The court granted the FTC summary judgment on liability for
violation of §5 and the Telemarketing Sales Rule with respect to three
“wealth-creation” products sold via infomercials, the John Beck system
(promising real estate riches), the John Alexander system (ditto), and Jeff
Paul’s Shortcuts to Internet Millions (guess what). The FTC successfully held the named
originators, their companies, and related companies liable.
The John Beck system claimed to help consumers make money by
buying real estate at tax foreclosure sales by paying the delinquent back
taxes. The relevant defendants falsely
represented that consumers could quickly and easily earn lots of money by buying
homes in their area “free and clear” for “pennies on the dollar,” then
reselling them for full market value or renting them for a profit. The informercials also claimed that buyers would
get a free 30-day membership to “John Beck’s Property Vault,” but failed to
disclose that it was a continuity plan that subsequently charged them
$39.95/month, in violation of the Telemarketing Sales Rule.
The “John Alexander's Real Estate Riches in 14 days”
infomercial touted Alexander's “inverse ownership system” of acquiring real
estate, supposedly allowing consumers to put together real estate transactions
and get “the cash out at closing” without using any of their own money or
credit, within 14 days. “John's Club” was
the same type of continuity plan.
“Jeff Paul's Shortcuts to Internet Millions” infomercials
marketed materials on “proven, turnkey internet businesses,” allegedly “so
simple that consumers do not need any prior experience with internet business
to make it work.” The “Big League” or “Internet Millionaires Club” was the same
type of continuity plan.
Defendants challenged the FTC’s survey, which was conducted
by Dr. Conrey. The survey “measured the
earnings and profit experienced by consumers who had purchased one of the three
products. [It] also investigated whether
investment in coaching services or investment of time was related to consumers'
earnings or profit.” Using the list of
people from customer databases of the three products, the surveyor took a
sample. Each person in the sample was
mailed a Prenotification Letter, which read in part:
The Federal Trade Commission needs
your help. Since 1914, the Federal
Trade Commission (the FTC) has protected American consumers by monitoring and
regulating businesses. In order to
fulfill this responsibility, it periodically conducts research into the
experiences of customers who have purchased certain types of products and
services. As part of a current research
study, the FTC has enlisted the help of ICF Macro, an independent research
firm, to learn about customers' experiences with [PRODUCT NAME]. A few days
from now, you will receive a phone call from an ICF Macro interviewer who will
ask for your assistance in this important research effort....
Dr. Conrey confirmed that the final survey was consistent
with best practices in survey design.
Defendants argued that the prenotification letter tainted the pool by
positioning the FTC as the “good guy.”
Dr. Conrey explained that there was no feasible alternative to a letter
with this kind of disclosure, given respondents’ privacy and legitimacy
concerns; the notification gave the survey credibility and legitimacy and
avoided confusion or suspicion about the sponsor. The court held that this satisfied the
requirements for admissibility.
The court readily found Section 5 violations. The claims were material and were false and
unsubstantiated at the time they were made.
Just looking at the John Beck system, the claims that consumers could “purchase”
homes for “pennies on the dollar”; buy homes in their own area, regardless of
where they lived; make money “easily” and with little financial investment; and
make money “free and clear of all mortgages” were disproved by the kit
materials themselves. Buying tax liens
doesn’t mean you get a deed, only a right to collect delinquent taxes, which
only ends up with title and right to possess or sell in exceptional
circumstances. Tax sales are held only
once a year and bidding typically starts at a very high percentage of fair
market value.
Beck’s deposition testimony also showed the falsity of the
infomercials; while he expressly claimed to have bought “thousands” of
properties with his system, at deposition he admitted that he did so “very
infrequently”—only 10 times. Beck
claimed that his daughter had bought over 90 properties using his system, but
admitted that he knew of only 4 “students” who’d been able to get title to
homes like those shown in the infomercial, and those instances required several
years of waiting, including a court trip to foreclose on the right of
redemption. Purchasing property at tax
sales is elaborate and time-consuming.
Dozens of consumer witnesses further confirmed this falsity. They testified that it was difficult or
impossible to find tax sales in their area, and difficult or impossible to earn
substantial money using the Beck system. Success, if any, would require significant
monetary investment. The Conrey survey
showed that less than 2% of consumers made any revenues at all, and less than
0.2% made any profits. Only 1.9% of
those who bought coaching materials made any revenues. Even among consumers who spent ten or more
hours per week using the product, only 3.5% of them made any revenues.
Defendants argued that their representations weren’t false,
in that the houses featured in the infomercial did in fact sell for the
displayed prices. Plus, the Beck system
also encouraged purchases of raw land and house sites. And, even if a consumer does not live in a
non-tax lien state, she can use the Internet to buy properties elsewhere. None of this matters: the overall net
impression of the ads communicated that a typical consumer could easily
purchase high-value properties for pennies on the dollar and quickly earn tens
if not hundreds of thousands of dollars.
What the kit “encouraged” was immaterial, because the visuals of the
infomercials themselves focused heavily on large homes and vacation properties. And even if the featured houses did sell for
the displayed prices, the net impression was still false: that nice homes such
as those shown were easily available in all 50 states, and that one could
easily obtain deeds to them for pennies on the dollar. The same defect applied to defendants’ argument
that the exact phrase “quick and easy” never appeared: “quick,” “easy,” and
similar concepts were used repeatedly.
Defendants’ own copy test showed that the number of respondents who
received the challenged claims exceeded 10.5%, which was sufficient to count as
deceptive. No reasonable trier of fact
could concluded that these representations weren’t likely to deceive consumers
acting reasonably under the circumstances.
The same story, with variations only as to the misrepresentations,
held for the other infomercials. The
court dismissed small print disclaimers that endorsers’ experiences were
unique. “The prints are so tiny that,
under the circumstances, consumers are unlikely to read them while watching and
listening to the testimonials of the endorsers.” Nor did defendants possess any substantiation
for their exaggerated claims of easy financial success. Infomercials that gave
the overall impression that a typical buyer could “easily, quickly, and ‘magically’
earn thousands of dollars per week simply by purchasing and using the Jeff Paul
System” were deceptive.
Likewise, failure to disclose that buyers would be
automatically enrolled in continuity programs when they bought the front-end
kits was material and deceptive under Section 5 (and violated the TSR).
Further, defendants misrepresented that consumers who bought
their coaching programs would quickly and easily earn back the coaching costs
or more, falsely claiming that personal coaches would hold consumers’ hands and
walk them “step by step” through the system; some telemarketers even suggested
that consumers would certainly fail without coaching. Conrey’s survey showed that almost all who
bought coaching programs lost money, and more than 17% lost at least
$10,000. Only 1.7% of those who bought
coaching services made any profit at all.
And the coaches failed to answer questions or walk consumers step by
step through the system. Defendants
argued that they had a quality assurance program and took steps to rein in
rogue staff. Nonetheless, their
telemarketers made false and unsubstantiated representations; there was no
evidence showing that defendants’ recording of calls reduced or eliminated the
false claims. And in any event, the basic express claim that the coaching
program would help consumers was completely unsubstantiated.
The continuity charges violated the TSR because defendants
didn’t disclose their existence before customers handed over their credit card
information. Defendants argued that they
explained the negative option program at the time of the purchase, and also did
so in the invoice and package shipped with the product, as well as in post card
disclosures, phoned expiration notice disclosures, and coaching
disclosures. Those were all too late:
disclosure was required before a consumer divulges credit card or bank account
information.
In addition, defendants violated the do not call rule. They failed to set up a meaningful compliance
program, lacked written procedures, and didn’t train staff. They allowed paper
leads to pile up on “boiler room” floors before marking them as do not call in
their database. They also used “lead
recycling,” ensuring that consumers, including people who asked not to be
called, would be called multiple times.
Defendants argued that these were isolated incidents and that the
violations didn’t fall outside the 30-day grace period for putting customers on
the company’s internal do not call list.
But without written policies and procedures for do not call complaints,
these defenses were unavailing.
The FTC asked for injunctive relief and monetary relief of
over $300 million. The defendants were all liable, including the individual “gurus”
who knew that their claims were false and unsubstantiated. The court requested further briefing on
whether certain defendants should be subjected to a lifetime ban on
telemarketing, given prior lawsuits.
Likewise, the court sought further briefing on monetary relief in the
form of disgorgement under Section 13(b); defendants were liable, but there was
more to learn about the amount because the FTC’s numbers didn’t exclude
consumers who benefited; it might be equitable to subtract from the
disgorgement the amount actually earned by consumers who used the products.
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