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.
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.
The Federal Trade Commission recently announced that it has approved a final order settling charges against Compete, Inc., a Boston-based web analytics company. Compete, Inc. sells reports on consumer browsing behavior to clients looking to drive more traffic to their websites and increase sales. Compete, Inc. obtained the information by getting consumers to install the company’s web-tracking software in their computers. The FTC alleged that the company’s business practices were unfair and deceptive because the company did not sufficiently describe the types of information it was collecting from its users.
With all the heightened concerns among consumers about internet privacy, one might wonder why consumers would be willing to install web-tracking software in their computers in the first place. Well, Compete, Inc. sweetened the pot by offering gift cards, cash rewards, and other incentives to entice consumers.
The fact that Compete, Inc. was using web-tracking software to track consumers’ visits to websites was not the problem for the FTC. The major issue was that the software was recording far more than just which websites a consumer was visiting. It was recording everything the user entered on the websites – usernames, passwords, detailed credit card information, Social Security numbers, etc. – all without the consumer’s knowledge or consent.
Reports indicate that the company may not have known that its software was collecting all of this user information. Compete, Inc. representatives stated that in January 2010, when they first learned that there was a potential security issue, they immediately disabled data collection from affected versions of the software and deleted inadvertently-collected information from their servers. The company also responded by implementing new data filters and security measures. The company took these steps even before the order was handed down and said that it would continue to develop and uphold new standards of transparency and security.
Perhaps the company’s commitment to correcting its behavior is part of the reason that the FTC settlement order didn’t include a monetary sanction. Instead, the order focuses on ensuring that such intrusive data is not collected in the future. Pursuant to the order, Compete, Inc. must implement a comprehensive information security program with biannual audits from an independent third party for the next 20 years (a fairly typical obligation in recent FTC settlements of this type); disclose the types of information that will be collected and obtain consumers’ express consent through their website before collecting any data from its web-tracking software; delete or anonymize the use of the consumer data it has already collected; and provide consumers with directions on how to uninstall the web-tracking software. The settlement also bars the company from misrepresenting its privacy and data security practices.
In the age of affiliate marketing, web analytics are extremely valuable for merchants seeking to increase web traffic to drive revenue. However, FTC investigations and resulting sanctions are costly, time-consuming, and quite simply bad for business. Companies interested in using this technology should make sure they know exactly what information they are collecting and should ensure that they are following FTC guidelines regarding data privacy. Clear disclosures to the public as to what software is being installed, what information is viewed or collected, and how that information is used, are all critical. Taking steps to get it right in the beginning will help them avoid costly investigations and bad press in the end.
For more than a decade, the Federal Trade Commission has been releasing its list of the top ten categories of consumer complaints received by the agency in the previous year. This list always serves as a good indication of the areas toward which the FTC may choose to direct its resources and increase its scrutiny.
For the 12th year in a row, identity theft was the number one complaint received by the FTC. Out of more than 1.8 million complaints the FTC received last year, 15% – or 279,156 – were about identity theft. Of those identity theft complaints, close to 25 percent were related to tax or wage-related fraud. The number of complaints related to identity theft actually declined in 2011 from the previous year, but this type of fraud still topped the list.
Most identity theft complaints came from consumers reporting that their personal information was stolen and used in government documents — often to fraudulently collect government benefits. Complaints about government document-related identity theft have increased 11% since 2009 and represented 27% of identity theft complaints last year. These numbers are likely to increase as concerns about consumer data privacy continue to garner the attention of the FTC.
After ID theft, the FTC’s top consumer complaints for 2011 were as follows:
• Debt collection complaints
• Prizes, sweepstakes, and lotteries
• Shop-at-Home and catalog sales
• Banks and lenders
• Internet services
• Auto-related complaints
• Imposter scams
• Telephone and mobile services
• Advance-fee loans and credit protection or repair
While credit cards are intertwined with many of the above complaints, complaints about credit cards themselves are noticeably absent from the 2011 list. In past years, credit card fraud was a major source of complaints from consumers. The drop in credit card-fraud-related complaints, however, is not surprising given the passage of the Credit CARD Act of 2009. This landmark federal legislation banned interest rate hikes “at any time for any reason” and limited the instances when rates on existing card balances could be hiked by issuers. The law also required lenders to give customers at least 45 days advance notice of significant changes in terms to allow card users time to shop around for better terms.
With the upcoming changes to the FTC’s advertising guidelines, there may very well be new additions to the consumer complaint list next year. Those complaints that already appear on the list are also likely to receive increased scrutiny.
If you advertise or sell over the Internet, be aware that changes are afoot at the FTC that will affect your business. The Commission is in the midst of revamping its Dot Com Disclosures, guidelines it prepared back in 2000 regarding online advertising. It issued a request for public comment on prospective revisions in late May. Now that the comment period has ended in early August, we are in a wait-and-see period until the new guidelines are published.
The original guidelines were pretty broad, generally providing that advertising standards that applied to more traditional media also applied to advertising over the Internet.
Acknowledging the vast technological developments in marketing since the Dot Com Disclosures were published over a decade ago — e.g., mobile marketing, the app economy, pop-up blockers and social networking – the FTC requested comment on a number of issues, in 11 questions. For instance, it requested comment on (1) what issues have been raised by new technologies or Internet features, (2) what should its staff consider regarding online advertising techniques or consumer online behavior, and (3) what issues have arisen from multi-party selling arrangements.
As we wait for the FTC’s revisions, we can anticipate several areas that the new guidelines will address. Generally speaking, the FTC likely will express interest in two broad categories affected by new technology: (1) what is conveyed and (2) what is collected.
What is conveyed. A general concern with disclosure standards since the earlier guidelines were published is how disclosure applies to marketing through new media. How do traditional “clear and conspicuous” standards (such as proximity of a disclosure to the relevant claim, prominence of the disclosure, or duration of the disclosure) play out on a small mobile device such as a smartphone? How can advertisers effectively disseminate disclosures on such devices?
What is collected. A greater concern, as expressed in many of the public comments submitted to the FTC, is the development of consumer tracking online and online behavioral advertising. Something that can be a great boon to sellers, who can now tailor their advertising to an individual user’s interests, or to advertisers who collect and sell that consumer data, can become a privacy nightmare. One group that made a comment to the FTC noted the development of technologies that can track consumer behavior both on and offline.
Recent enforcement actions as well as informal initiatives by the FTC and consumer groups demonstrate the likelihood that the Commission will address consumer privacy in the new guidelines. For instance, the FTC just settled charges with W3 Innovations, a mobile app company, for alleged violations of the Children’s Online Privacy Protection Act. The action, based on the company’s failure to obtain parental consent before collecting children’s personal information, was the first of its kind. The FTC has also been promoting its Do Not Track program, which calls for enhanced consumer controls over online data tracking.
It’s worth noting the likelihood that the FTC will devote a part of its new guidelines to multi-party selling arrangements. Affiliate marketing-related issues involve both broad categories above, impacting both what is disseminated and what is collected. The Commission may highlight the importance of effective disclosure at all levels when multi-party selling arrangements are involved. It may also address privacy concerns along the various levels of the advertising chain. And there are good indications the FTC will take the view for enforcement purposes that all parties along the advertising chain are subject to FTC standards.
An organization that represents online affiliates filed suit in federal court this month challenging the constitutionality of a new Illinois law targeted at collecting sales tax from Web retailers. Internet retail giant Amazon.com has threatened to cut off its marketing affiliates in Illinois in an effort to avoid paying the tax, and other companies are threatening similar action. We have previously examined the potential effects on affiliates of this type of state tax.
Internet retailers cite a 1992 Supreme Court decision, Quill Corporation v. North Dakota, which ruled that states could require only companies that had a physical presence within the state to act as a tax collector. Online retailers have used this ruling to justify the payment of taxes only in the few states in which they have a physical presence.
The suit claims that the Illinois law goes beyond the state’s power to regulate interstate commerce, since the state legislature seems to be taking the view that an online retailer, with no physical presence in the state, establishes a presence in Illinois merely by advertising on websites owned by Illinois affiliates.
With many states facing significant budget shortfalls, legislative momentum is growing throughout the country to tax Internet retailers. A University of Tennessee study has estimated that between 2007 and 2012, states will sustain over $52 billion in losses from uncollected taxes on e-commerce sales. Connecticut has already signed into law a state tax on online purchases earlier this month, and California lawmakers have passed a bill, now awaiting approval from the governor, that would force out-of state Internet retailers to collect taxes. Bills are pending in at least five other state legislatures.
These bills are all, in one way or another, efforts by the states to circumvent the court’s ruling in Quill. Last year, New York enacted a law that stated that the practice of paying commissions to marketing agents based in the state constituted a presence in the state. Amazon has challenged the law in court. Several other states, including Arkansas, Colorado, Illinois, North Carolina, and Rhode Island all followed by passing laws similar to New York’s.
With companies threatening to leave states that enact taxes and in some cases actually cutting all ties with the states, state legislatures are debating what to do. While some states are looking at enacting their own taxes, other states are considering different routes. In April, the South Carolina legislature defeated a law that would have provided a five-year sales tax exemption to Amazon in exchange for Amazon building a distribution center in the state. Amazon then cancelled its plans to build a distribution center in South Carolina.
The one action that would break the logjam would be federal legislation requiring states to collect sales tax on Internet retailers. Last summer a bill entitled the “Main Street Fairness Act,” (H.R. 5660) was introduced in Congress that would require all businesses to collect taxes in the state where the consumer resides. The bill did not make it out of committee, but some feel that the tides are shifting towards federal action. Sen. Dick Durbin (D. Ill.) has stated that he plans to reintroduce legislation to tax online retailers, calling the idea “overdue.” However, federal legislation could be complicated if voters perceive this as a new tax.
As states look to close the gap on budget shortfalls, there will be continued debate on the viability of taxing Internet retailers. Unless action occurs at the federal level, states will have to decide if it’s preferable to tax Internet retailers and risk losing their presence in the state or not to tax them in an attempt to maintain or grow their presence in the state.
The FTC’s recent settlement with a California-based Internet marketer may provide a good example of why the Commission is revising its online advertising guidelines. The FTC announced last Thursday that it has reached a settlement with Jaivin Karnani, his company, Balls of Kryptonite, and several associated companies. The settlement resolves charges the FTC brought against Karnani in 2009 for allegedly deceptive tactics in marketing products to consumers in the United Kingdom. The defendant allegedly misled British purchasers that his company, which sold a variety of electronics online, was based in the U.K. The ruse was accomplished by tactics like using foreign website domains ending in .co.uk, listing prices in British pounds, and asserting that goods purchased would be shipped via “Royal Mail.”
British purchasers consequently believed that the websites were U.K.-based and therefore covered by Britain’s strong consumer protection laws for sales over the Internet (which, for instance, allow for return of purchases within seven days of receipt and full refunds for cancelled transactions and returned goods). Purchasers also believed that products would be covered by full warranties (which did not, in fact, apply to overseas purchases).
Among the terms of the settlement, Karnani and his companies will no longer be able to pose as U.K.-based.
The case highlights new complications faced by consumers and regulators in dealing with Internet sales and marketing. Just as people can create fictional personalities online through avatars and the like, so too can companies create artificial existences. How easy it is to create a false front when you don’t need to start with bricks and mortar! Karnani’s alleged shenanigans and manipulation of domain names provide a good example of the many things regulators and consumers need to look out for.
Such challenges, and the evolving dynamics of online marketing and sales, are part of why the FTC recently announced its plans to overhaul current Internet advertising guidelines. The current guidelines date back to 2000 and are pretty basic. In effect, they simply pronounce that consumer protection standards that apply to more traditional media also apply to the Internet.
The Commission’s announcement regarding the guidelines overhaul, which requests public comment through July 11, notes its seeks to address more specifics on the technical and legal issues of online marketing and sales, from dynamics of social media to “Apps” to pop-up blockers.
It obviously remains to be seen what exactly the new guidelines will address, but they may reflect issues brought out by this case. Other likely issues to be addressed, as we’ve seen them come up in FTC enforcement actions and as we have addressed them in this blog, are (1) multi-party selling arrangements (e.g., affiliate marketing) and (2) privacy concerns over online tracking of consumer data.
We’ve been monitoring the public comments regarding the new guidelines and will post developments of interest.
The FTC recently filed suit against ten operations with websites that market acai berry weight loss products. The FTC alleged that the companies’ websites – which look like news websites – deceived consumers who thought the sites were credible journalistic outlets as opposed to elaborate marketing schemes.
According to the FTC, the sites contained titles such as “News 6 News Alerts,” “Health News Health Alerts,” or “Health 5 Beat Health News” and would include the names and logos of actual major media outlets such as ABC, Fox News, CBS, CNN, USA Today and Consumer Reports. The sites published news-type headlines, articles with content that appeared to be objective investigative reporting, and supposed independent user comments at the end of the articles.
These websites, however, were made up entirely of marketing content to prompt consumers to click on hyperlinked acai berry weight loss product sites (which is how the website operators made money — when consumers clicked through to linked product sites and made purchases, the marketing site would receive a commission). This nature and purpose of the sites was not made clear to consumers – another failing alleged in the FTC’s suits.
The FTC’s action should come as no surprise to the defendant companies. Looking at a sample defendant company site (see, for example, the exhibit provided on the FTC’s Bureau of Consumer Protection blog) it seems pretty obvious that the marketing schemes of these companies attempted to entice consumers into believing their website content was objective news reporting. Such schemes seem textbook “deceptive” advertising as outlawed under the Federal Trade Commission Act.
Moreover, the FTC has been making noise over the last couple of years that should have put the companies on notice. Last August, the Commission succeeded in halting a similar deceptive scheme by Central Coast Nutraceuticals, Inc. regarding marketing of the very same product. And back in 2009, the FTC published guidelines on use of Testimonials and Endorsements in advertising, outlining how relationships with producers should be disclosed.
It is possible that the defendant companies knew of, but merely ignored, the fact that their marketing schemes could result in FTC action. They may have opted for temporary profit over long-run regulatory risk. But when the regulatory risk could mean frozen assets and disgorgement of profits, marketers should think twice before selling “by any means necessary.”
A new Illinois law purporting to preserve and create jobs in the state may soon be putting Illinois affiliates out of business. Governor Pat Quinn recently signed a law requiring online retailers to collect sales tax on purchases made in Illinois, on the premise that the companies have a presence in the state due to in-state affiliates. This follows the Supreme Court ruling in Quill v. North Dakota, 504 U.S. 298 (1992), which stated that vendors are only required to track and collect sales tax on transactions for states in which they have a physical presence.
Illinois lawmakers claim that the bill will level the playing field for small businesses to compete with online merchants, and will generate $150 million in tax revenues annually. However, the plan could backfire on the state. Amazon.com, the online retailer at which the law is largely aimed, has responded by promising to terminate all of its Illinois affiliates in order to avoid charging the state sales tax. Other major online merchants such as Overstock.com are vowing to follow suit.
Illinois has cause to believe that Amazon will follow through with its threat. It has responded to similar laws in Colorado, North Carolina, and Rhode Island by terminating its contracts with affiliates in those states. In fact, officials at the Rhode Island Department of Revenue “do not believe that there has been any sales tax collected as a result of the Amazon legislation” according to Paul Dion, the head of the department’s revenue analysis-office.
Rather than support small businesses, this law will put Illinois affiliates out of business. We believe that this law unfairly targets internet affiliates, costing them their jobs and costing the state income tax revenue. Since the state will not generate additional sales tax if online retailers terminate their in-state affiliates, Illinois will be left in a worse position than it was before. We believe that this law punishes the small businesses which it purports to help, and that it should be repealed.
The Wall Street Journal has acknowledged the serious problem that chargebacks pose to businesses in an article posted on its website. Merchants pay a heavy price for these reverse credit card transactions, which cost them a lost sale, the lost product, and a fine imposed by the credit card company. What’s more, courts have equated chargebacks to merchant fraud, using merchants’ chargeback rates against them in lawsuits regardless of the reason for the reverse transaction.
Long considered evidence of consumer injury, chargeback rates are not a reliable indicator of merchant wrongdoing. When courts cite a merchant’s chargeback rate in litigation, they do not analyze the reasons for the chargebacks, but only the percentage of the merchant’s total sales that were charged back to credit cards. As the article discusses, chargebacks do not always indicate that a customer has been fraudulently charged. Rather, chargebacks can be triggered for any number of reasons, including when a card issuer finds an authorization or processing error, such as an invalid account number or an expired card.
Recent years have also seen the dramatic rise of “friendly fraud,” or fraud carried out by customers to get items free of charge. According to the Better Business Bureau, the most common types of friendly fraud involve cases in which a customer falsely claims that he or she never received an item ordered online, received the wrong item, or had a credit card stolen and was charged for items that weren’t ordered. The customer then either demands a refund from the business or issues a chargeback on his or her credit card. In some cases, the customer receives a “double refund” after receiving a refund from the company and a chargeback on the credit card. The Wall Street Journal has previously reported that many major online companies, such as Expedia, have seen a 50% increase in friendly fraud since October 2008.
Credit card companies have liberalized chargeback procedures, providing an inducement for consumers to purchase and use products and then demand a chargeback, without ever contacting the merchant’s customer service department with complaints about the product or the manner in which it had been sold. Whereas consumers once had to go into the bank to request a chargeback, they can now view their statement online and merely click “dispute charge” in order for the charge to be reversed.
It is refreshing for the Journal to acknowledge the price that business owners pay for this customer convenience, which some customers unfortunately abuse. We hope that as this issue gains greater exposure, customers will realize how their actions harm merchants, many of whom are small businesses that cannot afford these losses. We hope customers will begin to think twice before contacting their credit card company for a chargeback, and instead first contact the merchant regarding a return or disputed charge.