR by importing 156 shipments of false eyelash kits from two suppliers located in the People’s Republic of China (PRC) that contained materials sourced by these suppliers from the Democratic People’s Republic of Korea (DPRK). The total value of the imported shipments equaled $4,427,019.26. The statutory maximum civil monetary penalty amount for the apparent violations was $40,833,633, and the base civil monetary penalty amount for the apparent violations was $2,213,510.

OFAC determined that throughout the time period in which the apparent violations occurred, ELF’s OFAC compliance program was either non-existent or inadequate. The company’s production review efforts focused on quality assurance issues pertaining to the production process, raw materials, and end products of the goods it purchased and/or imported. Until January 2017, ELF’s compliance program and its supplier audits failed to discover that approximately 80 percent of the false eyelash kits supplied by two of ELF’s China-based suppliers contained materials from the DPRK.

OFAC considered the following facts and circumstances pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. Part 501, Appendix A, in reaching the settlement amount. It found the following to be aggravating factors:

  • The apparent violations may have resulted in U.S.-origin funds coming under the control of the DPRK government, in direct conflict with the program objectives of the NKSR;
  • ELF is a large and commercially sophisticated company that engages in a substantial volume of international trade; and
  • ELF’s OFAC compliance program was either non-existent or inadequate throughout the time period in question.

OFAC found the following to be mitigating factors in this case:

  • ELF’s personnel do not appear to have had actual knowledge of the conduct that led to the apparent violations in this investigation;
  • ELF has not received a Penalty Notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the apparent violations;
  • The apparent violations do not appear to constitute a significant part of ELF’s business activities; and
  • ELF cooperated with OFAC by immediately disclosing the apparent violations, signing a tolling agreement, and submitting a complete and satisfactory response to OFAC’s request for additional information.

ELF then terminated the conduct which led to the apparent violations and has undertaken the following steps to minimize the risk of recurrence of similar conduct in the future:

  • Implemented supply chain audits that verify the country of origin of goods and services used in ELF’s products;
  • Adopted new procedures to require suppliers to sign certificates of compliance stating that they will comply with all U.S. export controls and trade sanctions;
  • Conducted an enhanced supplier audit that included verification of payment information related to production materials and the review of supplier bank statements;
  • Engaged outside counsel to provide additional training for key employees in the United States and in China regarding U.S. sanctions regulations and other relevant U.S. laws and regulations; and
  • Held mandatory training on U.S. sanctions regulations for employees and suppliers in China and implemented additional mandatory trainings for new employees, as well as, regular refresher training for current employees and suppliers based in China.

The notice from OFAC regarding this enforcement action highlights the risks for companies that do not conduct full-spectrum supply chain due diligence when sourcing products from overseas, particularly in a region in which the DPRK, as well as other comprehensively sanctioned countries or regions, is known to export goods.

OFAC indicated that it encourages companies to develop, implement, and maintain a risk-based approach to sanctions compliance and to implement processes and procedures to identify and mitigate areas of risks. It also explained that such steps could include, but are not limited to, implementing supply chain audits with country-of-origin verification; conducting mandatory OFAC sanctions training for suppliers; and routinely and frequently performing audits of suppliers.

For more information and in response to any questions regarding OFAC regulations and supply chain compliance please feel free to contact us.

There was a time when a quick estimate of market shares might have been enough to provide a reasonable assessment of antitrust risk for a potential combination between two brick and mortar retail chain stores.

Not anymore.

The playbook for evaluating competitive concerns from a potential combination of two brick and mortar retailers has evolved considerably. In recent years, the Federal Trade Commission (FTC) has reviewed proposed transactions between well-known retailers, including Office Depot/OfficeMax (2013), Dollar Tree/Family Dollar (2015), Albertsons/Safeway (2015), Walgreens/Rite Aid (2017), Bass Pro Shops/Cabela’s (2017), and 7-Eleven/Sunoco (2018). Public statements from recent transactions investigated by the FTC confirm that the agency is using more sophisticated data-driven tools during investigations with important implications for future deal activity.

As the tools used by the U.S. antitrust enforcement agencies have evolved, so too must the tools used to gauge antitrust risk at the pre-deal stage. These risks include the potential for a long and costly antitrust investigation, including compliance with a Second Request (a giant subpoena for documents, data, and other information from the merging parties), the potential that divestitures may be required to resolve competitive concerns raised by the agency, as well as the possibility that the agency may seek to block the transaction entirely.

That’s why brick and mortar retailers contemplating a merger need to adjust their thinking about pre-deal risk assessment. A modern approach to retail M&A involves five key areas, including:

CONSUMER SUBSTITUTION PATTERNS

Consumer substitution patterns—not market shares—are central to assessing the antitrust risk of a potential retail merger. In an investigation, the FTC is trying to figure out whether the consolidation will “substantially lessen competition.” Naturally, a key aspect of answering that question is to determine how closely the two retailers compete with one another. Closeness of competition is evaluated along a variety of dimensions, including geographic proximity as well as similarities in pricing, promotion, and product assortment. The closer two retailers are along these dimensions, the more likely it is that the FTC will conclude that consumers view them as close substitutes.

A before/after analysis is a standard practice at the antitrust agencies for assessing customer substitution patterns and whether the proposed transaction is likely to give rise to competitive concerns. One of the most common types of before/after analysis used by the FTC is to compare the parties’ store-level sales before and after a competitor store opens nearby. In undertaking this type of analysis, the agency is attempting to develop evidence to answer questions related to consumer substitution patterns, such as: How big of a hit to sales does the store suffer when a competitor store opens nearby? Is the hit to sales from entry bigger for some categories of products than others? Is the hit to sales bigger when one specific competitor (e.g., one of the parties to the proposed transaction) enters compared to other competitors?

In general, if the hit to sales from entry by a variety of competitors are all similar, then it is more likely the agency will conclude that consumers do not view the parties to the proposed transaction as particularly unique or especially close substitutes in the marketplace. The same is true if the hit to sales from the entry is small.

In a FTC merger review, the impact on sales from a competitor’s entry are translated into consumer substitution patterns, which are referred to, in antitrust jargon, as “diversions” or “diversion ratios.” The amount—and value—of that diversion provides a numerical measure used by the FTC to assess how closely the parties to the proposed transaction compete. The agency views “high” diversion ratios as indicating that those two retail chains are close competitive alternatives for consumers. Consequently, antitrust risk typically increases if the FTC, using its own analytical framework, would likely find high diversion ratios between the parties to the proposed transaction.

Evidence about the extent of customers’ cross-shopping across multiple retailers is also useful, but must be interpreted with care. While cross-shopping often reflects consumers’ ability and willingness to substitute purchases of the same goods across different retailers, such cross-shopping could well reflect that consumers satisfy different needs at different retailers or through different channels of sale.

  1. ONLINE COMPETITION

Online sales as a percentage of overall retail sales continues to grow significantly. Few brick and mortar retailers have escaped at least some competitive pressure from e-commerce retailers. The constraint from online retailers, however, is not the same in every retail setting. Nearly everyone buys online these days, but not everyone considers buying everything online all the time—or even most of the time for certain types of retail purchases.

That has implications for the antitrust analysis of retail mergers. In some retail settings, like the retail sale of office supplies (Office Depot/OfficeMax) and children’s toys (Toys ‘R Us), the FTC has credited online competition as a constraint on brick and mortar retailers. But in other retail settings, like the sale of tailored men’s suits (Jos. A Bank/Men’s Wearhouse) and supermarkets (e.g., Albertsons/Safeway, Ahold/Delhaize), the FTC has not viewed online retailers as a significant constraint on brick and mortar retailers despite the growth of online sales. Therefore, determining how much credit the antitrust agency is likely to give online retail competition is critical.

  1. PRICING STRATEGIES

Understanding the business rationale for the choice of pricing strategy is a central issue in the antitrust agency’s competitive assessment of a proposed transaction. While zone-level or store-level pricing may be driven by differences in costs to serve, the FTC typically considers prices, pricing policies, and price zones that vary locally based on the presence or absence of key competitors to be a major factor in their antitrust analysis. A price zone allowing for higher prices when a competitor (or type of competitor) is absent, or lower prices when the competitor is present, is likely to affect how the agency defines the relevant set of competitors and is almost always a critical factor in the agency’s ultimate assessment of the competitive effects of the merger itself.

National and omnichannel pricing—in which prices and promotions do not vary across stores, e-commerce, and hardcopy mailings such as catalogs—may mean there are different competitive constraints compared to localized pricing strategies. Indeed, it is not uncommon for parties to a proposed transaction to point to their national-pricing policies to explain why the transaction will not change pricing in any local area where the parties both have stores. But even here, the reason for the choice matters.

National pricing may be driven by a desire to provide a singular experience because many consumers purchase across multiple stores and through multiple channels—both in-store and online. A decision to use national pricing may also be driven by vigorous competition from omnipresent e-commerce alternatives. National pricing may also stem from vigorous competition from thousands of diverse mom-and-pop retailers across the country. Those are benign to affirmatively helpful facts for parties that propose to merge.

National pricing, however, is not a silver bullet. If the reason for national pricing is that the other party to the transaction has a nationwide, or nearly nationwide, footprint of stores, making nationwide pricing an efficient way to price against that key competitor, national pricing may raise antitrust scrutiny.

  1. EFFICIENCIES AND TRANSACTION-RELATED STORE CLOSURES

The ability to lower costs often motivates a potential combination. That’s almost always a good thing because it is important to be able to articulate a strong pro-competitive rationale for the proposed transaction. The focus of the antitrust agency’s investigation is not on how the consolidation will benefit the merging parties, but rather: “How will the transaction benefit consumers?” A merger premised on lowering costs and passing those savings on to consumers through lower prices is viewed favorably by the FTC.

But not all synergies are inevitably pro-competitive. While cost synergies are often viewed as pro-competitive, synergies that stem from transaction-related store closures can create a red flag.

  1. TRADITIONAL TOOLS AND EVIDENCE

One thing that has not changed over time is the use of the traditional investigation tools and types of evidence. In retail merger investigations, these include: documents discussing competition and efficiencies that are submitted with the merging parties’ premerger notification Hart-Scott-Rodino filings; interviews of competitors of the merging parties and other industry participants; and the merging parties’ ordinary-course documents focusing on how the merging parties assess competition, their competitors, and, yes, their market shares.

The five areas described here represent a modern, pre-transaction risk assessment approach that is aligned with the analytical tools the antitrust agencies rely on when reviewing a merger. The tools described here play a key role in assessing internally the competitive issues that may arise during the antitrust merger-review process and that affect the ultimate outcome of that review.

This original version of this article appeared in Retail Leader.

@ Business Benefits Group

It’s 1974 and bell-bottom pants and platform shoes were in fashion…unfortunately. It was also the year that an odd federal law was passed that now governs $29 trillion in U.S. retirement plan assets. The law was ERISA or the Employee Retirement Income Security Act. And notwithstanding the word “retirement” in its title, it also covers all employer-sponsored health plans and most other employee benefit arrangements. The bell-bottoms and platform shoes may be gone but the growing impact of ERISA and explosion of class action litigation against employer plan sponsors in recent years is something that boards of directors, officers and other company executives should be concerned about – because under ERISA they may be personally on the hook for any plan breaches as fiduciaries – and often D&O insurance isn’t going to protect them.

The costs of ERISA litigation can be staggering. The 10 highest ERISA class action settlements in 2017 totaled nearly $1 billion. With courts increasingly siding with plaintiffs in these cases, there appears to be little hope that the trajectory of ERISA litigation will reverse. At the same time, plaintiffs are exploring new avenues of attack under employer sponsored health plans using the same ERISA fiduciary arguments developed over the last 45 years on the retirement side. It’s simply not enough that employers keep compliant with the Affordable Care Act and Internal Revenue Code (both of which have provisions embedded in ERISA amongst eight other federal laws including COBRA). They also need to focus on their fiduciary obligations under ERISA because that’s the focus of these class action lawsuits.

Historically, ERISA litigation has focused on the duties, responsibilities, and actions of retirement plan’s fiduciaries—typically, the board and company executives. Under ERISA, those fiduciaries are charged with one main objective: to act solely in the best interests of plan participants. Class action suits against companies have alleged that fiduciaries have violated that rule by, for example, making imprudent decisions regarding investment choices, or failing to manage plan documentation or monitor people hired to carry out plan duties.

In recent years, ERISA fiduciary litigation has increasingly focused on excessive plan fees and expenses. There has been an increase in class action litigation by plan participants who are basically saying that their employer’s 401(k) plan charged them too much—and the plan fiduciaries should have shopped around and found better deals. Those can be huge lawsuits. In some, the employer has ended up being on the hook for reimbursing retirement accounts for millions—sometimes hundreds of millions—of dollars.

Often, businesses will carry directors and officers (D&O) liability ERISA fiduciary insurance as a hedge against personal liability exposure. However, those policies might not be sufficient when it comes to ERISA fiduciary litigation. D&O policies may not cover ERISA-related liability at all, or there may be special provisions, such as requiring executives to get annual fiduciary training. Even if there is coverage, it might be woefully inadequate compared to the size of the plan or the risks involved.

Up Next: Health Plans Under ERISA

The United States spends approximately $3 trillion a year on health care, making the oversight of company health plans an attractive target for plaintiffs. Such plans have been covered by ERISA since it was passed, but over the course of four decades, there has been comparatively little litigation on that front. However, that has been changing with rapidly rising health care costs and the implementation of the Affordable Care Act. These factors prompted employers to collect cost-sharing premiums from employees or become self-insured, thus creating a new target for ERISA fiduciary breach actions.

The plaintiffs’ bar is now arguing that those employee premiums and other costs, such as co-pays, types of coverage, pharmacy rebates, should be considered protected ERISA plan assets, and that every decision a plan sponsor makes with respect to use of those plan assets is a fiduciary decision. Fiduciaries overseeing health plans have to be exceptionally careful to follow the same golden rule that follow with retirement plans under ERISA, i.e., to ensure what they do is solely in the best interest of participants.

Looking ahead, fiduciaries’ decisions about monitoring costs and who they appoint and hire to administer health plans will be important drivers of ERISA litigation. The best protection for employers is to demonstrate that they have undertaken regular and in-depth compliance reviews of retirement and health plans. That means providing proof that the plan sponsor has reviewed plan documentation for compliance with applicable law, undertaken review of governance and delegation of authority structures, provided external fiduciary training, and demonstrated regular monitoring and benchmarking. In general, companies need to make sure that their fiduciaries perform due diligence and follow clear decision-making processes.

With the increasing emphasis on personal liability, companies also need to make sure that people in those roles are qualified to act as fiduciaries—a factor that may be getting more scrutiny. In September 2018, after losing a class action lawsuit against New York University over the handling of retirement funds, the plaintiffs turned around and sued for the removal of two fiduciaries on the retirement committee —an action based on the court’s ruling that noted that the two individuals lacked the capabilities needed to effectively oversee the plan.

 

@CPSC.gov

Some CPSC breaking news unrelated to the shutdown! Last Wednesday, President Trump renominated Ann Marie Buerkle, who has served as Acting Chair of the U.S. Consumer Product Safety Commission since February 9, 2017, to serve as permanent Chairman of the Commission.  The appointment is for a seven-year term beginning on October 27, 2018 when her current term expired. Acting Chairman Buerkle has continued to serve under the agency’s enabling statute and rules that permit a commissioner to “hold over” for an additional year pending confirmation of a new term or commissioner.

Notably, this is the third time that President Trump has nominated Acting Chairman Buerkle to be permanent Chairman of the CPSC. In 2017 and 2018, Senate leadership did not bring Buerkle’s nomination to the Senate floor for a vote leading to a process whereby the White House had to send the nomination back to the Senate for further consideration.

So what does this renomination mean for Buerkle’s prospects to finally be confirmed as Chairman?

First, the White House is clearly sticking by Buerkle to become permanent Chairman of the agency. The Administration has shown no intention of nominating someone other than Acting Chairman Buerkle—even in the face of prior, sporadic opposition to the nomination by some former Commissioners and members of Congress.

Second, speaking of opposition, Buerkle’s main detractor in the Senate, former Senator Bill Nelson (D-FL), Ranking Member of the Senate Committee on Commerce, Science, and Transportation in the 115th Congress, lost his 2018 election to now-Sen. Rick Scott (R-FL). Senator Nelson made no secret of his opposition to Buerkle’s nomination and frequently focused his attention on disagreements with Buerkle over the regulation of portable generators. While other individual Senators, including the Committee’s new Ranking Member, Sen. Maria Cantwell (D-WA), may have policy disagreements with Buerkle, their opposition to her nomination is not likely to be as vocal or strong as former Senator Nelson’s.

Third, the political dynamic at the Commission is different than in July 2017 and January 2018 – the last two times President Trump nominated Buerkle to serve as Chairman. With the Senate’s confirmation of Commissioners Dana Baiocco and Peter Feldman this past year, the Republicans now have a majority at the agency. Buerkle, as Acting Chair, has led that new majority. Elevating her to permanent Chair will change little in the current day-to-day operations of the Commission (though, it is true that her confirmation would have a longer-term impact on the political makeup of the Commission, but that subject is for another day).

From this vantage point, Buerkle deserves an up or down vote at the very minimum, and the opportunity to lead the Commission as permanent Chairman. She has shown herself to be an astute leader of the agency over the past two years who seeks consensus and input from all product safety stakeholders—industry and consumers alike. Time will tell whether her nomination moves forward in the Senate given the current political dynamic.

 

Crowell & Moring has issued its seventh-annual “Litigation Forecast 2019: What Corporate Counsel Need to Know for the Coming Year.” 

The Forecast provides concise, forward-looking perspectives on technological developments that can help corporate counsel identify the many opportunities and challenges ahead as they harness the power of technology. The Forecast further explores the developing legal, regulatory, and technology developments affecting a wide range of companies in twelve areas of law: antitrust, corporate, cybersecurity, e-discovery, environmental, government contracts, health care, intellectual property, international trade, labor and employment, torts, and white collar.

In the article, “AGs: Watching Out For Consumers,” authors examine why state attorneys general are especially focused on consumer protection, bringing increased risk as well as potential opportunities to companies.

Be sure to follow the conversation on social media with #LitigationForecast.

businesswoman checking the time on watch

Do not assume a government shutdown means that reporting obligations at the CPSC are on hold. While the Commission’s staff designated as essential personnel are dedicated to protecting against substantial, immediate or “imminent threats to human safety” under the Commission’s shutdown directive[1], they will be reviewing reports to make that determination. The obligation to report is not suspended during the shutdown, even if there may be slower than normal response on matters that do not present an immediate threat. The filings are tracked by date and time electronically, and with 15 million in penalties at stake for failure to timely report, it is important not to confuse a partial shutdown of government operations with a stay on statutory obligations. There is no stay of the reporting obligations If you are a manufacturer, importer, distributor, and/or retailer of consumer products, you continue to have a legal obligation under the Consumer Product Safety Act (CPSA) and other statutes administered by the CPSC to report the following types of information to the CPSC:

  • A defective product that could create a substantial risk of injury to consumers;
  • A product that creates an unreasonable risk of serious injury or death;
  • A product that fails to comply with an applicable consumer product safety rule or with any other rule, regulation, standard, or ban under the CPSA or any other statute enforced by the CPSC;
  • An incident in which a child (regardless of age) chokes on a marble, small ball, latex balloon, or other small part contained in a toy or game and that, as a result of the incident, the child dies, suffers serious injury, ceases breathing for any length of time, or is treated by a medical professional; and
  • Certain settlements of lawsuits.

Notably, the government shutdown has no impact on the timely reporting of lawsuit settlements. The New Year brings a new time period for an additional and separate reporting requirement under Section 37 of the Consumer Product Safety Act. It requires manufacturers of consumer products to report information about settled or adjudicated lawsuits during specific 24-month periods. Specifically, companies are required to report when at least three civil actions filed in federal or state court involve the same model of a product and each suit alleges the product was involved in death or grievous bodily injury.  15 U.S.C. § 2084(a). The products at issue in the three cases must involve the same particular model, distinctive as to functional design, construction, warnings, and instructions, i.e. the characteristics that affect the product’s safety related performance.

The CPSC regulations define grievous bodily injury to include certain categories of injury, including, but not limited to:

  • Mutilation or disfigurement including permanent facial disfiguration or non-facial scarring that results in permanent restrictions in motion;
  • Dismemberment or amputation;
  • The loss of important bodily function or debilitating internal disorder such as the permanent injury to the loss of an organ, or blindness or permanent loss, to any degree, of vision.
  • Injuries requiring extended hospitalization, including in-patient care of 30 days in acute care facility or 60 days in a rehabilitation facility;
  • Severe burns or severe electrical shock.[2]

Section 37 sets forth specific statutory time periods within which three settlements involving the same product would trigger reporting. Each of the 24-month statutory periods begin every odd year.  For purposes of this analysis, the applicable statutory periods are:

  • January 1, 2015 – December 31, 2016;
  • January 1, 2017 – December 31, 2018; and starting now
  • January 1, 2019 – December 31, 2021.[3]

In addition to Section 37 reporting, lawsuits should be reviewed with an eye towards whether they contain information reportable under Section 15, such as if the allegations reasonably support the conclusion that a product contains a defect which could create a substantial product hazard or an unreasonable risk of injury. In-house counsel should keep these intersections in mind and make sure they bridge the gap between litigation and this regulatory reporting obligation.

It is a common tendency to think about product safety issues in separate buckets depending on whether they raise litigation or regulatory risks. But each should not be considered in isolation as they can overlap in various ways, including within the Consumer Product Safety Act.

 

[1] Order No. 0921.1

[2] 16 C.F. R. §1116.2

[3] See 15 U.S.C. § 2084(b); see also 16 C.F.R. § 1116.2(a); CPSC Recall Handbook at page 9 (found at https://www.cpsc.gov//PageFiles/106141/8002.pdf).

 

 

This article originally appeared in Bloomberg Law Big Law Business.

Pop-star Selena Gomez is an international celebrity with 144 million followers on Instagram. That’s second only to soccer icon Cristiano Ronaldo who trumps her by 500 followers.

So you might think companies would jump at the opportunity to enlist them as brand ambassadors. But companies are increasingly turning away from deals with mega stars like Gomez and Ronaldo and tapping lesser known social media personalities to represent their products. Too often, though, the liabilities involved in working with so-called micro-influencers are overlooked.

Companies can do more to protect themselves by simply using the same high level of caution with non-celebrity influencers as is used when entering arrangements with household names.

Influencers are becoming sought-after for two primary reasons:

  • they are considered more cost effective, and
  • their endorsements are often seen as being more authentic and better able to reach a highly engaged audience.

In fact, it is estimated that nearly 80 percent of professionals in fashion, luxury, and cosmetic industries in the U.S. and Europe implemented influencer campaigns last year.

However, the line between the traditional celebrity and the influencer is not as clear-cut as it once was. While influencer marketing continues to be far cheaper and can be more effective in reaching potential buyers, many influencers have shifted from casually filming videos in their bedrooms to becoming highly recognizable household names. Influencers are increasingly transforming this celebrity to build their own brands. With this transformation comes more risk.

While many companies have rapidly embraced influencer marketing, their legal strategies haven’t always kept pace. Missteps around content ownership and the lack of cohesive policies around disclosure requirements have led to costly and drawn out legal battles.

Accordingly, we suggest treating influencers like more conventional celebrities, specifically by focusing on the following.

1. Social Media Content Ownership

Companies should ensure that influencers are aware that sharing any image containing copyright-protected works might be infringing on third-party intellectual property and privacy rights and establish indemnity clauses and/or holdbacks for infringement by an influencer in any contract.

Further, while it is standard for influencers to own the content in social media posts, the brand should be sure both to retain the right to re-use it for future campaigns or advertisements and the ability to require the influencer to take down a post.

2. Design Collaborations

As influencers grow in popularity, many have established or are seeking to establish their own “brand” identity. Deals with influencers now go beyond mere endorsements, as many influencers aspire to launch their own product lines. This creates a gray area: does that, let’s say, pocket design belong to the company or is it emblematic of the influencer’s own brand?

In 2015, when Becca Cosmetics entered into a partnership with makeup artist and influencer Jaclyn Hill, it appears the company failed to establish ownership of the product packaging design of their wildly popular “Champagne Pop” collection. When another cosmetics company called Morphe later collaborated with Hill to launch a new “Vault” eyeshadow pallet with an arguably similar packaging design, Becca sent Morphe a cease and desist letter, prompting Morphe to file a lawsuit, leaving the two makeup companies embroiled in a legal battle. (See Morphe LLC v. Becca Inc., No. 2:18-cv-06667, C.D. Cal.)

Where both company and influencer may be competing for brand recognition, agreements with influencers should clearly specify which party owns the various elements relevant to the design collaboration and require an assignment of rights where necessary.

3. Risk of Reputational Harm

Brands may also want to make sure contracts with influencers protect against the reputational harm that can be associated with an influencer’s behavior, and not just focus on number of followers.

Influencers, like conventional celebrities, can become embroiled in scandals which can embarrass companies they work closely with. For example, beauty guru Laura Lee’s eponymous makeup line was recently dropped by Ulta Beauty after fans of rival beauty guru Jeffree Star uncovered racially charged tweets Laura sent in 2012.

To protect against these potential reputational risks, Companies should add mortality and non-disparagement clauses to the influencer’s contract, allowing them to terminate the relationship and/or recover damages in the event the influencer does anything that would reflect unfavorably on the brand.

4. Disclosure Requirements

In April 2017, the FTC sent letters to 90 influencers and marketers reminding them of their obligation to clearly disclose their relationships with brands when endorsing them on social media. The issue here is not always whether companies know that influencer disclosure requirements exist, but rather whether brands monitor their influencers’ compliance with these requirements.

Indeed, lack of compliance is so widespread that the FTC cracked down on companies and influencers and released updated FAQs clarifying how and when to comply with the 2008 Endorsement and Testimonial Guides.

While companies can’t shift the legal burden of disclosure to an influencer, they can protect themselves by crafting proactive compliancy policies, training influencers in the best practices for disclosure, and including a clear, simple, and specific disclosure mandate in the influencer’s contract. Companies must also actively monitor the influencer’s compliance.

Final Thoughts

As marketers have enthusiastically seized on influencer marketing as a relatively inexpensive and powerful way to reach their target consumers, the influencer economy has evolved. Influencers have increasingly transformed themselves into quasi-celebrities, building their own brands as they amass larger followings and command higher fees and more lucrative brand deals.

As the line between traditional celebrity and the influencer blurs, risk to brands engaged in influencer marketing increases. Legal departments can no longer engage with influencers as unsophisticated amateurs and should rethink the way they enter into agreements, incorporating some of the same protections they would when engaging with traditional celebrities.

@getty images

On November 12, Crowell & Moring chaired a plenary session during the 2018 ICPHSO International Symposium in Brussels, which was presented as part of the European Commission’s International Product Safety Week. The panel focused on how, as a result of their Big Data strategies, Business-to-Business (“B2B”) companies are affected by consumer-focused legislation such as the General Data Protection Regulation (“GDPR”). Additionally, the EU’s Digital Single Market initiatives and their expected consequences were discussed.

As a brief reminder, the GDPR is a European-wide legislation applicable since the end of May that regulates the use of personal data, which is basically any type of information that can identify an individual. Replacing a name by a number, only referring to the identification number of a vehicle or device or using a nonsensical patient ID number is not sufficient to be out of scope; only truly anonymized data, e.g. aggregate data, is.

Manufacturers of industrial equipment are a good example of companies whose Big Data strategy forced them to focus on GDPR compliance. Indeed, in order to enhance the safety of the users of their equipment, a huge amount of data is collected. As such data relates to these users, such data is considered “personal data” and thus in scope of the GDPR. Therefore, the GDPR challenges and risks are very similar or the same for both B2B and Business-to-Consumer (“B2C”) businesses.

The same applies to the Internet of Things (“IoT”) in general, and connected devices more specifically, as we have moved from people speaking to each other, over people speaking to devices, to devices speaking to each other. Because connected devices operate both in B2B and B2C environments, compliance challenges are very similar or the same in this situation as well.

While compliance with very strict legislation such as the GDPR is not impossible, it cannot be denied that organizations with innovative Big Data-based business models often encounter substantial challenges. In the medical environment, for example, both artificial intelligence and 3D-printing can undoubtedly enhance the accuracy of a diagnosis or the precision of a treatment and, thus, add significant value to the entire healthcare sector. However, as such accuracy and precision increases with the amount of personal data that is processed, the use of huge amounts of data needs to be aligned with GDPR principles such as data minimization and purpose limitation, to only name a few.

Key to this dilemma is trust, combined with true ethical behavior and a clear focus on the rights of individuals. The importance of the latter cannot be underestimated, as the right to the protection of personal data is a fundamental right in the European Union, which means that this right should be respected in a similar way as other fundamental rights, freedoms and principles such as the right to life, prohibition of torture, the right to liberty and security, etc.

The buzz created around innovative technologies such as artificial intelligence and blockchain have put the need for an ethical approach high on the agenda. While, depending on their effective role in the actual processing of personal data, developers of these technologies might entirely be out of scope of the GDPR, the parties who use their technology are not. The latter will therefore have to embrace their responsibility and accountability obligations and make sure that the individuals’ rights and freedoms are optimally respected by means of appropriate technical and organizational measures, in line with the GDPR’s Data Protection by Design requirements. Clear information and even education about the efficiency and effectiveness of these measures is crucial to ensure that the true value of innovation is not thrown away with the bathwater.

Another topic that was discussed is the EU’s strategy for the future. While the “old school” single market approach ensures a level playing field and a free flow of goods, capital, services and labor within the European Union, the goal of the Digital Single Market is to ensure access to online activities for individuals and businesses under conditions of fair competition, consumer and data protection, removing geo-blocking and copyright issues.

In that context, an important initiative is the proposed Cybersecurity Act, which wants to ensure safe access to online activities for individuals and businesses. The EU-wide certification scheme that comes with it is a highly debated topic, as its approach seems to differ from the GDPR’s accountability requirement, where organizations themselves need to assess the risks and, based on such analysis, take appropriate technical and organizational measures accordingly.

A last topic that was part of the discussion was the EU’s proposed New Deal, that is aimed at strengthening consumer rights online, giving consumers the tools to enforce their rights and get compensation, e.g. via class action-like representation, and introducing effective penalties for violations of EU consumer law.

The panel concluded that the challenges posed by new EU consumer legislation cannot be underestimated, and that not only consumer products will be affected by the new regulatory framework. Compliance is certainly not impossible, and a focus on ethical behavior, a clear allocation of responsibilities and a constructive collaboration between the different stakeholders seem the key to success.

ICPHSO’s next event will be its 2019 Annual Meeting & Training Symposium which will be held February 25-28, 2019 in Washington, DC.

This article originally appeared in Bloomberg BNA.

Image of ruler at the 10 inch mark
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When Subway faced a class action over its “footlong” sandwiches coming up short, a quick settlement seemed like a good bet. Instead the case became a memorable example of how the courts and the Justice Department are cracking down on settlements that often do little more than generate easy money for plaintiffs’ attorneys.

Companies facing meritless class actions often move to quickly settle to avoid costly drawn-out legal battles, but in this new legal climate, companies should reconsider their strategies for resolving these lawsuits.

One of the most famous examples of this trend is the proposed settlement of class action lawsuits filed after a picture of a Subway “footlong” sandwich measuring less than 12 inches went viral. The lawsuits claimed the sandwich company engaged in deceptive marketing and sales practices. But the company quickly provided discovery showing it used the same amount of dough in each “footlong” roll. Thus, any variation in length of the rolls was merely a fluke of the baking process and not an indication that consumers were receiving less food.

Still, Subway agreed to settle the case and committed to institute quality-control practices designed to ensure consumers received 12-inch rolls. The company also agreed to post notices explaining that, even with the quality-control practices, the bread-baking process sometimes results in rolls measuring less than 12 inches.

For obtaining these concessions, plaintiffs’ attorneys were to receive more than $500,000 in fees.

No Benefit to Class

Subway, like many companies, embraced the opportunity to quickly settle a meritless lawsuit for only the cost of legal fees and a few minor business changes. But the U.S. Court of Appeals for the Seventh Circuit, one of a number of increasingly skeptical courts, rejected the settlement because it provided “zero benefits for the class,” noting “[a] class settlement that results in fees for class counsel but yields no meaningful relief for the class is no better than a racket.”

Courts are not alone in turning a more critical eye on proposed class action settlements.

Earlier this year, the Department of Justice signaled it would be making a concerted effort to review class action settlements. For the past 13 years, the DOJ has had the authority to review and weigh in on the fairness of class action settlements but has rarely done so. But in February, departing Associate Attorney General Rachel L. Brand indicated that the DOJ would use its authority to ensure class action settlements provide meaningful value to class members.

Soon after, the DOJ made good on its promise and issued a statement of interest opposing a proposed consumer class action settlement in federal court in New Jersey. Again, the concern was that class counsel was receiving $1.7 million for a settlement of dubious value to consumers. The plaintiffs claimed that an online wine retailer had misled them by showing very high “original” prices for bottles of wines, leading consumers to believe they were getting a better discount. However, as the DOJ pointed out, the plaintiffs “actually received the products they ordered at the prices to which they agreed.”

But even assuming the plaintiffs could show they suffered a loss, the proposed settlement offered only rebate codes that would allow a plaintiff a $2 discount per bottle of wine purchased from the defendant. The DOJ determined that, either way, the settlement was not fair.

The court agreed and ultimately rejected the settlement.

Do Your Homework

With courts and the DOJ viewing class settlements more stringently, companies should carefully consider whether a settlement that appears to be an easy way out is truly the best approach.

Such settlements may prove a waste of time and resources if they are challenged by the DOJ or ultimately rejected by the court. Although plaintiffs’ attorneys could withdraw their claims following a rejected settlement, often companies are faced with months or even years of continued litigation. And even if the settlement survives the increased level of scrutiny, it will not necessarily reduce the risk of similar lawsuits by plaintiffs that were not bound by the agreement.

Instead, companies should determine whether, even if more costly in the short term, they may ultimately have more to gain from seeking a dismissal of the action on the merits.

If companies still decide to settle, they should avoid the hallmarks of settlements that were found not to provide benefits to the class. If the value to the class involves only business practice changes, the companies should make certain to include changes that were not already in place before the settlement and that will materially reduce the risk of harm to consumers.

And instead of offering consumers coupons, which have limited value because customers need to spend money to get the benefit, companies should offer them small credits instead. Apple showed benefit to its customers when it settled a 2016 class action lawsuit by agreeing to pay $400 million to consumers who bought e-books at an inflated price by automatically crediting their e-book accounts.

Given the increased scrutiny on class action settlements, a more thoughtful approach to settlements that seem like a quick fix could save companies time and money in the long run.

 

Join Us For A Complimentary Webinar – Thursday, October 25, 2018 – 12:00 – 1:00 PM ET

Two years into the Trump Administration and:

  • The Consumer Product Safety Commission finally has a Republican majority,
  • the Department of Transportation has released its 3.0 guidance on autonomous vehicles,
  • NIST has published a 375 page recommendation on medical device security,
  • the FTC is holding a series of hearings on the transformative nature of the digital transformation on markets.
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What does all this activity in the United States mean for companies following the rapidly evolving regulations globally related to the safety and security of products?

This PLAC webinar will describe the current landscape at the federal agencies setting policy for product safety and security. With all the recent talk of regulatory humility in the face of great technological change, we’ll discuss whether regulators practice what they preach and if recent actions encourage or stifle innovation. Our session will compare and contrast activities across the federal government relevant to consumer products broadly defined with a particular focus on product safety and security.

Presenters:

Cheryl Falvey, Partner, Crowell & Moring, Washington, DC
John Fuson, Partner, Crowell & Moring, Washington, DC
Peter Miller, Senior Counsel, Crowell & Moring, Washington, DC

Please click here to register for this webinar.