Beyond the Target Market: Product Advertising and Rule 10B-5's in Connection with Requirement

Cleveland State University EngagedScholarship@CSU Cleveland State Law Review Law Journals 2013 Beyond the Target Market: Product Advertising and Rule 10B-5's in Connection with Requirement Thomas J. Maloney Elon University School of Law Follow this and additional works at: https://engagedscholarship.csuohio.edu/clevstlrev Part of the Securities Law Commons How does access to this work benefit you? Let us know! Recommended Citation Thomas J. Maloney, Beyond the Target Market: Product Advertising and Rule 10B-5's in Connection with Requirement , 61 Clev. St. L. Rev. 101 (2013) available at https://engagedscholarship.csuohio.edu/clevstlrev/vol61/iss1/5 This Article is brought to you for free and open access by the Law Journals at EngagedScholarship@CSU. It has been accepted for inclusion in Cleveland State Law Review by an authorized editor of EngagedScholarship@CSU. For more information, please contact . BEYOND THE TARGET MARKET: PRODUCT ADVERTISING AND RULE 10B-5’S “IN CONNECTION WITH” REQUIREMENT THOMAS J. MOLONY* ABSTRACT An investor purchases Apple common stock in reliance on representations in advertisements that the new iPad is capable of connecting to “ultrafast” 4G wireless networks. It turns out that the iPad is not compatible with the fastest wireless network in Australia or the 4G networks in Sweden and Germany. If the investor suffered a loss as a result, can the investor recover from Apple for securities fraud under Rule 10b-5 of the Securities Exchange Act of 1934? A number of possible impediments to recovery exist. One is Rule 10b-5’s limited scope. The Rule applies only to a fraud that is “in connection with” a securities transaction, and whether a false or misleading statement primarily directed to consumers has the requisite connection is an open question. This Article evaluates Rule 10b-5’s “in connection with” requirement as it relates to product advertisements and concludes that false or misleading statements in advertisements are actionable under the Rule. The Article also suggests that, to determine whether a particular advertisement meets the “in connection with” requirement, courts should look to factors considered in determining whether an advertisement is an “offer” under the Securities Act of 1933. INTRODUCTION .................................................................... 102 I. RULE 10B-5—AN OVERVIEW .............................................. 105 II. RULE 10B-5’S “IN CONNECTION WITH” REQUIREMENT ...... 108 A. The Supreme Court’s Limited Guidance ..................... 108 B. Varying Approaches of the Courts of Appeals ............ 112 C. Publicly Disseminated Information Principles............ 115 III. HISTORICAL CONSIDERATION OF ADVERTISEMENTS AND THE “IN CONNECTION WITH” REQUIREMENT ............... 119 A. Advertising Cases ........................................................ 119 B. Criticism of Carter-Wallace ......................................... 122 IV. ADVERTISEMENTS MAY MEET THE “IN CONNECTION WITH” REQUIREMENT.................................... 123 A. Publicly Disseminated Information Principles Allow for Advertisements to Meet the “In Connection With” Requirement ............. 123 B. Empirical Studies Indicate that Product * Associate Professor of Law, Elon University School of Law. 101 Published by EngagedScholarship@CSU, 2013 1 102 CLEVELAND STATE LAW REVIEW [Vol. 61:101 Advertising Affects Investor Decisions and that Managers Use Advertising for that Purpose ........ 124 C. The Approach to “Offers” Under the Securities Act of 1933 Recognizes the Possible Effect of Advertisements on Investors ........... 126 1. The “Gun-Jumping Rules” ................................... 126 2. 2005 Securities Offering Reform ......................... 129 V. DETERMINING WHEN AN ADVERTISEMENT MEETS THE “IN CONNECTION WITH” REQUIREMENT ............................. 131 A. Public Companies and the CausationBased Approach ........................................................... 131 B. Factors from the Approach to “Offers” Under the Securities Act of 1933 ............................................ 133 CONCLUSION ....................................................................... 134 INTRODUCTION Introducing the new iPad. With the stunning Retina display. 5 MP iSight camera. And ultrafast 4G LTE. It’s brilliant. In every sense of the word. Pick up the new iPad and suddenly, it’s clear. You’re actually touching your photos, reading a book, playing the piano. Nothing comes between you and what you love. To make that hands-on experience even better, we made the fundamental elements of iPad better—the display, the camera, the wireless connection. All of which makes the new, third-generation iPad capable of so much more than you ever imagined.1 Apple excitedly released its new iPad across the globe in March 2012,2 but for those in Australia, Sweden, and Germany, Apple’s suggestion that the device was “capable of so much more than [they] ever imagined” did not necessarily ring true— at least not as to the 4G LTE wireless connection. The new iPad, it turned out, was incompatible with the fastest wireless network in Australia and the 4G networks in Sweden and Germany.3 Purchasers of new iPads in those countries had a right to be disappointed. In Australia, Apple had marketed one model of the new iPad as “iPad with WiFi + 4G,” using that designation on its Australian website and online store, on signs in Apple retail stores, and in marketing materials provided to and used by other 1 Shirley Brady, Is Apple’s New iPad Resolutionary Enough to Drive Sales?, BRANDCHANNEL (Mar. 7, 2012 4:31 PM), http://www.brandchannel.com/home/post/AppleiPad-3-Reveal-030712.aspx. 2 See id. (reproducing “Apple’s iPad 3 pitch”). 3 Robb M. Stewart, New iPad Sparks Debate Over 4G Overseas, WALL ST. J. (Mar. 29, 2012 2:33 PM), http://online.wsj.com/article/SB1000142405270230381650457730828 2123733976.html. https://engagedscholarship.csuohio.edu/clevstlrev/vol61/iss1/5 2 2013] BEYOND THE TARGET MARKET 103 retailers.4 The fact that the iPad was incompatible with the Telstra LTE network, the only commercially available LTE network in Australia at the time of the new iPad’s release, caught the attention of the Australian Competition & Consumer Commission (ACCC). The ACCC filed a lawsuit against Apple in the Federal Court of Australia, claiming that using the “iPad with WiFi + 4G” designation was misleading to consumers and violated the Australian Consumer Law.5 In response to the lawsuit, Apple agreed to modify its website and promotional materials to make clear that the new iPad was not compatible with the Telstra network and offered refunds to those who purchased new iPads before the ACCC filed its suit.6 As a result of Apple’s compliance with the ACCC’s demands, consumers in Australia were made whole. But what about an investor who purchased Apple common stock in reliance on the statements on Apple’s website and other promotional mate (...truncated)