Court Holds Violation of FTC Endorsement Guidelines Does Not Lead to Federal Trademark Claim

(Lokai Holdings LLC v. Twin Tiger USA LLC, S.D.N.Y. 2018)

While brand owners often benefit from the endorsement of online and social media “influencers,” such endorsements must not mislead consumers as to the relationship between the brand and individual endorsing the brand’s products or services. To ensure that “material connections” between brands and influencers are clearly and fully disclosed, the FTC has put forth guidelines designed to assist brand owners with meeting this requirement. Under the guidelines, brands are subject to liability for failing to disclose material connections between themselves and those individuals who promote or endorse the brand. To the extent an advertiser contravenes these guidelines, however, no private right of action exists; instead, it is up to the FTC to take action. A recent decision by the U.S. District Court for the Southern District of New York has added a further limitation, holding that a violation of the FTC guidelines cannot support a claim for false advertising under either federal or California state law.

Background

Lokai Holdings LLC is a socially conscious lifestyle brand that sells, among other products, beaded bracelets. In 2015, Lokai sued competitor Twin Tiger based on Twin Tiger’s sales of allegedly unauthorized imitations of Lokai’s bracelets. Twin Tiger, in turn, asserted various counterclaims, including false advertising and unfair competition under federal trademark law, California law, and New York law. All of the claims relied on the same allegations, including Twin Tiger’s assertion that Lokai failed to disclose that it compensates certain celebrities and influencers promoting Lokai’s products online and through social media.

Lokai’s Motion to Dismiss

Lokai moved to dismiss Twin Tiger’s false advertising and unfair competition claims, asserting that Twin Tiger had failed to adequately allege either claim.

Twin Tiger acknowledged that only the FTC could bring a claim based on Lokai’s alleged violation of the FTC guidelines. However, Twin Tiger argued that the FTC guidelines can nonetheless inform what constitutes false advertising under federal trademark law.

The Court disagreed, noting that federal trademark law does not impose an affirmative duty to disclose the relationship between brands and those who endorse their product. Rather, in order to support a claim under the Lanham Act, there must be an affirmative misrepresentation or omission. As a result, according to the Court, Lokai’s failure to disclose that it had compensated certain celebrities and influencers in connection with the promotion of its products could not support Twin Tiger’s Lanham Act claims.

Nor could such failure to disclose support Twin Tiger’s California state law claims for unfair competition and false advertising. Both state law claims focus on whether an advertisement is likely to deceive a reasonable consumer. According to the court, Twin Tiger had failed to allege any facts from which to infer that the non-disclosure of paid endorsements is likely to mislead consumers into believing that the endorsements are unpaid.

Lastly, the court dismissed Twin Tiger’s claim under New York’s General Business Law § 349, which prohibits deceptive acts and practices that impact consumers. While the Court did find the FTC guidelines relevant to this claim – Section 349 is substantially modeled on the FTC Act – that Section requires consumer injury or harm to the public interest. Disputes between competitors, focused on harm to another business (as opposed to consumers), does not satisfy this standard. The court determined that Twin Tiger had failed to demonstrate how Lokai’s failure to disclose paid endorsements, and consumers’ purchase of Lokai bracelets (instead of, presumably, Twin Tiger’s) injured the public interest.

Takeaway:

The district court’s decision in this case, while limiting, does not foreclose the possibility of brand-owners asserting claims based on a competitor’s failure to disclose material relationships with product endorsers or reviewers. While federal trademark law does not impose an affirmative duty of disclosure, an omission or failure to disclose a material fact can be actionable when it renders an affirmative statement false or misleading. In those instances, a potential plaintiff must identify the affirmative statement rendered false or misleading in order to support a claim under the Lanham Act. It is unclear whether Twin Tiger’s claims would have succeeded – at least through the early stages of the litigation – if it had more precisely identified those specific statements rendered false or misleading as a result of Lokai’s failure to disclose its compensation of celebrity endorsers.[1]

As a result, brand owners should ensure compliance with the FTC’s guidelines, and should not assume that they are fully insulated from private actions based on conduct that violates those guidelines. Conversely, parties seeking to assert violations of the Lanham Act should ensure that their claims are based on more than a failure to disclose compensation to endorsers or influencers. To the extent a potential plaintiff wishes to focus on a material omission, that party must craft its claim carefully and with sufficient precision, identifying the particular statement(s) rendered false or misleading by the omission, to avoid an early dismissal of its lawsuit.

 

[1] Twin Tiger has sought leave to amend its answer and counterclaims, presumably to address this deficiency. Twin Tiger’s request remains pending.