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Archive for the ‘Affiliate Marketing’ Category
Apr 13
2015

Even In The UK, Think Twice Before Using Celebrity Endorsements

Battleship Premiere - RihannaPhoto at vi.wikipedia.org

A recent legal case in the UK between singer Rihanna and fashion retailer Topshop has highlighted differences between publicity rights in the UK and some US jurisdictions. Rihanna sued Topshop for its sale of a t-shirt bearing a large photograph of her.  Rihanna had not approved or endorsed the sale of the t-shirt; rather, an independent photographer had taken the picture and licensed it for use on the shirts.

In the United States, many jurisdictions have laws governing the right of publicity; that is, the right to control the use of your image for commercial gain, or to be compensated for the commercial use of your image.  The UK, however, does not have corresponding laws on image rights.  Instead, Rihanna had to allege that Topshop engaged in “passing off” the shirts as being endorsed by the singer, thereby damaging her goodwill and business.  In support, Rihanna argued that the circumstances of the sale of the shirts were likely to mislead customers into thinking that she had endorsed the product because the photograph was similar to those used in official album promotions, the nature of the shirt itself, and the fact that Topshop is a major and reputable retailer.

The lower court considered Rihanna’s prior connections to the store in considering whether passing off occurred.  It noted that Topshop had previously run a competition in which the winner was awarded with a shopping trip to Topshop. Also, only weeks before the shirts went on sale, Topshop tweeted that Rihanna was shopping at one of its locations.  Against that background, the court noted that the particular photograph on the shirt could have led her fans to believe that it was associated with the marketing campaign for the album, since the particular hairstyle and scarf worn by Rihanna in the photograph were widely used in a music video and associated publicity.

Ultimately Rihanna’s passing off arguments were successful, and the court granted an injunction prohibiting Topshop from selling the shirts without informing customers that they had not been approved or authorized by Rihanna.  However, it is interesting to think what the result might have been in an instance where it was more obvious that Rihanna had not endorsed the product; for instance, if the t-shirts were sold, not through a trusted retailer which has been associated with the singer but instead by an independent seller hawking t-shirts on the street corner.  In such circumstances the case in favor of passing off may have been weaker and Rihanna might not have been able to control the use of her image.

In contrast, the outcome under such a scenario might be very different in a state like California, which has strong right of publicity laws.  California Civil Code §3344(a) forbids the use of another’s likeness “on or in products, merchandise, or goods, or for purposes of advertising or selling, or soliciting purchases of, products, merchandise, goods or services, without such person’s prior consent…”   The law establishes liability $750 or actual damages, whichever is greater, as well as “any profits from the unauthorized use that are attributable to the use and are not taken into account in computing the actual damages.”  Punitive damages and attorney’s fees and costs are also available under the statute.

While Rihanna’s victory in UK court does not establish a right of publicity in the country, it does provide an interesting case study in the workarounds that celebrities must use in order to protect their image from being improperly used in jurisdictions which do not have a right of publicity.

Apr 02
2015

Telemarketing Tips: What We Can Learn From Caribbean Cruise Lines’ Excursion With The FTC

iStock_000013768185_Large

The FTC’s “Do Not Call” and “robocall” rules do not apply to political survey calls.  So, if Hillary Clinton sought to “voice blast” a survey about international issues, she could do so without violating the Telemarketing Sales Rule (“TSR”).  (Though under FCC rules she would have an issue calling wireless numbers).  However, companies may not telemarket under the guise of exempt political calls.  Caribbean Cruise Lines (CCL) and several other companies working with CCL recently learned this lesson the hard way. The FTC and a dozen state attorneys general sued CCL and others for offering cruises and vacation “add ons” following purported political calls.  CCL settled, agreeing to pay $500,000 of a $7.2 million dollar penalty, and to comply with multiple compliance mechanisms.

CCL and the other defendants implemented an extensive calling campaign involving 12 to 15 million calls per day for approximately ten months offering a political survey.  However, the survey calls invited consumers to “press one” to receive a “free” two-day cruise to the Bahamas (port taxes would apply).  A live telemarketer working on behalf of CCL then offered consumers pre-cruise hotels, excursions, and other value packages.

While political calls remain exempt under the TSR’s robocall and Do Not Call provisions, if a caller offers a good, product or service during an otherwise exempt call, an “upsell” has occurred and the call is now telemarketing.  FTC rules prohibit robocalls to telemarket except with prior express consent.  Thus, the FTC asserted that CCL violated the TSR’s robocall provision since the called parties had not consented to the recorded sales calls.  While the calls started as political survey calls, they were actually standard telemarketing, subject to all TSR telemarketing rules.  The FTC also alleged violations of the Do Not Call rules, the caller identification rules, and the “company-specific Do Not Call requirements,” among other violations.

In addition to the reminder about “upsells” or “mixed messages,” this action highlights several important TSR enforcement lessons:

bulletThe FTC and State Attorneys General work closely in telemarketing enforcement – in this action, ten state attorneys general joined the FTC’s action.

bulletMany of the State AGs involved tend to be those most active in telemarketing litigation– Florida, Indiana, Mississippi, North Carolina, Ohio, and Washington State.

bulletThe FTC does not require a company to actually make the prohibited calls. An enforcement action will lie where a company paid or directed others to make calls in violation of the TSR.

bulletThe TSR also bars third parties from providing “substantial assistance” to others who violate the rule. Here, the FTC’s complaint charged a group of five companies and their individual owner with assisting and facilitating the illegal cruise calls, by providing robocallers with telephone numbers to use in the caller ID field, to hide the robocallers’ identities.

bulletAs part of its settlements, the FTC may impose a variety of remedies, including requiring the seller (here, CCL) to monitor its lead generators.

bulletThe FTC may also bar the seller from purchasing leads from a lead generator who is determined by the seller to obtain leads through unlawful TSR calling.

bulletThe FTC will carefully review, and proceed against companies who violate other TSR provisions, including caller ID requirements, scrubbing of the federal Do Not Call database, and the company-specific Do Not Call list.

bulletA settlement often requires ongoing recordkeeping. Here, the FTC required CCL to create records for ten years (and retain each one for 5 years), including records of consumer complaints and documentation of all lead generators.

bulletThe FTC and state AGs may proceed against individuals as well as companies.

bulletMany states have their own “do not call” laws, caller ID requirements and TSR-similar rules which can be used to bolster claims and penalties.

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            While it should not come as a surprise that a “mixed message” call must comply with the TSR, the recent joint case against CCL and others serves as a potent reminder that the FTC and state attorneys general continue to monitor robocalling and other mass telemarketing campaigns. Further, the enforcers will use the full panoply of legal requirements and enforcement mechanisms to address telemarketing violations.  The seller, the telemarketer, the lead generator, the caller ID provider, and any other party providing substantial assistance may find themselves at the receiving end of a call from the FTC if they fail to follow each of the TSR’s obligations or engage in activities that the TSR prohibits.

Jan 31
2014

Overstock Case Could Alter the Landscape of Price Comparison Advertising

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.

Jan 08
2014

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

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.

Dec 19
2013

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

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.

Oct 24
2013

FDA Regulations on the Horizon for Billion Dollar E-Cigarette Industry

In September, 40 state attorneys general wrote to the U.S. Food and Drug Administration (FDA) asking the agency to take all available measures to issue regulations on the advertising, ingredients, and sale to minors of electronic cigarettes, also known as e-cigarettes or e-cigs. The full text of the letter is available here. The FDA has set a deadline of October 31 to issue proposals to regulate e-cigarettes, but the agency has delayed action in the past.

E-cigarettes are battery-operated nicotine delivery devices that are meant to replicate the flavor and sensation of smoking a tobacco cigarette. The sales of these products are rapidly growing and have doubled every year since 2008. In 2013, the industry is projected to reach $1.7 billion in sales. Tobacco giants Altria, which owns Philip Morris, and R.J. Reynolds, both of which have not previously been involved in the e-cigarette industry, are now launching their own brands.

E-cigarettes have been available for several years, but there has been very little regulation of the industry since its inception. However, the calls for the FDA to explore regulation are becoming louder, and momentum is growing to have the FDA take action. Last month, Rep. Henry Waxman (D-Calif.) and three other House Democrats sent a letter to FDA Commissioner Dr. Margaret Hamburg urging the agency to take action on regulating e-cigarettes. Those same representatives also sent a letter to the Chairman of the House Committee on Energy and Commerce, Subcommittee on Oversight and Investigations, and the Subcommittee on Health urging the subcommittees to hold a hearing on the increased use and health impact of e-cigarettes.

In the past, the FDA has stated that it would not feel compelled to regulate e-cigarette companies unless they overtly advertised their products as smoking cessation devices. We have previously looked at Federal Trade Commission regulation of e-cigarette advertising claims. The FTC has jurisdiction to regulate advertisements for any product, but has yet to flex enforcement muscle with regard to e-cigarettes. There are currently no federal rules about advertising e-cigs to young people, but the attorney general letter asked the FDA to “ensure that companies do not continue to sell or advertise to our nation’s youth.”

There has been very little regulation of the industry since its inception– partially because the extent of the FDA’s authority to regulate e-cigarettes is not clearly defined. In 2010, the U.S. Court of Appeals for the D.C. Circuit issued an opinion in Sottera, Inc. v. Food & Drug Administration, affirming the district court’s decision that the FDA could not regulate e-cigarettes as a medical device under the Food, Drug & Cosmetic Act and finding that the FDA’s authority is limited to traditional tobacco products. The FDA also has authority to regulate e-cigarettes under the Tobacco Control Act of 2008, but that authority is limited. Specifically, the Tobacco Control Act authorizes the FDA to regulate “tobacco products,” giving the agency authority to impose restrictions on their sale, advertising and promotions, and establish other standards for their distribution and production.

It remains to be seen what actions will be taken by the FDA in response, but it does seem as if some type of regulation may be on the horizon. The industry will need to adapt to these changes and be active in the rule making and comment process to make sure that the regulations proposed are fair. We will continue to monitor developments on e-cigarette regulations here.

Aug 29
2013

A Report From Affiliate Summit East, 2013

Since 2003, online marketers and merchants have been gathering twice a year to take part in the Affiliate Summit Conferences. In recent years, Ifrah Law has become a fixture at these shows, and our associate Rachel Hirsch is not only widely recognized as the face of the Ifrah Law Power Booth station, but also as a well-respected and preferred attorney counseling online advertisers on compliance-related matters and representing them in nationwide litigation.

After Rachel recently returned from this year’s Affiliate Summit East conference in Philadelphia, we interviewed her about new and emerging trends at this conference and in the industry.

Q. What struck you about the crowd at the conference this year?
A. In addition to the new venue, there were plenty of new faces at the conference this year. Surprisingly, however, despite the conference’s name, there weren’t as many affiliates there as there have been in the past. Traditionally, affiliates, sometimes known as “publishers,” are independent third-parties who generate or “publish” leads either directly for an advertiser or through an affiliate network. This year, with a reported crowd of about 4,000 people, the conference included more individuals representing networks, brokers, and online merchants than affiliates. (Official conference statistics bear this out. Only 29 percent of attendees were affiliates.)

Q. What about vendors?
A. According to the organizers, one out of every 10 people there was a vendor. The term “vendor,” however, is something of a misnomer. A vendor can be another term for an online merchant – someone who is actually selling a product on the market – or it can be a generic category for marketers who do not fit into the traditional categories of affiliates, merchants, or networks.

Q. What new industry trends did you notice?
At every conference, one or two markets always seem to have a dominant presence. At the Las Vegas conference in January, there was a large turnout of marketers in the online dating space. This year, two different markets emerged– diet/health and downloads.

Some of the exhibitors this year were manufacturers of neutraceuticals, which can include weight-loss products or testosterone-boosting products. The trend seems to be for online marketers to “white label” or “private label” neutraceuticals from bigger manufacturers. What this means is that online marketers or advertisers actually attach their brand names to a product and product label that they purchase from a manufacturer, either based on their own formulations or based on the manufacturer’s product specifications. Well-known products that would fall into this category include Raspberry Ketone, Green Coffee Bean, and Garcinia Cambogia.

There were also a lot of individuals and companies there in the so-called “download” space. This often means the use of browser plug-ins that the consumer can download himself or herself. These can install targeted advertising (often pop-ups or pop-under ads) on an existing web page.

Q. Are there any risks involved in private labeling?
A. Definitely. If your name is on the label, it doesn’t matter that you didn’t manufacture the product. Your company and your label are subject to FTC scrutiny to the extent that you make claims about the product that you cannot substantiate. And beyond that, the Food and Drug Administration will also flex its enforcement power to the extent you or your manufacturer fail to institute good manufacturing practices, or “GMPs.” While many companies claim that they are GMP-certified, many do not have practices and processes in place to account for defective product batches, serious adverse events resulting from product use, or product recalls.

Q. What are some other hot areas of enforcement by the federal government?
A. Well, how you market your product may be as closely scrutinized as the underlying message. Online marketers who make outbound calls to consumers, or who engage third-party vendors (such as call centers) to make these calls can run afoul of the Telephone Consumer Protection Act. Under the TCPA, anyone who calls customers without their express advance consent, or who hires anyone else to do so, can be hit with a $500 fine for each violation. That adds up, and the TCPA can be enforced by the Federal Communications Commission or by private plaintiffs. Upcoming changes in the TCPA, which will be effective in October 2013, make it even harder to stay on the right side of the law.

Q. How would you put it all together as far as the legal issues?
A. It’s not just the FTC any more. These days, online marketers need to be aware of other agencies with broad enforcement powers, such as the CFPB, the FDA, and the FCC. And don’t forget about the threat of private consumer litigation.

Jun 23
2013

Affiliate Marketers Need to Be Aware of the CFTC

Some affiliate marketers have recently gotten involved in the risky world of online trading. Online trading, particularly the trading of binary options, has become an attractive alternative for some affiliate marketers to traditional forms of online marketing.

However, those companies that do get involved in this market must be aware of the presence of the U.S. Commodity Futures Trading Commission (CFTC), which regulates these markets.

Simply put, binary options means “two options.” The system offers traders a simple choice whether an asset will close above a certain price (a “call option”) or below (a “put option”) at the end of the day. Lately, there seems to be a great deal of confusion regarding the legality of binary options trading in the United States.

The question is not so much whether binary options are legal in the United States but whether the firms offering them are listed on a proper U.S. exchange and are properly registered with and regulated by the Commodity Futures Trading Commission (CFTC). Nadex, for example, is a regulated U.S. exchange, which is designated by the CFTC and permitted to accept U.S. residents as members.

In a recent lawsuit, the CFTC charged the Ireland-based “Intrade The Prediction Market Limited” and “Trade Exchange Network Limited” with offering commodity option contracts to U.S. customers for trading, including option contracts on whether certain U.S. economic numbers or the prices of gold and currencies would reach a certain level by a certain future date, all in violation of the CFTC’s ban on off-exchange options trading.

For now, it seems that regulators like the CFTC have focused their attention on the actual firms offering these trading options. However, the CFTC has been sending cease and desist letters to affiliates in this space as well. Affiliates working in such risky markets must know the firms for which they are working. Some online trading firms may say they do not accept U.S. customers, but saying it is very different than actually representing and warranting that fact in a contractual document with their affiliates and indemnifying affiliates from liability.

For further information, see my article in the April 2013 issue of FeedFront, a magazine for affiliate marketers.

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May 31
2013

‘Marketplace Fairness Act’ Would Change Tax Game for Online Retailers

On May 6, 2013, the U.S. Senate passed the “Marketplace Fairness Act,” which allows states to collect sales tax on online purchases, whether or not the online retailer has a physical presence in the state. If this bill becomes law, it would change the structure that has been in place since the 1992 Supreme Court ruling in Quill v. North Dakota, 504 U.S. 298 (1992), which held that states could collect sales tax on online transactions only if they also had a physical presence in the state such as a warehouse, a store, or in some cases, an online affiliate.

The act would allow states to require all retailers with more than $1 million in sales to collect and remit sales taxes to state and local jurisdictions. Retailers would collect the tax at the point of purchase, code each sale by zip code, and remit the taxes to the eligible states and local municipalities. Although states would not be required to implement a tax on online sales, many would probably choose to do so as they look for ways to generate much-needed revenue to compensate for budget shortfalls. By taxing online sales, states could generate an estimated $23 billion a year in local and state sales taxes. Additionally, states are likely to receive pressure from local businesses seeking to level the playing fields for brick-and-mortar retailers who feel that they’re at an unfair advantage for having to charge tax on goods that customers can often buy tax-free online.

As Internet sales taxes become more common, one group likely to benefit is Internet affiliates. Prior to this bill, states such as Illinois sought to circumvent Quill by stating that Internet affiliates created the requisite “nexus” of a physical presence within a state. This caused online stores, including retailer behemoth Amazon, to cease using affiliates in any states where the affiliate would constitute a nexus. If a physical nexus is no longer required, affiliates would no longer be singled out and terminated due to their presence in any particular state.

Considerable support for a bill of this sort was likely inevitable. When online shopping was still new, online sales were minimal and most people did their shopping locally, meaning that the loss of state and local tax revenue was minimal. However, the dramatic increase in the choices available online, along with quick and free shipping, means that by some estimates up to 85 percent of Internet users do at least some shopping online. The corresponding decrease in patronage at local stores meant that states were missing out on taxes from those purchases. As a result, this bill would give states the opportunity to collect what they see as lost revenue.

That is not to say, however, that the bill will eventually become law. The bill faces stiff opposition in the Republican-controlled House, where some lawmakers see the bill as a tax increase. They face additional pressure from the Conservative Action Project, which has obtained more than 50 signatures from business and political leaders in a letter opposing the Marketplace Fairness Act on the premise that “retailers would be subject to laws imposed by states with which they have no direct connection, and in whose political system they have no voice. It is regulation without representation, allowing politicians to raise revenue, without fear of a public backlash.”

Currently, it appears that the bill is unlikely to become law. However, politicians will continue to raise revenue regardless. If the federal law does not pass, states will likely continue to issue broad and increasingly strained interpretations of what constitutes a “presence” in the state in order to collect revenues from online merchants.

Jan 19
2012

FTC Enlists Surprising Watchdogs to Police Marketers’ Practices

The FTC is building up its army of watchdogs to police online marketing content and practices.  Who those watchdogs are – and their relationship to the industry – might surprise you.

Earlier this month, the agency entered into a settlement agreement with Central Coast Nutraceuticals, an Internet marketer of weight-loss and health products.  The agreement settles charges that were initiated against the company in 2010.  The company is one of the many marketers targeted by the FTC for its tactics in selling acai berry diet products.  Like more recent FTC targets, Central Coast was charged with deceptive advertising and unfair billing.  The deceptive advertising allegations were based on (1) the marketer’s use of phony endorsements by Rachael Ray and Oprah Winfrey and (2) the marketer’s unsubstantiated claims about the benefits of its products.  The unfair billing allegations were based on the marketer’s “free trial” scheme that baited consumers into pricy negative continuity programs.

Those  tracking the FTC’s enforcement actions against online diet marketers are familiar with these allegations.  Last spring, the FTC halted the sites of 10 operators who marketed acai berry diet pills for alleged fake endorsements from major media networks and unsubstantiated claims about the pills’ efficacy.  An eleventh operator was slapped with an action last December for the same issues, including the use of negative continuity programs.

Since Central Coast was the first of these marketers to come under the agency’s fire, and the first to enter into a settlement agreement (the actions of the other 12 operators are still pending), it is likely that the Central Coast settlement agreement will be the template for the suits to follow. (The  FTC uses its settlement agreements to establish its legal standards.)

A term in the settlement agreement that caught our attention is a requirement that the company monitor affiliate marketers it does business with in the future.  This obligation includes reviewing marketing materials to make sure that  those materials comply with the provisions of the settlement agreement.  Again, the Central Coast agreement likely will be the standard for subsequent enforcement actions, so these monitoring duties likely will be included in future agreements with other companies.

There have been a few FTC actions in the past that have imposed monitoring duties on companies who find themselves in hot water with the agency.  In March of last year, a seller of instructional DVDs entered into an agreement  with the FTC that requires the company to periodically monitor and review affiliates’ representations and disclosures.  That includes monthly visits to top affiliate websites “done in a way designed not to disclose to the affiliates that they’re being monitored.”

What does this mean?  Corporate spying has taken on new meaning, thanks to FTC sanctions.  Affiliate marketers have their business partners as their proverbial Gladys Kravitz.  It is likely that this type of government-imposed self-regulation will become increasingly the norm.  The FTC doesn’t like affiliate marketers or the layers of puffery they create between advertiser and consumer.  Policing for free through private companies is a win-win for the agency.

 

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, healthcare, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen, David Deitch, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, Sarah Coffey, Nicole Kardell, and Casselle Smith. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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