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.
Putting a snag in New Year’s resolutions for pound-shedding, the FDA and the FTC recently sent out warning letters to several companies that sell HCG-based diet products online. (These companies include Nutri-Fusion Systems LLC, Natural Medical Supply, HCG Platinum, LLC, theoriginalhcgdrops.com, HCG Diet Direct, LLC, and Hcg-miracleweightloss.com.)
The warning letters, which came at the outset of the holiday season (and just before the January windfall for the diet industry, which the government may or may not have had in mind), allege that the companies are in violation of federal law (1) for selling unapproved and misbranded new drugs and (2) for advertising the health benefits of products without sufficient back-up research.
The products at issue, generally liquid drops, contain the human chorionic gonadotropin (HCG) hormone, which comes from human placenta and is extracted from pregnant women’s urine. HCG has been popular for weight loss since the 1950s, when a British doctor published a study that the hormone aided dramatic weight loss (of up to a pound a day) by mobilizing fat stores without affecting muscle or normal/structural fat. The popularity of HCG-based diet products escalated in 2007 when the notorious infomercial man, Kevin Trudeau, published a diet book on HCG.
Responding to the increased demand, in came many enterprising online marketers. But there’s an issue with selling these products – government regulation. HCG is FDA-approved, but only as a prescription drug and only for certain medical conditions, which do not include weight loss.
To get around this government roadblock, companies have marketed their HCG products as “homeopathic.” The FDA allows for the manufacture and distribution – without FDA approval – of homeopathic drugs provided those drugs meet criteria set out in the agency’s Compliance Policy Guide under “Conditions Under Which Homeopathic Drugs May be Marketed (CPG 7132.15).”
But according to the FDA’s warning letters such as this one, the HCG products marketed by these companies don’t meet the Compliance Policy Guide criteria. The biggest issue, which companies are going to have a hard (read impossible) time getting around is that HCG is not an established homeopathic active ingredient. And if a product has any non-homeopathic active ingredients, it falls out of the homeopathic exceptions under the CPG. Since HCG is a regulated drug (several states, including California and New York, list it as a Schedule III controlled substance) and can’t fall under the homeopathic exception, companies marketing HCG-based products are subject to a host of FDA regulations that require FDA involvement and approval. As these companies operated outside the FDA’s purview, they now find themselves in hot water.
The FDA isn’t the only government agency barking up these marketers’ money trees. The FTC joined the investigation and incorporated their allegations into the warning letters. The letters note that the companies’ websites make a host of claims that the government alleges are unsubstantiated. Any advertisement that includes health claims requires “competent and reliable scientific evidence,” such as human clinical studies.
The letters give the companies 15 days to take corrective measures and notify the government of those measures. If you go on these companies’ sites today, you’ll notice a lot of “coming soon” and “products currently being improved”-type language. And this all takes place during the New Year’s resolution timeframe, when these companies could be raking it in.
A few takeaways from the warning letters: (1) If you are going to invest time and money into a product being marketed purely through a regulatory loophole, make sure you satisfy all the criteria to meet that exception. (2) Don’t go where Kevin Trudeau has gone. This is meant to be partially glib, but the fact of the matter is that Trudeau is an FTC pet peeve. You can be sure of FTC involvement if you trek the same path he has. (3) Disclaimers are not enough to avoid the FDA. A couple of the HCG marketers to whom warning letters were issued had included disclaimers on their websites that the products are not intended to treat, cure or prevent disease. Such disclaimers, according to the FDA, could not overcome other health claims and language on the sites. (4) At the end of the day, if the government wants to give you a hard time, there is little you can do about it. Other warning letters issued by the FDA regarding homeopathic products noted that “that there may be circumstances where a product that otherwise may meet the conditions set forth in the CPG may nevertheless be subject to enforcement action.” With this last pointer, all we can say is, do a cost-benefit risk analysis.
Google, Yahoo! and Bing have suspended their accounts with hundreds of advertisers and agents associated with mortgage programs under federal investigation. The move by Google and Microsoft (Microsoft powers Bing and Yahoo!) has basically shut down these businesses: Without the vehicle of the search engines, these sites cannot effectively generate traffic.
Why did Google and Microsoft cut the cord of these companies, and is there anything the companies can do? Google and Microsoft (we’ll call them the Government’s “Judge, Jury, and Executioner” or the “Enforcers”) acted upon the request of SIGTARP, a federal agency charged with preventing fraud, waste, and abuse under TARP’s Home Affordable Modification Program. (The pressure started a while back, as we wrote last March.)
SIGTARP is investigating mortgage programs that it believes have been wrongly charging “struggling homeowners a fee in exchange for false promises of lowering the homeowner’s mortgage.”
According to a source at SIGTARP, the agency handed Google and Microsoft a list of some 125 mortgage “schemes.” Apparently, the Enforcers then took that list, identified advertisers and agents associated with those mortgage programs, and opted to suspend relations with those companies (about 500 advertisers and agents for Google and about 400 for Microsoft). (SIGTARP’s announcements on these actions can be found here and here.)
So it looks as if these companies have been penalized through government action without any adjudicative process, merely through government pressure on private companies, i.e. Google and Microsoft. (More analysis from us on this to come.)
It’s easy to understand why the Enforcers would feel pressure. Google just settled with the Department of Justice and agreed to pay more than $500 million for its role in publishing prescription drug ads from Canada. Those familiar with that settlement may see Google’s recent actions for SIGTARP as follow-on. Likely Google is more apt to buckle to the Feds quickly because of the costly settlement, but the matters are not directly related. In fact, the prescription drug settlement agreement relates to prescription drug ads only.
While the SIGTARP investigation is “ongoing,” and Google and Microsoft are continuing to cooperate with the agency, what can companies who have been caught up in this firestorm do? The Enforcers do, fortunately, have grievance processes (see, for instance, Google’s grievance process here).
Either on their own, or with some added strength through legal representation, the companies can try to make their cases regarding the content and nature of the ads at issue.
What is the next step going to be? If the Federal Trade Commission identifies, say, a group of websites that it believes are promoting bogus weight-loss schemes, will the Enforcers simply move to shut off their access to the Web, without further ado?
The online advertising industry is inching its way to more comprehensive policies regarding the collection of consumer data. Several announcements this month by different self-regulatory groups show that pressure from government agencies and consumer watchdog groups concerned about consumer privacy is taking effect . . . slowly but surely.
The most recent pronouncement comes from the World Wide Web Consortium (W3C), an international standards body made up of more than 300 members, including Google and Facebook. W3C announced earlier this week two first drafts for standards that provide consumers more information and control over how their data is tracked online.
The first set of standards, Tracking Preference Expression (DNT), is supposed to define means for users to establish their tracking preferences and see whether sites will honor those preferences. The second set of standards, Tracking Compliance and Scope Specification, is intended to set forth practices for websites to comply with a defined “Do Not Track” preference.
W3C’s announcement has generated a good bit of attention on the other side of the pond, where the EU has been pushing for years for more transparency and consumer control over online behavioral advertising. But W3C’s standards are not expected to be finalized until mid-2012.
On this side of the pond, more clamoring has gone on about the Digital Advertising Alliance’s consumer data tracking policies. The DAA, another self-regulatory project put together by the American Advertising Federation, the Interactive Advertising Bureau, the Better Business Bureau, and several other similar groups, announced last week its latest set of principles. These principles, known as Principles for Multi-Site Data, are supposed to govern companies’ collection and use of online consumer data – like earlier DAA standards, but more comprehensive. The DAA appears to have published these in response to the FTC’s concern that prior DAA standards did not sufficiently address forms of Internet tracking.
There seems to be a trend here: companies (and their consortiums) with major online presences are having a hard time reforming their online behavioral advertising (OBA) tracking, and are doing so with the speed and enthusiasm of a satiated pig. It makes sense: advertising, and OBA, has been the center of Web business models. Shaking up the models by giving consumers opt-outs across pages significantly interrupts, for instance, how sellers get leads to their sites, how advertisers track their effectiveness, and how affiliates get paid.
But like it or not, change is the reality for companies who use OBA. Growing concerns over data privacy will force companies to take new approaches, as we’ve discussed thoroughly here already. See this post, this post, and this post, for example.
Slow and steady as self-regulation may be going, it looks like government agencies like the FTC are willing to let companies take the lead on data privacy standards (with the ever ready government prod to coax them). FTC Chairman Jon Leibowitz made this point last week, while praising the DAA’s latest set of principles: “We believe that you, the advertising industry, should give consumers choices about how they are tracked online.”
Companies should be aware, though, that the FTC is not washing its hands of data privacy issues; it rather intends to enforce those company-prescribed standards. So another business beware: whatever data privacy policies you adopt, make sure you adhere to them. If not, the FTC may come to ensure you do. See, for example, this recent enforcement action.
In an unusual and little-noticed recent settlement, Google Inc. has agreed to pay a forfeiture of $500 million because it permitted Canadian pharmacies to advertise to United States consumers on its site using Google AdWords, resulting in the illegal sale of prescription drugs through online channels into the United States between 2003 and 2009.
The U.S. Department of Justice announced this agreement on August 24, 2011, in conjunction with the Food and Drug Administration’s Office of Criminal Investigations and the Attorney General of Rhode Island.
The government said that this forfeiture represents the gross revenue received by Google as a result of Canadian pharmacies advertising through Google’s AdWords program, plus the gross revenue made by Canadian pharmacies from their sales to U.S. consumers.
Although Canada has its own system of regulation of pharmaceuticals, Canadian pharmacies that ship drugs outside that nation are not subject to that system, and the U.S. Food and Drug Administration regards those shipments into the United States as generally illegal since they don’t comply with its regulations regarding labeling, distribution, and the use of a valid prescription.
What is most unusual here is that Google agreed to pay the forfeiture – even though its role was simply to accept advertising by Canadian pharmacies and to turn a blind eye to the legal problems. According to the government, Google did so from 2003 through 2009, when it learned of the investigation and took a number of steps to prevent the unlawful sale of prescription drugs by online pharmacies, including Canadian pharmacies, to U.S. consumers.
Last March, we asked the question, “Does Google Need to Police Its Ads for Fraud?” when Consumer Watchdog asked whether Google should be held legally responsible for deceptive advertisements placed on its site by mortgage rescue companies. This forfeiture agreement puts Google – and others in its position – on notice that they may need to account for their actions in connection with potentially illegal advertising.
It may go even further. A blog that covers the affiliate marketing community has noted: “For affiliate marketers, the Google and Justice Department settlement has serious consequences. There are many opportunities to partner with products or services online that may or may not be entirely legal.”
In fact, this settlement may have significant effects on the affiliate marketing community. Does each affiliate marketer that places an ad on a website, or simply permits an ad to go on a website, need to check the accuracy and truthfulness of the ad, or risk a major fine? This is at the very least a question that affiliate marketers need to concern themselves with.
The FTC recently issued the Mortgage Acts and Practices – Advertising Final Rule. This rule is the FTC’s response to a congressional directive to address unfair or deceptive acts in the mortgage loan industry. Briefly, the MAP Rule (1) gives the FTC and state authorities the ability to seek civil penalties for deceptive mortgage advertising, (2) clarifies and provides examples of what constitutes deceptive mortgage advertising, and (3) institutes record-keeping requirements on mortgage advertisers.
FTC Commissioner Edith Ramirez asserted in her concurring statement that the “[t]he MAP Rule is narrow in scope — addressing only the advertising phase of the mortgage lifecycle by those subject to the Federal Trade Commission’s jurisdiction — and does not render unlawful any conduct that is not already banned by the prohibition on deception in Section 5 of the FTC Act.”
At first blush, one might think that the new rule merely states the obvious, i.e. that deceptive advertising, unlawful in other industries, is also unlawful in the mortgage industry and that the rule does nothing more than to provide guidelines for what may be considered unfair or deceptive. If that were all, the rule might have deserved a resounding “duh.”
However, the record-keeping requirements that are a part of this rule should instead inspire an “ugh.” The MAP Rule requires anyone subject to the rule (essentially, everyone involved in mortgage advertising with the exception of banks and other financial institutions specifically exempted from FTC oversight) to maintain records of:
• Commercial communications, sales scripts, training materials, and marketing materials regarding any term of any mortgage credit products; and
• Documents describing or evidencing all mortgage credit products and all additional products or services that may be offered in conjunction with the products at the time of the communication.
Under the rule, this documentation must be maintained for 24 months. And failure to keep these records could constitute an independent violation of the MAP Rule.
Considering that the MAP Rule touches everyone in commercial mortgage communications who is not specifically exempted, these record-keeping requirements are hefty. Not just lenders and brokers, but also real estate agents and brokers, ad agencies, affiliate marketers, and lead generators will be subject to the rule as long as they are involved in disseminating information on mortgage products. Compliance will require advertisers to monitor and keep records of downstream ads and will require the tracking of weekly changes in mortgage rates regardless of whether one is acting on behalf of loan originators.
The FTC justifies this burden as helpful in enforcement actions. But the costs of compliance with the MAP Rule outweigh this negligible benefit. How many companies that were once involved in dissemination of mortgage product information will simply decided not to communicate? This may be especially true, considering that the record-keeping requirements come with their own penalty for compliance failures. The result will be that the MAP Rule will discourage real estate agents, brokers and others from providing mortgage-related information to clients. It will create barriers to entry for those not large enough to afford a compliance program.
The FTC, in its press announcement on the final MAP Rule, claims the rule “is designed to create a level playing field for legitimate businesses to compete in the marketplace.” Instead, it appears that the FTC is reducing the size of the playing field by creating compliance costs that will discourage market entrants/players. How will the consumer benefit from fewer options?
Given the fact that the record-keeping requirements were not a part of the congressional directive regarding mortgage ads, we look forward to seeing someone in the industry challenge them in court.
The companies behind the ubiquitous “1 Tip for a Tiny Belly” ads are the most recent targets of a new FTC crackdown on online weight-loss ads that have conned millions of people. The ad seems innocent enough; it promises “1 Tip” to a svelte stomach. But this ad is actually the tip of something much larger: a scheme by the promoters and sellers of a host of diet pills and weight loss products to grab consumer credit card information and pile on additional, unapproved charges.
The headline typically reads: “1 Tip for a Tiny Belly,” in what appears to be hand-lettered type and positioned above a crudely animated drawing of a woman’s bare midriff, which shrinks and reinflates — flabby to svelte, svelte to flabby. Versions of these ads appear just about everywhere, including Facebook and the home pages of major news organizations. The government estimates that the accumulated number of “impressions”—the number of times it has flashed by a viewer on the Internet over the past 18 months — runs into “the tens of billions.”
In April, the FTC filed ten lawsuits against some of the companies and individuals behind these ads, but the “1 Tip” ads continued. The ads are the work of an army of affiliate marketers who place them on various websites on behalf of diet product sellers with such names as HCG Ultra Lean Plus. The promoters make money every time someone clicks through to the product seller’s site and orders a “free” sample. The samples, however, are not always free. The government estimates that the affiliate companies sued by the FTC spent more than $10 million buying Internet ads to push products such as acai berry diet products. One of the companies the government sued, IMM Interactive of Long Island, spent more than $1.3 million last year to place “flat belly” ads, which generated more than a billion impressions.
The FTC contends that almost everything about these ads is bogus. According to the FTC, these ads are part of a three-part scheme to obtain consumers’ credit card information and pile on additional, unapproved charges, which have led to thousands of consumer complaints. The “1 Tip” ad is the first step in this scheme, meant to lure consumers into the process. Consumers who click on the ad are directed to a second site, which looks like a diet or health-news page that seems to carry positive information about the products supposedly from credible news sources like CNN, USA Today, or ABC and to include brief “reader comments” extolling the virtues of the product. The pages then link to a third site, where consumers can use a credit or debit card to order “trial” samples of the featured products. But people who order the free sample find out later that they have actually agreed to pay $79.99 for an additional shipment of the product two weeks later, and another $79.99 for a shipment six weeks later, and so on until the consumer cancels the product, which is not always that easy.
These ads undoubtedly have power to attract the unwitting consumer in search of weight loss secrets. Some of this drawing power can be attributed to their appearance on websites belonging to real news organizations. In all of these cases, the credible news sites appear to be passive hosts of the ads. The ads are “served” to the news sites and thousands of others by ad networks, including those operated by Google and Pulse360, based in New York. The “host” sites, in turn, receive a commission for being part of the network or when their visitors click on one of the network-fed ads. If these ads continue, perhaps the the FTC will decide to investigate hosts of these ads, such as Google, for promoting these deceptive ads, as the Consumer Watchdog group encouraged the FTC to do in the case of mortgage scammers.
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.
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.