If your company sells a smart device to a consumer, can it later turn the device into a paid advertising platform? Can it do so without advanced disclosure?  A recent court ruling suggests the answer is “yes,” at least in New York.

In In re Sling Media Slingbox Advertising Litig., No. 15-05388 (S.D.N.Y. Aug. 12, 2016), consumers who purchased a “Slingbox” claimed they bought the device solely to “sling” their cable television service from one place (their home) to another device located anywhere (e.g., a vacation rental, office, etc.) over the Internet, but the manufacturer began adding its own advertising to the internet transmission.  The consumers claimed that, in addition to the ads already included in the feed pre-slinging, Sling Media inserted ads that played before (or alongside) the post-slinging feed in the form of banner advertisements that appeared on the edge of the screen (and which, purportedly, would disappear if the user viewed the streamed content in full screen mode or purchased a certain app for an ad-free experience).   Plaintiffs portrayed Sling Media’s imposition of ads as the beginning of a parade of horribles in which various “smart” devices—from cars to dishwashers—suddenly begin “forc[ing]” drivers, passengers, etc. to watch “unwanted” ads.  The consumers asserted the alleged unilateral insertion of ads violated the consumer protection laws of forty-eight states, including New York General Business Law (GBL) § 349.

The district court dismissed the claims, finding that New York law governed and that the allegations did not describe any misleading or deceptive conduct or actual injury.

The court first found that there were no viable claims of fraud or deceit. For example, there was no allegation that Sling Media actually stated the slinging functions would be “ad free.”  Likewise, the court observed that the lead plaintiffs failed to allege whether they bought their devices after Sling Media allegedly formed its intent to insert ads and before Sling Media launched the new feature (thereby disclosing the intent).

Critically, the court rejected the assertion that it is necessarily deceptive to sell a consumer a device meant to do one thing—transmit programming separately purchased by a consumer from his or her cable operator—and then use it for an additional function—transmitting advertising for which Sling Media was being paid. The court found that there was no allegation that the lead plaintiffs themselves subjectively expected an “ad-free experience” when they purchased a Slingbox, let alone plausible allegations that objectively reasonable consumers care about the insertion of ads by Sling Media such that the company’s alleged failure to disclose a future plan to disseminate advertisements was a “material” deception.

The court also found that the consumers failed to allege “injury.” The plaintiffs implied that Sling Media’s “use” of the plaintiffs’ property was itself an injury (like a private version of a “takings” claim).  But the court ruled that, to allege injury, the plaintiffs would have to plead facts showing that Sling Media’s ad insertions somehow prevented consumers from using the device to watch television or made it more expensive to do so.  Ultimately, the court ruled that the complaint was devoid of any allegations regarding how the insertion of ads, “which may be beneficial, detrimental or of no consequence based on consumers’ personal tastes, likes, or dislikes, constituted or caused Plaintiffs’ the type of harm that might qualify as an ‘actual injury’ within the meaning of GBL § 349.”  The court also underscored that, in New York, alleged “deception” itself is not “injury.” (See Op. at 11, n. 15 (citing Small v. Lorillard Tobacco Co., Inc., 94 N.Y.2d 43, 56 (1999) (consumers who buy a product that they would not have purchased absent deceptive conduct, without more, have not suffered injury)).

Lastly, and importantly for the “smart” device industry, the court noted that plaintiffs could not establish that ad insertion impaired any “legal right established by contract.”  The software needed to use the Slingbox was only licensed to consumers and the license did not reference advertising one way or the other.  Moreover, the license allowed Sling Media to modify the software (for example, to insert additional advertisements).

The impact of the Sling Media decision is tempered by the fact that it was a decision on a motion to dismiss (and allowed plaintiffs to move for leave to amend).  And it was decided under New York’s consumer fraud statute, not California’s potentially more liberal laws.  That said, the decision stakes out several key points to consider in switching a consumer device (or paid service) from an ad-free to an ad-supported environment:

• Have affirmative representations been made about ads one way or the other?

• Is there evidence about whether consumers view the addition of ads as a benefit? Or whether they care at all?

• Does the addition of ads interfere with any core functions of the device or service?

• Does the addition of ads actually make it more costly to use the device or service?

Finally, as always, consider whether you have an effective dispute resolution provision covering the device and/or any service or software, including class action waivers (to the extent permitted by law).