Settle or Fight the FTC: A ‘Hobbesian’ Choice

Imagine you’re a Federal Trade Commission (FTC) target presented with a no-compromise settlement demand for all your assets and warned by a top FTC official that unless you take it, “You’ll be working for me all your life.” You have someone else to pay for your defense (insurance), top-tier legal representation and a chance to win. If you gamble and lose, on the other hand, you could face a multi-million dollar judgment. What would you do? “Cave,” or fight?

The defendant, former president of Commerce Planet, which sold a product that helped people make money on eBay, doesn’t have to imagine it. Unlike the other individual defendants (disclosure: represented by the author) who settled, the defendant chose to take a stand. How did his gamble turn out? Last month, in FTC v. Commerce Planet Inc., he was found liable for unfair and deceptive negative option marketing and ordered to pay consumer redress of $18.2 million. This follows a $30 million judgment that was entered jointly and severally against individual defendants in another Internet negative option case, FTC v. Grant Connect.

In both cases, each involving a “free trial,” the court found that the negative option was not “clearly and conspicuously” disclosed, leaving the deceptive “net impression” that the consumer could get the product for free. In Commerce Planet, for example, the judge compared the highlighted claims for the “free” offer:

• “GET YOUR KIT NOW FOR FREE” with the word “FREE” in red, at the top of the page
• “WHERE do we ship your FREE KIT?” with “FREE KIT” in red
• “GET YOUR ONLINE AUCTION STARTER KIT TODAY FOR FREE!” with the “$19.95” price crossed out and next to it, “NOW FREE! (limited time offer)!” with “FREE” again in red

with the lack of attention given the negative option. It was disclosed only in hyperlinked terms and conditions and “below the fold,” at the “very bottom” of the order page, in “fine print” that was “difficult to read” because it was the smallest text size and blended into the background.

Later versions of the disclosure, while more readable, remained inadequate because they were still in the smallest text and at the bottom of the page, not in “close proximity” to the order button. Even had the disclosure been “above the fold,” the court said it still would have been deficient since its “visibility is only slightly improved given its overall placement and presentation.”

Prior to Grant Connect and Commerce Planet, the federal “Restore Online Shoppers’ Confidence Act” (known as “Rockefeller”), enacted in December 2010, took care of the so-called “below the fold” problem with negative option placements by requiring that the terms be disclosed “before obtaining the consumer’s billing information” – that is, ahead of the credit card fields. Like the judge in Commerce Planet, however, Rockefeller requires that the disclosure be made not only above the fold, but that it be “clear” as well as “conspicuous.” To quote the FTC, it must be “unavoidable.”

While Grant Connect and Commerce Planet don’t necessarily break new ground in legal requirements for online negative option disclosure, they lend a powerful punch to the FTC’s current “scorched earth” settlement approach. As humiliating and painful as it may be to have to accede to FTC “all asset” demands that can be punitive, not doing so – and rolling the dice in court, even where you have a chance to win – can be far more ruinous still. Until there is a change in FTC settlement policy, this is the “Hobbesian” choice any FTC target capable of defending himself in court is going to have to make.

Talking about Direct Response, FTC

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