In This Issue:
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With EU Safe Harbor Invalidated, Companies Ask: What Now?
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Fantasy Football Tackled by Reality With Insider Trading Scandal
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Court Sides With Bayer in FTC Contempt Case
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False Advertising Suits Over Outlet Prices Continue
With EU Safe Harbor Invalidated, Companies Ask: What Now?
What happens now?
That is the question that businesses across the country are asking after the Court of Justice of the European Union (CJEU) threw out the Safe Harbor agreement between the United States and the European Union, leaving a wake of uncertainty about the international transfer of data.
The 15-year-old agreement required companies in the United States to self-certify that they are in compliance with seven principles in the EU’s standard: notice, choice, onward transfer, security, data integrity, access, and enforcement. Administered by the U.S. Department of Commerce, the agreement permitted American countries to transfer data from the EU to the United States without fear of violating the more stringent data laws found in the European Union.
But after Edward Snowden’s revelations about the surveillance activities of the National Security Agency (NSA), Austrian citizen Max Schrems filed a complaint requesting that the Data Protection Commissioner (DPC) of Ireland prohibit a social networking site from transferring his personal data to the United States. Schrems argued that the United States did not ensure adequate protection of his data as required by EU law because of the surveillance activities Snowden exposed.
The DPC refused to investigate the complaint, noting that there was no evidence that the NSA had accessed Schrems’ personal data. Schrems appealed to the Irish High Court, which stayed the proceedings and referred questions to the CJEU, including the validity of the Safe Harbor.
In an opinion still being processed and discussed by legal entities on both sides of the Atlantic, the CJEU ruled not only that the DPC should have investigated Schrems’ complaint, but also that the principles behind the EU’s data laws required that the Safe Harbor agreement be invalidated.
The transfer of personal data to a third country which does not ensure an adequate level of protection must be prohibited, the court wrote, and the United States failed to meet this standard for multiple reasons, including that American companies must comply with U.S. law if it imposes an obligation conflicting with the Safe Harbor Principles. In addition, governmental entities are not required to comply with the Safe Harbor, and the broad exemption for “national security, public interest or law enforcement requirements” meant the NSA had access to the data of EU citizens.
“National security, public interest and law enforcement requirements of the United States prevail over the safe harbour scheme, so that United States undertakings are bound to disregard, without limitation, the protective rules laid down by that scheme where they conflict with such requirements,” Europe’s highest court wrote. “The United States safe harbour scheme thus enables interference, by United States public authorities, with the fundamental rights of persons.”
Companies with a European presence are now left wondering how to handle the trans-Atlantic transfer of data. Without the Safe Harbor framework in place, businesses may opt to keep data in the EU in lieu of sending it to the United States. European countries are now free to create their own data regulations, setting up a potential patchwork of laws that U.S. companies would be required to navigate when dealing with data overseas.
Two other options are available to U.S. businesses: one, known as binding corporate rules, requires an entity to establish company-wide policies and procedures for handling European personal data and make them binding on all relevant affiliates. The company must share its plan with citizens from the relevant countries (so that they can seek enforcement if they believe the policies are being violated) and obtain approval from each relevant European data protection authority. Better suited to large corporations, this path requires time and expense.
Model contracts offer another possible means of compliance for companies. Standard contract clauses adopted by the European Commission, the model contract between a European data controller and a U.S. business, establishes the obligations for data transfer and security.
To read the opinion in Schrems v. Data Protection Commissioner, click here.
Why it Matters: For the last two years, the U.S. and EU have been in the process of negotiating a new Safe Harbor agreement. The Schrems decision puts additional pressure on the negotiations and shifts a great deal of bargaining power into the hands of the Europeans, who can now point to the opinion in support of increasing the security protections for overseas data transfer. In the interim, the approximately 4,400 businesses that signed onto the Safe Harbor framework can consider options such as model contracts or binding corporate rules.
Fantasy Football Tackled by Reality With Insider Trading Scandal
With a major scandal brewing, fantasy sites DraftKings and FanDuel instituted new policies banning their employees from playing fantasy games for money while a state Attorney General launched an investigation into the companies and ESPN suspended branded news segments featuring DraftKings from the sports network.
In late September, news reports revealed that employees at the two companies regularly placed bets on each other’s websites. DraftKings content manager Ethan Haskell bet $25 on FanDuel and walked away with $350,000, allegedly by using data about which players were the most selected for lineups submitted on the DraftKings site—information that is not generally released until the lineups for all games have been finalized.
The fantasy sites responded with a formal ban on employees playing on competitors’ websites. Many employees at both DraftKings and FanDuel—the two largest online sites for fantasy gaming—also play fantasy sports, particularly as the niche industry has exploded in recent years. “Effective immediately, DraftKings employees will be permanently prohibited from participation in any public daily fantasy games for money,” the company said in a statement. “We will also prohibit employees from any Daily Fantasy Sports contest operator from participating in games on DraftKings.”
ESPN released its own statement to announce that the company suspended certain DraftKings content. The sports network, which reached a $500 million advertising deal with the company earlier this year, said it pulled DraftKings “billboards and sponsorship out of news programming,” as part of “a standard procedure for us to pull these kind of sponsorships and integrations when we are covering significant news, to avoid any suggestion of influence on our coverage.”
In recent years, fantasy sports have grown from informal groups of sports fans to online sites devoted to playing games for high-stakes money, with major sites like Yahoo entering the business and with investments from professional teams (including the National Football League’s Dallas Cowboys owner Jerry Jones and owner of the New England Patriots Robert Kraft).
Fantasy sports are subject to an exemption as a “game of skill” under the Unlawful Internet Gambling Enforcement Act of 2006, which prohibits online poker and sports betting, but are subject to state gambling laws. Betting on fantasy sports remains illegal in five states—Arizona, Iowa, Louisiana, Montana, and Washington—and a license must be obtained in Nevada.
That may change following the launch of an investigation by New York Attorney General Eric Schneiderman. The AG sent letters to both FanDuel and DraftKings requesting information such as the names and titles of employees who compile player data, set roster values, and aggregate the success of players on their sites. In addition, Schneiderman asked about data storage and security, as well as any policies in place on limiting winnings that can be claimed by employees, their friends, and relatives playing on the company’s site or rival platforms.
To read the AG’s letter to FanDuel, click here.
To read the letter to DraftKings, click here.
Why it matters: While fantasy league sponsors were subject to fallout from the revelations, it remains to be seen if the scandal impacts the bottom line of the multibillion-dollar industry.
Court Sides With Bayer in FTC Contempt Case
Bayer did not violate the terms of a 2007 consent order with the Federal Trade Commission, according to a New Jersey federal court judge who rejected the agency’s contention that the company disseminated unsubstantiated claims for its Philips Colon Health.
The dispute began with a 1991 administrative order issued by the FTC to Bayer’s predecessor in interest to cease and desist certain advertising practices with respect to One-A-Day brand vitamins and mineral supplements. According to the agency, Bayer violated the terms of that order with claims about enhanced metabolism and the prevention of weight gain.
To settle the disagreement, Bayer agreed in 2007 to pay a $3.2 million civil penalty and be subject to a consent decree that prohibited the company from making misrepresentations that any of its products:
“increases metabolism; enhances metabolism through its … content; helps prevent some of the weight gain associated with a decline in metabolism in users over age 30; helps users control their weight by enhancing their metabolism; makes a material contribution to any program or system that promotes weight maintenance; can or will cure, treat, or prevent any disease; or have any effect on the structure or function of the human body.”
Further, Bayer was enjoined from making any representation, express or implied, about the benefits, performance, or efficacy of any dietary supplement it markets or sells unless, at the time the representation is made, the company “possess and relies upon competent and reliable scientific evidence that substantiates the representation.”
Importantly, the 2007 consent order defined “competent and reliable scientific evidence” as “tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that has been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.”
The FTC alleged that Bayer violated the terms of the consent order with a 2008 advertising campaign to promote Philips Colon Health, a dietary supplement containing a proprietary blend of three specific strains of bacteria. Claims included: “To Promote Overall Digestive Health” and “Helps Defend Against Occasional Constipation, Diarrhea, Gas and Bloating.” The government filed a motion for an order to show cause as to why Bayer should not be held in civil contempt and U.S. District Court Judge Jose L. Linares held a seven-day hearing on the issue.
He then sided with Bayer.
The FTC told the court that “competent and reliable scientific evidence” required randomized, placebo-controlled, and double-blind human clinical trials using the specific product for which the claims are made. The trials must be conducted in the population at which the claims are directed and appropriate statistical methods must be used to assess and validate the outcome.
But Judge Linares noted that such trials were not required under the Dietary Supplement Health & Education Act (DSHEA), by the FTC guidance on advertising for dietary supplements, or even under the consent order itself.
“The Consent Decree does not mention randomized controlled clinical trials of any kind, let alone say they were required,” the court wrote. “In the seven years after entering the Consent Decree, the Government never told Bayer or anyone else in the industry that drug-level clinical trials … were required. Indeed, counsel for the Government conceded in closing argument that ‘you have to go outside the four corners of the consent decree’ in order to find support for the Government’s standard.”
In consent decrees with other companies, the FTC included a requirement for randomized, placebo-controlled, and double-blind human clinical trials, demonstrating that the agency knows how to require such studies when it wants, the judge added.
The FTC’s expert did not distinguish between study requirements for drugs and dietary supplements, the court said, and he testified that he was not familiar with DSHEA or regulatory guidance covering dietary supplements. Nor was the government’s expert from the field of probiotics. Bayer’s experts, on the other hand, were familiar with the regulatory regime for dietary supplements, were experts in the area of probiotics, and testified that a “vast majority” of their colleagues would disagree that the testing proposed by the FTC was necessary in their field.
“The government cannot seek contempt on the basis of a lone expert who proposes a standard that was not disclosed to industry until the day the government filed its contempt motion,” Judge Linares said.
The court also found that the FTC failed to present clear and convincing evidence that Bayer made implied disease claims, noting that the claims made for Philips Colon Health “are ubiquitous in the industry.” If such claims were truly disease claims, “then many of the most popular probiotic supplements on the market would be in violation of the law, and subject to seizure by the Food and Drug Administration,” the court wrote.
In addition, “every one of Bayer’s labels and advertisements contain the FDA disclaimer that [Philips Colon Health] is ‘not intended to diagnose, treat, cure or prevent any disease,’ and a Government witness conceded that, with this disclaimer, Bayer ‘disclaim[ed]’ any disease claim,” the court said.
Bayer possessed and relied upon sufficient evidence to support its claims, the court concluded, and it refuted the government’s argument that the company needed to print and record the studies it relied upon as the consent decree did not require physical copies. The absence of physical records did not give rise to an inference that Bayer did not possess and rely upon competent and reliable scientific evidence, Judge Linares explained, particularly as the company provided almost 100 studies in support of its claims when the FTC filed its motion for contempt.
To read the opinion in U.S. v. Bayer Corp., click here.
Why it matters: The decision reiterates that the FTC may not create additional requirements outside the lines of an existing consent order, particularly when the mandate goes beyond existing federal law and regulations. The judge cited two other decisions from federal courts in Florida and Utah, where courts held that competent and reliable scientific evidence did not require drug-level clinical trials and that the government could not reinvent the standard through expert testimony.
False Advertising Suits Over Outlet Prices Continue
Demonstrating the hot new trend in false advertising consumer class action, Columbia Sportswear Company was hit with a deceptive pricing suit in California federal court.
Jeanne and Nicolas Stathakos claimed the outerwear company overstated the “Former Price” listed on price tags at its outlet stores. The complaint stated that “Based on the represented price reduction, reasonable consumers would believe that Columbia is offering bona fide discounts off of true former prices.” “But the ‘Former Price’ represented by Columbia was a sham.”
The goods sold at Columbia outlet stores are manufactured for exclusive sale at that location, the plaintiffs said, and were never sold—or even intended to be sold—at the “Former Price” advertised on the price tags and the tags were designed to falsely convince consumers that they are buying brand products at reduced prices and not “lower quality goods.”
“To put it simply, one may pay $30,000 for a Prius and $100,000 for a Tesla, but no reasonable consumer would understand himself to have ‘saved’ $70,000 by buying a Prius,” the suit claimed. “Rather, he has simply chosen to buy a different car.”
For example, during a July visit to the Vacaville, Calif. Columbia outlet, the Stathakos’s purchased six items, including a pair of women’s shorts with a “Former Price” of $30 and an actual price of $14.97, believing they saved approximately 50 percent on their purchase.
Such “phantom markdowns” violate Federal Trade Commission’s regulations as well as California state law, the suit said. Specifically, Section 17501 of the state’s Business & Professions Code states: “No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price … within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.”
The “Former Price” listed on price tags at Columbia outlet stores did not reflect a prevailing market retail price from the prior three months, the plaintiffs alleged.
Seeking to represent a class of California plaintiffs, the complaint requested injunctive relief and restitution for violations of California’s False Advertising Law, Consumers Legal Remedies Act, and the unfair, fraudulent, and unlawful prongs of the state’s Unfair Competition Law.
To read the complaint in Stathakos v. Columbia Sportswear Company, click here.
Why it matters: The Stathakos complaint noted that the shift from using outlet stores as a means to sell-out-of season or damaged full-price inventory to a destination for goods manufactured solely for sale at the outlet has triggered both consumer class action suits and a letter from four members of Congress requesting that the FTC investigate misleading marketing practices by outlet stores in the country.
