Sunday, July 16, 2006

Misleading checks work -- until the FTC catches you

Federal Trade Commission v. LLC, --- F.3d ----, 2006 WL 1928496 (9th Cir.)

Between 1999 and mid-2000, defendant’s subsidiaries mailed 4.4 million solicitations offering internet access to individuals and small businesses. As the court explained, the mailings

included a check, usually for $3.50, attached to a form resembling an invoice designed to be detached from the check by tearing at the perforated line. The check was addressed to the recipient and the recipient's phone number appeared on the "re" line. The attached invoice-type form included columns labeled "invoice number," "account number," and "discount taken." The back of the check and invoice contained small-print disclosures revealing that cashing or depositing the check would constitute agreement to pay a monthly fee for internet access, but the front of the check and the invoice contained no such disclosures.

At least 225,000 small businesses and individuals cashed or deposited the solicitation checks, leading to charges for $19.95 or $29.95 a month added to their ordinary telephone bills. Internet usage records show, however, that less than one percent actually logged on to the service.

Defendants’ principals were aware that they’d misled some consumers; they received complaints, and informed a prospective buyer of one of their subsidiaries that they believed “a number of customers” signed up without realizing they’d done so. After they ceased mailing solicitations, defendants commissioned a study, which found that “87.9 percent of 256 participants who actually read the language on the back of the solicitation understood that the act of cashing or depositing the check would constitute agreement to purchase internet service.”

The FTC sought an injunction and consumer redress in the district court. The defendants stipulated to a permanent injunction; the court then granted summary judgment to the FTC on liability, including individual liability for defendant’s principal Ian Eisenberg, and over $17 million in consumer redress.

Section 5 of the Federal Trade Commission Act prohibits "deceptive acts or practices in or affecting commerce." FTCA § 5(a)(1), 15 U.S.C. § 45(a). An act violates § 5 if it is likely to mislead consumers acting reasonably under the circumstances in a way that is material. (The Ninth Circuit rejected defendants’ attempt to add another element, that the FTC must prove that consumers could not reasonably have avoided injury.) Unsurprisingly, the court of appeals agreed that the fine print on the back of the check and other marketing materials was insufficient to avoid liability. The net impression of the offers was of an “invoice” resolving some small outstanding debt.

The fact that over 200,000 people were deceived – as evidenced by low usage rates – was powerful additional, though not necessary, evidence of deception. This reinforces my conclusion that the “reasonable” consumer is the ordinary consumer. In a world where we see thousands of ads a day, it’s not reasonable to expect detailed attention to every one. If an ordinary consumer would take a claim at face value, it’s reasonable to do so. Thus, defendants’ consumer survey did nothing to show that reasonable consumers wouldn’t be deceived, because the survey didn’t look at whether reasonable consumers would read the fine print in the first place. (I’m also worried about the 12% who didn’t understand. There’s always some noise in a survey like this, and 12% is on the low side of deceptiveness, but I find it difficult to believe you couldn’t convey “you’re signing up to pay $X for internet access every month if you cash this check” in a way that more people would understand.)

The court further concluded that the misleadingness was material. The idea that the check was merely a refund clearly made it more likely that consumers would deposit the check, obligating themselves to pay for internet service. This materiality is unusual because it’s materiality with respect to whether consumers even thought they were entering into a transaction; they were unlikely to think they were receiving any representations about goods or services. (Does this reasoning have any relevance for proposals to regulate buzz or stealth marketing, in which the claim is that the apparent ordinariness and disinterestedness of the individual marketer gives an ad message special credibility?)

The court of appeals also upheld summary judgment on Eisenberg’s individual liability, because he participated directly in the deceptive practices by reviewing some of the solicitations before they were mailed, and he had the requisite mental state because he had numerous conversations with a billing manager about customer complaints of deception; he was at least recklessly indifferent to truth or falsity. Reliance on advice of counsel isn’t a valid defense to individual liability for FTC Act violations.

1 comment:

Anonymous said...

Chevy Chase bank engages in the same practice - they offer a "check" for $5.00 which is really an agreement to receive one-month free benefits from a discount program, after which they charge $5.00/month. Does this ruling put a "chill" on such misleading marketing practices? I didn't realize they were so widespread....