Overstock Case Could Alter the Landscape of Price Comparison Advertising

BY: Griffin Finan

A California court ruled earlier this month that Overstock must pay a roughly $6.8 million penalty to settle claims that the retailer “routinely and systematically” made false and misleading claims about the prices of its products on its website. If upheld, this ruling could have significant effects on how companies use price comparisons in advertisements in the future.

A group of California District Attorneys sued Overstock in 2010 for $15 million, alleging that Overstock was deceptive in the way it determined and displayed price comparisons on its website. Overstock used a comparative advertising method based on price, which is commonly referred to as “advertised references prices” or “ARPs” that showed the price of a certain product on Overstock compared to the price of the same product from a different retailer. The lawsuit alleged that the ARPs that Overstock used were false or misleading because Overstock employees chose the highest price that they could find as an ARP or constructed ARPs using arbitrary formulas. The lawsuit alleged that as a result of Overstock’s method of constructing its ARPs, its savings comparisons were inflated.

A California state judge’s tentative ruling earlier this month levied civil penalties against Overstock of just over $6.8 million. The court dismissed some of the claims in the lawsuit, but found that Overstock’s pricing comparison violated the state’s laws on unfair competition and false advertising.

The court also issued an injunction that prohibits Overstock from comparison price advertising unless it is done in conformity with a lengthy set of court mandated practices outlined in the opinion. Among those requirements, the court ordered that Overstock explain its pricing more clearly on its website, including a disclosure of how it computes the price comparisons. The ruling also prohibits Overstock from setting average retail prices based on anything other than the actual retail price offered in the marketplace.

Overstock has said that they plan to appeal the court’s ruling by arguing that the court’s decision is misreading California law and is holding the company to a higher standard than other e-commerce sites. If this ruling is upheld, this could have a significant ripple effect on retail advertising for both online and brick-and-mortar businesses. Almost every state has a law regarding deceptive pricing in advertisement, and the Federal Trade Commission also has jurisdiction to pursue claims against deceptive advertising in price comparisons. Companies need to be aware if they are using comparative price advertising that those advertisements, and the formulas for determining the prices on those advertisements, will be scrutinized by government agencies.

Industry, Members of Congress Take Action on FTC Process

BY: Michelle Cohen

As the Federal Trade Commission (“FTC”) continues to flex its consumer protection muscles by bringing numerous administrative lawsuits, industry and members of Congress are questioning whether there is a level playing field that allows companies to properly defend themselves against FTC charges.  Or, as some say, does the FTC have the “home court advantage” in its role as investigator and prosecutor, armed with very broad authority under Section 5 of the FTC Act –leaving many companies to decide simply to settle rather than face the Goliath FTC.  However, some companies have been bucking that trend recently and challenging the FTC’s authority (particularly in the area of regulating data security and FTC officials’ impartiality.

As background, the FTC may begin an enforcement action if it has “reason” to believe that the FTC Act is being or has been violated. Section 5(a) of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting commerce.”  The FTC also enforces several other consumer protection statutes, including the Fair Credit Reporting Act, the Do-Not-Call Implementation Act of 2003, and the Children’s Online Privacy Protection Act.

Under Section 5(b) of the FTC Act, the FTC can challenge “unfair or deceptive acts or practices” or violations of certain other laws (such as those listed above) in an administrative adjudication. The way this works is the FTC issues a complaint putting forth its charges.  Many companies faced with such complaints inevitably settle with the FTC, rather than endure an administrative trial.  Those companies that contest the charges face a trial-type proceeding before an FTC administrative law judge.  FTC staff counsel “prosecute” the complaint.  The administrative law judge later issues an initial decision. Either party can appeal the initial decision to the full FTC for review.

Many observers, including the American Bar Association, have criticized this situation — where the FTC acts as both prosecutor and judge — as inherently unfair. After the FTC’s decision, the respondent organization (or individual)may appeal to a federal court of appeals. However, at this point, an extensive record has been made and this assumes an organization or individual has the resources to devote to a federal appeal. (In addition, the FTC can also bring consumer protection enforcement directly in court rather than through administrative litigation).

The FTC’s winning record in these administrative proceedings has many observers questioning the process and the FTC’s potential impartiality.  House antitrust chairman Spencer Bachus (R-Ala.) called out the FTC’s apparent lack of impartiality and fairness, stating “ a company might wonder whether it is worth putting up a defense at all.”

Just a couple weeks ago, however, medical testing company LabMD went on the offense and sought the disqualification of an FTC Commissioner. Facing an administrative proceeding relating to its alleged failure to secure patient information data, LabMD moved to disqualify Commissioner Julie Brill from consideration of its case.  LabMD claimed that the Commissioner made numerous statements at industry conferences prejudging its ongoing litigation. Specifically, LabMD claimed Brill stated LabMD that had violated the law, rather than indicating that LabMD was under investigation or in litigation.  The FTC opposed the disqualification. However, Commissioner Brill voluntarily recused herself from the case on Christmas Eve to avoid “undue distraction” from the administrative litigation.

As the FTC litigates in several key areas – data privacy, financial services, credit repair, telemarketing – we expect administrative litigation will increase in 2014. While some companies will continue to settle to avoid continued litigation expenses and possible further detrimental outcomes, we think others will take the LabMD route and seek relief when they believe the processes are not transparent or the FTC is exceeding its authority.

New Year Brings New Plans by the FTC to Take Down Deceptive Weight Loss Advertisers

BY: Rachel Hirsch

New year, new resolutions.  Yesterday, the FTC announced a resolution of its own: to undertake a nationwide enforcement effort to protect consumers against deceptive weight loss claims.  Dubbed “Operation Failed Resolution,” the FTC’s latest enforcement effort seeks to protect consumers who face a barrage of “opportunistic marketers” promising quick ways to shed pounds. According to the FTC, these marketing tactics cause millions of dollars of consumer injuries and encourage people to postpone important changes to diet and exercise.

To announce this new initiative, the FTC held a press conference in which it identified four significant enforcement actions: (1) Sensa – a flavored powder that claims to cause weight loss when sprinkled on food; (2) L’Occitane Inc.– a skin cream that promised to shave inches off consumers’ bodies; (3) HCG Diet Direct – a product based on the human chorionic gonadotropin hormone; and (4) LeanSpa – a dietary supplement. Collectively, these four enforcement actions total $44 million in potential recovery for consumers.

All four enforcement actions shared one common thread – claims of quick and easy weight loss that were not supported by evidence.  Many of the ads in question touted substantial weight loss without diet or exercise simply by using the product alone.  Although some of these marketers cited clinical studies that supported their claims, the FTC said that the so-called “independent” studies were largely fabricated. The FTC also took issue with consumer endorsements, which failed to disclose that the consumers were paid for their testimonials or that the consumers were related to the owner.  The FTC also scrutinized so-called physician endorsements.  According to the FTC, marketers failed to disclose that their endorsers were compensated to the tune of $1,000-$5,000 and free trips.

Yesterday’s press conference is not the first time that the FTC has taken action against deceptive weight loss claims.  In 2011, we reported on 10 lawsuits filed by the FTC against marketers behind the ubiquitous “1 Tip for a Tiny Belly” ads, which the FTC claimed were a scheme by marketers of diet and weight loss products to grab consumer credit card information and pile on additional, unapproved charges.

Although deceptive weight loss claims are not a new phenomenon, the FTC announced yesterday that it is taking a new approach to cracking down on these types of ads. The FTC is now encouraging media outlets that run these ads to conduct a “gut check” and turn down spots with bogus claims. Yesterday’s press conference was a call to action for both consumers and media outlets to help the FTC track down deceptive weight loss marketers, which can mean only one thing – more widespread enforcement efforts against marketers of dietary supplements. The FTC does not comment on non-public investigations and would not comment on whether these enforcement efforts would result in criminal enforcement from other agencies. One thing is for certain, however: If you make a claim about your weight loss product, you’d better be able to back it up.

Botnet ZeroAccess Hit With Complaint by Microsoft, but Will This Slow the Malware Industry Down?

BY: Rachel Hirsch

ZeroAccess is one of the world’s largest botnets – a network of computers infected with malware to trigger online fraud.  Recently, after having eluded investigators for months, ZeroAccess was disrupted by Microsoft and law enforcement agencies.

Earlier this month, armed with a court order and law enforcement help overseas, Microsoft took steps to cut off communication links to the European-based servers considered the mega-brain for an army of zombie computers known as ZeroAccess. Microsoft also took control of 49 domains associated with ZeroAccess.  Although Microsoft does not know precisely who is behind ZeroAccess, Microsoft’s civil suit against the operators of ZeroAccess may foreshadow future enforcement efforts against operators alleged to have illegally accessed and overtaken people’s computers.

ZeroAccess, also known as max++ and Sirefef, is a Trojan horse computer malware that affects Microsoft Windows operating systems.  It is used to download other malware on an infected machine and to form a botnet mostly involved in Bitcoin mining and click fraud, while remaining hidden on a system.  Victims’ computers usually fall prey to ZeroAccess as the result of a drive-by download or from the installation of pirated software.   Essentially, ZeroAccess hijacks web search results and redirects users to potentially dangerous sites to steal their details.  It also generates fraudulent ad clicks on infected computers then claims payouts from duped advertisers.

The Microsoft lawsuit, originally filed under seal in Texas federal court, alleges, among other things,  violations of the Computer Fraud and Abuse Act  (“CFAA”) (18 U.S.C. §1030), the Electronic Communications Privacy Act (18 U.S.C. §2701), and various trademark violations under the Lanham Act (15 U.S.C. §1114 et seq.).  Microsoft secured an injunction blocking all communications between computers in the U.S. and 18 specific IP addresses that had been identified as being associated with the botnet.  The company also took control of 49 domains associated with ZeroAccess.  Microsoft took action against ZeroAccess in collaboration with Europol’s European Cybercrime Centre, the FBI, and other industry partners.  As Microsoft enacted the civil order obtained in its case, Europol coordinated law enforcement agency action in Germany, Latvia, Luxembourg, the Netherlands and Sweden to execute search warrants and seize servers associated with the fraudulent IP addresses operating within Europe.

The federal statutes on which Microsoft relied in its lawsuit may be broad enough to capture the gravamen of the complaint here.  For example, the CFAA was enacted in 1986 to protect computers that there was a compelling federal interest to protect, such as those owned by the federal government and certain financial institutions. The CFAA has been amended numerous times since it was enacted to cover a broader range of computer related activities and there has been recent discussion on Capitol Hill of amending it further. The CFAA now prohibits accessing any computer without proper authorization or if it is used in a manner that exceeds the scope of authorized access. The law has faced steep criticism for being overly broad and allowing plaintiffs and prosecutors unfettered discretion by allowing claims based merely on violations of a website’s terms of service.  In those cases in which ZeroAccess has accessed a user’s computer entirely without permission, there will likely be no dispute about whether the CFAA applies; however, in any follow-on cases in which the authority to access the computer was less clear, Microsoft may have more difficulty in relying upon this statute.

According to Microsoft, more than 800,000 ZeroAccess-infected computers were active on the internet on any given day as of October of this year.  Although the latest action is expected to significantly disrupt ZeroAccess’ operation, Microsoft has not yet been able to identify the individuals behind the botnet, which is still very much intact. Microsoft’s attack is noteworthy in that it represents a rare instance of significant damage being done to a botnet that is controlled via a peer-to-peer system.  But ZeroAccess has come back to life once before after an attack on it, and it would not be surprising if it recovered from this attack as well.  Unless Microsoft or Europol can identify the “John Does 1-8”referenced in the complaint, this and other botnets will keep on operating without fear of reprisal.

The big question at this point is whether Microsoft’s actions will have an enduring impact beyond ZeroAccess.  Will Microsoft’s actions spur other private companies to take steps of their own to stop malicious software?  That answer remains to be seen.

Report From FTC Briefing – Blurred Lines: Advertising or Content?

BY: John Peters

The FTC held a workshop on Wednesday to examine the blurring lines of advertisements and content in digital media today. Executives from a myriad of professions gathered to discuss how sponsored content in digital publications takes form and affects the consumer.

Native advertising, or sponsored content, is the practice of masking advertising to look like news articles and features of the publications where they appear. The Internet has witnessed this practice grow aggressively in the past few years, and the FTC has already issued a warning to advertisers, saying it won’t hesitate to enforce rules against misleading advertising.

One of the main issues discussed during the panels today was how consumers were affected by native advertisements. Staff attorneys from the FTC repeatedly stressed that marketers bear the responsibility to ensure that the original source of the advertisement is transparent to the consumer. Often times, especially on social media outlets such as Twitter, links are tweeted or retweeted along with other links, causing confusion. Marketers like this because their native advertisements will become blurred and perceived as actual content. Studies have shown that native advertisements actually receive more views than naturally occurring ads. Bob Garfield, MediaPost columnist, said of native ads, “Native advertising is not deception, it’s a conspiracy of deception that’s becoming harder and harder to spot. This is unfair for the consumer.”

Sponsored content run by various websites is already being carefully watched by the agency. FTC Chairwoman, Edith Ramirez, said of native advertising, “The delivery of relevant messages and cultivating user engagement are important goals. But it’s equally important that advertising not mislead consumer by presenting ads that resemble editorial content.”

But not everyone at the workshop on Wednesday was convinced this is a problem for the consumer. David Franklyn, University of San Francisco law professor, claimed that studies at his university showed 35 percent of consumers could not identify a sponsored advertisement. Additionally, nearly half of the consumers studied did not know what ‘sponsored content’ meant. “How can consumers have a problem with something that they don’t even know exists,” asked Franklyn. Lastly, and perhaps most importantly, a third of the consumers reported they did not care if something was an advertisement.

Another popular topic at today’s workshop was the deceptive advertising in the marketing of diet pills and the supplement industry as a whole. The FTC is beginning to crack down on the practices of this industry. The agency described their ‘endorsement guides’ as they pertain to advertising – certain principles must be met between the marketer and the buyer. Along the same lines, in an internal FTC memo, the agency noted that another recent problem with search engines was the ambiguity behind search results and the fake testimonials that came with the diet pill ads. The FTC stressed that consumers have the right to know what search results were ‘naturally occurring’ opposed to paid results.

Native advertising is by no means a phenomenon that exists only in obscure corners of the internet.  Sites such as the Huffington Post, Proctor and Gamble and BuzzFeed have all been engaging in these native advertisement practices. Additionally, 73 percent of online publishers reported they have offered sponsored content opportunities on their sites. Other online publications, such as The New York Times, are considering offering these types of ads in 2014.

Even though many consumers seem to be at peace with sponsored content, based on results found from studies at the University of San Francisco Law School, consumers are still being exposed to deceptive advertising practices. And any time that happens, the enforcement side of the FTC is likely to get involved. Will we see an enforcement case on native advertising as early as 2014? That’s unclear, but if more companies, like the Times, plan to engage in these practices, there is a high probability we will see the FTC take action sooner rather than later.

After Being Unfairly Characterized by Regulators, For-Profit Institutions Slowly Rebranding Image

BY: Nicole Kardell

For-profit education needs rebranding. With the recent appointment of Michael Dakduk as key advisor to the Association of Private Sector Colleges and Universities, the sector has made a step in the right direction. The onslaught of negative news against for-profit educators has severely impacted industry growth. Recent reports on drops in enrollment (and thus earnings) at Bridgepoint Education, Inc.,Strayer Education, Inc., Education Management Corp. and Apollo Group Inc. demonstrate just how hard the sector has been hit.

A central problem is for-profit education’s extreme unpopularity among government regulators – thanks, largely, to some bad actors overselling their programs and pressuring prospective students. Regulators both perceive and characterize for-profit educators as unscrupulous opportunists. Unfortunately for the industry, this is a characterization regulators like to broadcast to the public without much qualification. (Query: since when did it become okay for government representatives to lambast whole industries – and imperil jobs in those industries – for the actions of a few?).  Most recently, the FTC has launched a campaign to warn veterans about for-profit education:

• “Colleges are there to help you, right? Hmm, not so fast. Not every school has got your back. Some for-profit schools may care more about boosting their bottom line with your VA education benefits. Some may even stretch the truth to persuade you to enroll, either by pressuring you to sign up for courses that don’t suit your needs or to take out loans that will be a challenge to pay off.”  (http://www.consumer.ftc.gov/blog/veterans-dont-get-schooled)
• “[S]ome schools manipulate the data or lie about how well their graduates fare.” (http://www.consumer.ftc.gov/articles/0395-choosing-college)

The FTC’s campaign, published in a news release and articles on the FTC’s consumer page, provides the above warnings about for-profit schools, offers questions to ask when choosing a school, and furnishes a link to filing a complaint with the FTC, should a consumer believe a school hasn’t lived up to its promises. The hyperlink to a consumer complaint page suggests that the FTC is actively seeking cases to pursue against for-profit educators. Any FTC enforcement action would likely involve allegations that a school deceived students about the cost, quality, or outcome of its program offerings – as the FTC is charged with protecting consumers from deception and unfairness in the marketplace.  (Section 5 of the FTC Act broadly prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.’’)

The FTC’s campaign follows statements made by President Obama this summer that “soldiers and sailors and Marines and Coast Guardsmen, they’ve been preyed upon very badly by some of these for-profit institutions.” The message publicly broadcast over and over decries the supposed predatory practices of for-profit institutions. It is an unfair stereotype with a significant impact on these educators, harming their enrollment numbers and forcing institutions to lay off employees and shutter campus locations.  Yes there have been bad actors; but both state and federal enforcement agencies have been active in investigating and addressing predatory and/or deceptive practices. Blackening the eyes of all for-profit educators, which results from statements such as those of the President or the FTC, is overreach.

Part of the problem for government regulators maybe their difficulty accepting that educators could legitimately make money while students earn a degree. They may have the same reservations expressed by a representative from Student Veterans of America: “I am always professionally skeptical about any institution that must answer to shareholders and investors before students and customers.” But having to answer to shareholders and investors is not necessarily a bad thing. It can serve as a check on institutions to ensure they are running their programs effectively and efficiently; it can motivate institutions to be innovative and find better ways to meet their consumers – i.e. their students – needs and demands.  For-profit educators are responsible for advancements in online education and other innovations that make education more accessible.The result: for-profit educators are to thank for opening education opportunities to many underserved groups, like single mothers.

For-profit educators are in definite need of some effective marketing to promote their benefits and to dispel the negative conceptions presumed by and relayed by government regulators and outspoken detractors. They are making steps in the right direction with APSCU’s recent appointment of Mr.Dakduk. Dakduk is a former Marine and the former executive director of Student Veterans of America.

APSCU President Steve Gunderson said Dakduk’s hiring “builds on our member institutions’ commitment to excellence in post secondary education for military and veteran students.” With Dakduk’s presence, the industry may better overcome the flinching bias of so many regulators. Dakduk has built a reputation for success in his work advocating for veterans’ education. While at SVA, he grew the organization from a small group to one with chapters at over 900 campuses nationwide.

Dakduk’s move to APSCU is even a little ironic: In one of the FTC’s articles that warn veterans about for-profit education, the agency suggests veterans consult the SVA on the credibility of schools they are considering. Dakduk’s replacement at the SVA, D. Wayne Robinson, is a graduate of Trident University, a for-profit school.

For-profit education has had its bad actors, but problems in higher education span the spectrum of colleges and universities, and it is unfair – and ultimately detrimental to students and communities – to single out for-profit institutions. Dakduk understands this and should help for-profit educators improve their image.

LegalZoom and Rocket Lawyer Case over Misleading Advertising Heads to Trial – When is “Free” Really “Free”?

BY: Griffin Finan

Last week, a federal judge in California declined to grant a summary judgment motion to LegalZoom.com, Inc., in its lawsuit accusing rival Rocket Lawyer, Inc. over claims of trademark infringement, unfair competition, and false and misleading advertising that focus on the use of the word “free” in advertisements by Rocket Lawyer.

LegalZoom and Rocket Lawyer are the two biggest names in the online legal services industry. Both companies provide users online legal services, including incorporation documents, and documents establishing divorces, trusts, and wills, for a small fraction of the price that it would likely cost if a lawyer handled these matters. LegalZoom began offering products in 2001 and has used the model of charging for legal forms. Rocket Lawyer came along in 2008 and has made forms free and charged for legal and advisory services to help people complete the forms.

On Rocket Lawyer, users are able to sign up for a free seven day trial that allows them free access to all services on the site. If the subscription is not cancelled within the seven day window, then it is converted to a paid subscription. In the complaint, LegalZoom alleges that ads run by Rocket Lawyer used the term “free” which it said violated federal law because users still had to pay state filing fees to finalize their incorporations, divorces and other filings, or sign up for a subscription to access the service.

Not long after the complaint was filed in this case, Charley Moore, the Founder and Executive Chairman of Rocket Lawyer, authored an insightful blog about why Rocket Lawyer is fighting LegalZoom in the case.  Moore emphasized that many small businesses and individuals cannot afford the cost of traditional legal services and “free access to the basic tools of the legal system can both shield us and provide greater chances for success in the modern economy.”

In its decision last week, the district court held that genuine issues of material facts remain and denied LegalZoom’s summary judgment motion. The court was unwilling at this point in the litigation to rule that the advertisements by Rocket Lawyer regarding its “free” services were false as a matter of law because “a jury could reasonably conclude that the advertisements, when considered in context, are not literally false within the meaning [of the statute].” The court also held that at this point LegalZoom failed to carry its burden of proving that Rocket Lawyer’s advertisements actually deceive consumers.

The denial of summary judgment means that the case will proceed towards trial. This lawsuit could have potential implications for other businesses that use the term “free” in their advertisements as well as offering consumers a negative option enrollment plan. We will continue to follow the case here.

After Google Action, Those Who Dig for Dirt Must Dig a Little Harder

BY: Jeffrey Hamlin

Google recently announced that it would be taking action to demote websites that profit from the use of mugshot photos. These mugshot sites compile booking photographs taken after people’s arrests and publish them along with the arrestees’ names and information concerning the charges against them. Individuals who want their mugshot and arrest record deleted from the site usually must pay a fee ranging anywhere from $10 to $400. Until recently, when a Google user searched the Internet for the name of a recent arrestee, the search hits would include, and often prioritize, mugshot sites. Owners of those sites were content with that outcome; many others were not.

New York Times writer David Segal was one of the latter. In a recent article, Segal took Google to task for not penalizing mugshot sites, which many believe traffic in exploitation. Segal argued that Google should take corrective action because it had prioritized the sites in contravention of its own stated corporate goal that favors original web content. Mugshots do not offer original content; instead, they gather and use images and text from third-party sources.

Before his article ran, Segal contacted Google to discuss the issue. Google responded that it had been working to address the problem in a consistent way. Days later, a Google spokesperson confirmed that mugshot sites do not comply with one of the search giant’s guidelines. To address the problem, Google amended its algorithm, presumably to disfavor sites without original content.

Consequently, mugshot sites are now pushed off the front page of Google search results. People digging for dirt now have to look a little bit harder.

Others who object to mugshot sites have taken the fight to regulators and legislators. On October 7, the Maryland Consumer Protection Division settled its case against the owner of Joomsef.net for false and deceptive advertising. Joomsef’s owner, Stanislav Komsky, published information on the site about traffic offenses, but added statements falsely suggesting there had been an arrest. Persons identified on the site had to pay $40 to $90 to have the information removed. As part of the settlement, Komsky must take down the site, return all payments to consumers, and pay a penalty of $7,500.

Other states are addressing the problem through legislation. Segal points out that Oregon and Georgia have passed laws this year giving site owners 30 days to take down an image, free of charge, if an individual proves that he or she was exonerated or that the individual’s record has been expunged. Utah attacked the problem another way. There, sheriffs are prohibited from giving out headshots to websites that charge for deleting them. Lawmakers in other states, like Florida Representative Carl Zimmerman, have introduced legislation targeting the sites, but many of those bills died from lack of support.

These acts of government are constrained, as they should be, in view of free-speech guarantees under the First Amendment. By contrast, the private sector is not so limited and, therefore, may end up striking the decisive blow against mugshot sites. Things are heading in that direction. MasterCard, Discover, American Express, and PayPal recently pledged to sever all ties with mugshot sites, and Visa has asked merchant banks to investigate the practices of the sites.

FTC Takes Tough Action Against ‘Scareware’ Tactics

BY: Nicole Kardell

A great way to make money is to develop a product or service that responds to a consumer want or demand, and then to stay ahead of prospective competitors by offering better pricing or quality. A not-so-great way to make money is to convince consumers to buy a product or service that they don’t really want or need, at inflated rates. A highly dubious way to make money is to trick consumers into paying for something they didn’t want and didn’t mean to buy.

Businesses operating in this third category, which may include a scareware marketer or two, have to consider risk versus reward. Is the reward of temporary profits worth the risk of legal action; what is the likelihood of legal action; and what is the potential cost of such action?

Someone who operates on tricks over treats, or by pure scareware tactics, may expect business to dry up as consumers learn to avoid their traps. Such an operator must also face the looming threat of consumer legal action, government intervention, or run-ins with credit card companies alarmed by high chargeback rates.

For these types of businesses in the mobile marketing space, the cost of potential government intervention is going up. A recent settlement between the Federal Trade Commission and Jesta Digital LLC points to the severe penalties a business may face for operating on the sidelines of fair play. The consequences include a hefty fine, consumer refunds, restricted billing practices and stringent compliance measures for years to come.

Jesta (which also does business as Jamster) is known mostly for its marketplace of ringtones, photos, videos and apps. Starting in 2011, it ran a scareware campaign, purportedly for anti-virus software, that the FTC asserts crossed the line into deceptive advertising. The ads ran on the free version of the Angry Birds app for Android. Using a graphic that looks like the Android robot logo, the banner ad displayed a warning that viruses had been detected on the device – even though no virus scan was conducted. According to the FTC, when the consumers clicked on the “remove [virus]” button, or similar “warning” buttons, Jesta directed them through a number of pages about virus protection that left to very fine print a monthly service fee for ringtones and other content.

The FTC alleges that consumers were even charged at the instant of pressing a “Protect Your Android Today” button. Through the use of Wireless Access Protocol (WAP) billing, the company was able to charge consumers through their cell phone numbers without needing to obtain express authorization. (It may be that the use of the billing practice actually spurred the FTC into action as wireless carriers initiated their own penalties against Jesta for the large number of consumers demanding refunds.) The FTC also alleges that the anti-virus software often failed at download (apparently at one point, only 372 people out of 100,000 subscribers actually received some sort of anti-virus app download link).

The FTC describes numerous deceptive practices: mimicking the Android logo to confuse consumers into believing the virus warnings were credible, charging consumers without their knowledge or consent, failing to provide services charged for. The company apparently was aware that its scareware tactics crossed the line, as an email correspondence among company executives noted that the chief marketing officer was “anxious to move our business out of being a scam and more into a valued service.”

So now the company must pay the FTC a $1.2 million penalty and offer to refund consumers. The process of identifying and notifying consumers of their refund options and tracking all this to show to the FTC will be a costly undertaking. Another major cost will be the stringent and detailed billing practices that the company – and all participants, including principals and agents – must adhere to, disclosures it must make, and compliance monitoring and recordkeeping requirements it must adhere to, for 20 years. The settlement agreement is far more than a hand slap; its terms keep Jesta (and its principals!) beholden to the FTC for the foreseeable future.

Mobile marketers who may calculate risk versus reward and decide that a get-rich-quick scheme is worth the risk should think again. The FTC is making deceptive marketing tactics, like many scareware campaigns, a priority. We have seen strong action from the agency in the recent past, including hefty penalties for the company Innovative Marketing and its principal Marc D’Souza. Moreover, the newly-appointed head of consumer protection at the FTC, Jessica Rich, has noted that the FTC is expanding digital enforcement, increasing the risk of getting caught in the agency’s cross-hairs.

How to Break the Federal Debt-Collection Law — By Texting

BY: Steven Eichorn

It’s quite clear that the Federal Trade Commission and the Federal Communications Commission view existing federal consumer protection and communications statutes as fully applicable to new modes of communication such as texting. One excellent recent example is the FTC’s stipulated settlement, including a payment of $1 million, with a debt collection agency that had sent out text messages in order to collect debts.

The FTC had filed suit under the Fair Debt Collection Practices Act (FDCPA) against National Attorney Collection Services, Inc., National Attorney Services LLC, and Archie Donovan (as an individual). This appears to be the first FTC complaint alleging the illegal use of text messaging to collect consumer debts. In addition, the defendants were also alleged to have violated the FDCPA in more traditional ways by publicly revealing consumer debts to family members and co-workers, sending mailings that had a picture on the envelope of an outstretched arm shaking out an upside-down consumer to empty the money in their pockets, and falsely portraying themselves as law firms or attorneys in phone calls and mailings, as well as in text messages. Of course, the “older” methods of violations were troublesome in and of themselves, but there were two specific points that we see as trend-setting in FTC enforcement.

The first point is the FTC’s emphasis that the medium of text messages does not change disclosure obligations under the FDCPA. The FTC has continued to crack down on illegal behavior that may be carried out by non-traditional means. As Jessica Rich, director of the FTC’s Bureau of Consumer Protection, has said, “No matter how debt collectors communicate with consumers — by mail, by phone, by text or some other way — they have to follow the law.”

The consumer protections in the FDCPA that require the disclosure in initial communications that the company is a debt collector and that any communications may be used to collect a debt apply equally to text messages, even though there may be significant space and size limitations. Likewise, any follow-up text message must state that the communication comes from a debt collector.

The second noteworthy point was the level of consent required by the stipulated order. The stipulated order provides that “express consent” shall mean that prior to sending a text message to a consumer’s mobile telephone: “(i) the Defendants . . . shall have clearly and prominently disclosed that the debtor may receive collection text messages on mobile phone numbers . . . in connection with the transaction that is the subject of the text message; and (ii) the individual has taken an additional affirmative step, including a signature or electronic signature, that indicates their agreement to receive such contacts.”

The FTC appears to have adopted a more stringent definition of consent (similar to the FCC) and is using the stipulated order as a means of notifying companies and consumers of the higher standard. Of course, it is possible to argue that the FTC is only requiring these particular defendants to meet the higher standard because of their alleged prior bad acts. However, we believe it more likely that the FTC is attempting to enforce a standard of express consent similar to that which the FCC has recently promulgated. Consequently, all companies are well advised to meet this higher standard of consent.

The FTC has now put the industry on alert to ensure that their text messages comply with any applicable law. The idiosyncrasies of modern methods of communication do not limit the compliance obligation. Ignorance is not a defense, even though Donovan’s attorney said that “the companies are now in compliance,” and that “nobody was intending to violate the law.”