[email protected] – August 2020 #4 | BakerHostetler – JDSupra – JD Supra

Consumers Sue Mobile App Maker Over Loot Boxes

Supercell singled out for creating a gambling space for youngsters

Too Old for This

We need a minute.

Just a minute. Our heads are throbbing.

We just got through looking at Clash Royale and Brawl Stars, two frenetic, Day-Glo mobile games. Check out their YouTube channels (here and here) if you want to see what we mean.

(Are games like these the contemporary equivalent of watching way too much TV? Is that still a thing?)

The games are exemplars of classic gaming categories: Clash is a “tower rush” game where players and player teams send out attackers in an obstacle-filled environment; Brawl Stars is a multiplayer online battle arena featuring colorful characters. A class action filed recently in the Northern District of California claims that, despite the difference in genre, they’re both after the same thing: encouraging addictive behavior in children.

(Really) Buried Treasure

If you’re just staggering back from the YouTube channels mentioned above, you probably know why plaintiff Peter Mai is alleging Supercell, the manufacturer of the games, is marketing to kids. Both games have colorful cartoon characters for players to control, and the related promotional material has a distinctive, fast-paced-Saturday-morning cartoon quality. (Are Saturday-morning cartoons still a thing?)

The games also feature “loot boxes,” a type of gaming honeypot we’ve covered before. If you’re unfamiliar with the term (or the thing itself), allow us to reiterate: Companies like Supercell offer free versions of their games that are playable once they’re downloaded. They then attempt to capitalize on small in-game purchases that offer in-game advantages. (To be clear, these microtransactions still require real-world money.)

This approach, which grew alongside the advance of mobile computing, has been enormously profitable for game designers; Mai claims Supercell pulled in around $1.6 billion in profits for 2018 and 2019.

Nonetheless, he asserts that loot boxes are designed with the same attractive bells and whistles that festoon IRL slot machines, and that the chances of receiving truly valued loot through an online purchase are vanishingly slim. This is, according to Mai’s argument, the same thing as gambling. In fact, the whole complaint reads like a survey of the latest literature on the crossroads between online entertainment and addictive behavior – it’s worth a read, if only as a bibliography.

The Takeaway

Encouraging gambling would be bad enough, but the complaint alleges that the activity is not disclosed by Supercell or the marketplaces that offer the game – instead, Google Play and Apple’s App Store use the phrase “offers in-app purchases” in reference to the loot boxes in their description of the apps.

Mai seeks redress under California’s anti-gambling laws, Unfair Competition Law and Consumer Legal Remedies Act. He also alleges unjust enrichment.

If you’re designing an app that’s going to involve in-app purchases like these, disclose, disclose, disclose – and consider how you’re designing the rewards you’re offering to users.

But before you do that, we recommend reviewing relevant cases and information at the Children’s Advertising Review Unit (CARU). Its guidance for advertising and marketing to children is invaluable. And if you’re wondering about legislation and regulation related to loot boxes, check out a blog post of ours from last October, which provides a survey of recent efforts by oversight groups and legislatures.

Shadowy Keto Cabal Has Tendrils Everywhere

Gangbuster class action brings RICO charge against supplement scammers

Theater of the Deal

Rings within rings of collaborators, each attempting to conceal the other through endless compartmentalization: Are we talking about a diet supplement scam or a shadowy organization straight out of a John le Carré thriller?

The players:

The marketing ring, which operated “false-front” websites that captured consumers looking to purchase keto supplements. The fulfillment companies, which distributed worthless supplements instead of the promised products. The affiliate networks, offering “fill-in-your-own-name” websites to the marketers to push the supplements; these websites were then taken up by individual affiliates. The software companies that created the pages and stymied fraud detection efforts in a maze of merchant accounts and chargeback screening. And the processors that helped the whole enterprise avoid detection by bank and credit card companies.

Trick Mirrors

But this nested-dolls conspiracy isn’t le Carré protagonist George Smiley’s latest nemesis. It’s a complex scheme outlined in a complaint filed in the Southern District of California in early August by two SoCal consumers.

The complaint alleges that online shoppers looking for keto diet supplements were drawn into the scam through bogus celebrity endorsements and fake pricing. They would arrive at one of the defendants’ countless webpages, where they would place an order and hand over their credit card information. When the order arrived, the victims would receive more bottles of keto products than they had purchased – and would be charged more per bottle than they agreed to. The pills they did receive were allegedly worthless in any case.

When consumers raised a fuss, the network would “present a completely different face to the banks and credit card companies investigating complaints and requests for chargebacks … [and] a second website appearing to fully comply with the law and fully disclose the actual prices of the bottles.” Both named plaintiffs were denied their requested refunds.

Recombination

The complaint is a whopper – 108 pages long – and it’s filled with false celebrity endorsements, limited-supply and fake discount misrepresentations, thwarted Google searches, and failed return and refund policies. Lots of photos, too. The sheer variety of mutant iterations allegedly produced by the combination of these various scheme elements is astounding. But that was what made the scam successful.

The alleged network is a shadowy legion of companies and individuals, so only a handful of defendants have been identified.

And that obscurity is what makes this case distinctive. Sure, the plaintiffs accuse the networks of violations of numerous California statutes – including its Consumer Legal Remedies Act, False Advertising Law and Unfair Competition Law – along with fraud charges and regulatory violations. We discuss charges like these all the time.

But smack in the middle of the list is a Racketeer Influenced and Corrupt Organizations Act (RICO) charge, which attempts to define the multiple networks as a common criminal enterprise.

The Takeaway

“All of the Defendants are individuals and legal entities who associated in fact to comprise and operate the Keto scam,” the complaint asserts. “Defendants agreed to—and did—operate the Keto Enterprise through a pattern of racketeering activity.”

A RICO charge, of course, trebles (or triples) damages sustained by successful plaintiffs, making it a powerful charge, if the plaintiffs can get it to stick.

But can they succeed? Possibly, but there are high hurdles – the highest of which, unsurprisingly, is a paucity of defendants. To make a persuasive argument, the plaintiffs will have to draw clear lines between each of the parties to the alleged conspiracy. But who are they?

Given the murkiness surrounding the scheme, finding out may prove a difficult task.

FDA Issues New Final Rule Impacting Gluten-Free Foods

Fermented and hydrolyzed food manufacturers: keep your records straight

Wheat Retreat

Demand for wheat-derived food has been declining over the past few decades, driven down in part by low-carb diet trends but also by general health concerns, particularly celiac disease.

Celiac disease is a hereditary disorder that causes ingested gluten – a component of wheat grain – to irritate and damage the small intestine. The damage prevents nutrients from being absorbed into the body and leads to heightened risk of coronary artery disease and small bowel cancer, not to mention numerous troubling symptoms including anemia, joint pain, osteoporosis and infertility.

We’re Surrounded!

Since the 1940s, research has shown that gluten-free diets can treat the disease, and it’s still the only known effective response. In especially sensitive patients, even small amounts of gluten can cause significant distress – so ensuring that gluten-free foods are as free as they say they are is crucial.

Back in 2013, the Food and Drug Administration defined gluten-free foods for the benefit of consumers who live among vast crowds of wheat-eaters. Despite falling demand, Americans still knock back more than 130 pounds of wheat flour a year per capita. The stuff is everywhere, which makes it harder for celiac sufferers to stay safe.

The full definition is too long to quote here, but in part it defines products as gluten-free if “any unavoidable presence of gluten in the food is … below 20 mg gluten per kg of food.”

The Takeaway

That definition hasn’t changed, but the FDA recently issued a final rule outlining gluten-free designations for fermented and hydrolyzed foods. That covers a lot of products, including “yogurt, sauerkraut, pickles, cheese, green olives, FDA-regulated beers and wines, and hydrolyzed plant proteins used to improve flavor or texture in processed foods such as soups, sauces, and seasonings.”

If you don’t want to dive into the technical details, the FDA provides a convenient summary in a recent constituent update.

The challenge: Gluten contained in fermented and hydrolyzed foods is “no longer intact, and, currently, cannot be adequately detected and quantified through testing.” And that means the onus is on you, dear reader, to ensure gluten remains below acceptable levels (if you happen to be in the fermented or hydrolyzed food product business, that is).

“The final rule states that FDA will determine compliance based on records kept by the manufacturer to show that their foods are gluten-free before fermentation or hydrolysis,” the update states.

And if you need added incentive to keep accurate and up-to-date records, please remember that Health and Human Services Secretary Alex Azar suffers from celiac disease.

Do you want to accidently slip gluten into his yogurt?

FDA Rumblings on Natural Foods Shouldn’t Hold Up Case

Primary jurisdiction stay fails because court doesn’t see guidance ‘any time soon’

Get Horizontal

Back in September 2019, in the bygone era when human beings met each other in person, the Food and Drug Administration held a “Public Meeting on Horizontal Approaches to Food Standards of Identity Modernization” at the Rockville, MD, Hilton.

The purpose of this meeting was “to give interested persons an opportunity to discuss FDA’s effort to modernize food standards of identity and provide information about changes we could make to existing standards … to facilitate innovation and provide flexibility for the development of healthier foods.”

At this meeting, Dr. Susan Mayne, director, Center for Food Safety and Applied Nutrition, made a statement that raised eyebrows: “We are close to proposing a new definition for the ‘Healthy’ claim on food labels and have been working diligently on the claim ‘Natural.’”

One Small Step for … Not Much at All

Mayne’s statement wasn’t exactly a sentence that shook the world, but in certain circles it raised eyebrows. That’s because the FDA has failed, for years now, to issue guidance on what “natural” food is. The last major inflection point for the Administration was back in 2015 when it asked for comments on the “Use of the Term Natural on Food Labeling.” The comment period closed in May 2016, and there’s been little action since.

This sphinxlike silence is rather deafening given the ongoing obsession in culture and commerce over the benefits of natural products. Everyone’s got an opinion, but there’s no authoritative voice with the heft of the FDA keeping the packaging straight.

In the Meantime …

Which brings us to the case in question, Silva v. Hornell Brewing Co. – a relatively straightforward dispute in New York’s Eastern District. Brooklyn, NY, resident Christopher Silva sued Hornell Brewing Co. in February under a number of charges, including violations of the New York General Business Law, breach of express warranty, breach of the Magnuson-Moss Warranty Act and unjust enrichment.

At issue was a purchase by Silva of Hornell’s Arizona Fruit Snacks product, which bears the label “ALL NATURAL” on its package. Silva maintains that some of the ingredients listed on the product – gelatin, citric acid, ascorbic acid, dextrose, glucose syrup and modified food starch (corn) – are synthetic, thus giving the lie to the packaging claim.

Hornell moved to dismiss the case in June. The court let most of Silva’s charges stand in a recent order. But Hornell also moved to stay the case under the primary jurisdiction doctrine “because the FDA is currently evaluating regulations to guide the use of the term ‘Natural’ on food products.”

Pessimism

“Defendants make much of the recent comment by Dr. Magne (sic),” writes the court. The motion to stay, which argues that a class action against the company should be the concern of the FDA under the primary jurisdiction doctrine, cites nine other cases that have been stayed “against the backdrop” of Dr. Mayne’s comments.

“… there has been a prior application [by the defendants] to the agency,” the court writes, “but I have no confidence that the FDA will be addressing this issue anytime soon … . Dr. Magne’s (sic) comment was now almost a year ago, and there continues to be no agency action. Given the experience of the past five years, there is no reason to think the agency is going to be addressing this issue in the near future.”

The Takeaway

And so Hornell’s motion to stay failed, and the action moves forward. The court’s deep-seated skepticism regarding the FDA’s willingness to establish standards for “natural” claims wasn’t enough in this case to shelter the defendants.

This lack of consensus between courts should make any food producer cautious about how they handle “natural” as an advertising or marketing tag. After all, there’s a double level of uncertainty at play: First, there’s uncertainty about what “natural” means; and second, there are wide-ranging opinions about whether the FDA’s long-awaited ruling is right around the corner.