Marketing Issues of Promotions

Advertising

Overview

False and deceptive marketing practices may violate both federal and state laws. Such practices that are unique to the Web include:

(1) The inappropriate use of “frames” and linking;

(2) The use of browser tricks to keep visitors captive to a site, such as by disabling the “Back” button or by generating repeated pop-up windows (“mousetrapping”). See http://www.ftc. gov/opa/2001/10/cupcake.htm (FTC charges company that practices “mousetrapping” with violations of FTC Act);

(3) The use of “contextual” or “pop-up” advertising programs that plant new advertisements over existing Web pages without the site operator’s consent;

(4) The placement of ads in search engine results without clear disclosure that they are advertisements. See ategory_id=24&article_id=33; “FTC Staff Recommendations to Search Engines: Clear and Conspicuous Disclosures,” ftc.gov/os/closings/staff/commercialalertletter.htm;

(5) The use of domain names that are purposely misspelled or which transpose forms of other popular domain names to redirect users to an advertising website. See FTC v. Zuccarini, No. 01-CV-4854 (E.D. Pa. Apr. 9, 2002) (permanent injunction issued against a company for diverting and trapping Web users to sites containing numerous banner and pop-up ads in violation of Section 5 of the Federal Trade Commission Act); and

(6) The use of deceptive advertisements to trick users into visiting a particular website. See Complaint, Carstens v. Bonzi Software, Inc., No. 02-207199-1 (Wash. Sup. Ct. 2003) (suit filed against defendant for allegedly using banner ads that impersonated computer error messages that tricked users into visiting defendant’s website).

Federal Law

The Federal Trade Commission has formed an Internet Advertising Group within the Bureau of Consumer Protection’s Division of Advertising Practices. Federal laws governing consumer protection, advertising, and unfair or deceptive trade practices that apply to the online environment include:

(1) Federal Trade Commission Act, 15 U.S.C. §§ 41 et seq.; (2) False advertising, 15 U.S.C. § 52; (3) Unfair competition, 15 U.S.C. § 45; (4) FTC Advertising and Merchandising Guidelines, 16 C.F.R. §§ 240 et seq.; and (5) Lanham Act, 15 U.S.C. §§ 1051 et seq. (i) False endorsement; (ii) False designations of origin/description.

Federal Actions

(1) The FTC has published four articles intended to inform businesses of the applicability of federal laws to Web advertising. (i) “Dot Com Disclosures,”; (ii) “Advertising and Marketing on the Internet: The Rules of the Road,”; (iii) “Selling on the Internet: Prompt Delivery Rules,”; (iiii) “How to Comply with the Children’s Online Privacy Protection Rule,” http://www.ftc.gov/bcp/conline/pubs/buspubs/coppa.htm.

(2) The FTC has brought suit against various Internet businesses alleging false or misleading marketing practices. See FTC v. Western Dietary Products Co. (W.D. Wash. 2001), http://www.ftc.gov/opa/2001/12/westdiet.htm (company claimed that their herbal products and an electrical unit called the “Zapper” could cure cancer); FTC v. Ty Anderson, et al. (W.D. Wash. 2000), http://www.ftc.gov/opa/2001/08/pornpics.htm (company disconnected users’ modems from their regular ISP and reconnected to company’s server via an international phone line); FTC v. Western Botanicals, Inc., (E.D. Cal. 2001), http://www.ftc.gov/opa/2001/07/westbot.htm (company made unfounded claims that their products containing herb comfrey were beneficial in treatment of disease); FTC v. Leading Edge Processing, Inc., et al., No. 6:02-CV-681-ORL-19DAB, (M.D. Fla. 2002), http://www.ftc.gov/opa/2003/04/leadingedge.htm (married couple, through emails and online ads, allegedly marketed and sold work-at-home job opportunities while falsely representing earnings, job openings and the technical assistance the company would provide to purchasers); FTC v. Streamline International Inc., No. 01-6885, (S.D. Fla. 2001), http://www.ftc.gov/opa/2001/06/ streamline.htm and FTC v. Skybiz.com, Inc., et al., No. 01-CV-396-EA (N.D. Okla. 2003), http://www.ftc.gov/opa/2003/03/skybiz.htm (Internet companies were actually illegal pyramid schemes).

(3) Because false advertising laws are applicable to the Internet, the terms of any offer contained in an advertisement on a Web site must be updated as necessary to ensure the advertisement is kept current. For example, in early 1996, Virgin Atlantic Airways was investigated for continuing to advertise an expired airfare on its Web page, and as a result eventually agreed to pay a $14,000 fine to the U.S. Department of Transportation.

(4) Pitfalls of “Free.” Federal law requires that a “free” offer be accompanied at the outset with all terms, conditions and obligations of the offer. See “FTC Guide Concerning Use of the Word ‘Free’ and Similar Representations,”bcp/guides/free.htm. The FTC has taken enforcement actions against AOL, CompuServe, and Prodigy relating to their advertising of “free trial memberships.” A single service may not be advertised with a “free” offer (such as a free membership) for more than 6 months in any 12-month period. At least 30 days must elapse before another such offer is promoted, and no more than three such offers may be made in a 12-month period.

(5) Suits have also been filed by the FTC against companies that have allegedly been deceptive in their advertising of “free trial memberships.” For example, the FTC filed a complaint against Voice Media Incorporated, the owner and operator of an adult entertainment Web site that sold memberships to the site and periodically offered “free” trial memberships. Defendants allegedly ensured users that they would not be charged membership fees if they canceled their trial memberships within seven days of providing credit or debit card information and agreeing to participate in the trial membership. However, numerous users were charged despite the fact that they canceled their memberships within the seven-day trial period. The FTC also charged defendant with failing to “clearly and conspicuously” notify users that they would be immediately charged for a one month membership upon providing credit or debit card information and that the submission of credit and debit card information would be automatically treated as authorization to bill their credit or debit accounts. See In the matter of Voice Media Inc., File No. 002 3003 (Fed. Trade Comm’n Apr. 17, 2001),.

State law

Consumer protection divisions of state attorney general offices and local district attorney offices are also focusing on Internet advertising. Certain states take the position that any advertisement appearing on a Web page accessible to consumers within that state must comply with the consumer protection and false advertising laws of that state. While this is no different than, for example, advertising in a magazine with national distribution, it is an onerous requirement for small, local businesses operating Web sites since any Web site on the Internet can be accessed from national or international locations. State consumer protection laws that apply to Internet advertising include:

1. False Advertising, e.g., Cal. Bus. & Prof. Code § 17500;
2. Unfair Trade Practices, e.g., Cal. Bus. & Prof. Code § 17200;
3. Commercial Misappropriation/Right of Publicity, e.g., New York Civ. Rts. Law §§ 50-51; Cal. Civ. Code §§ 3344-3344.1 (unlawful to use another’s name, likeness or identity in an advertisement, subject to certain exceptions); and,
4. Private Attorney General Statutes, e.g., Cal. Bus. & Prof. Code §§ 17204, 17500, 17535; Cal. Civ. Code §§ 1750 et seq. (Consumers Legal Remedies Act).

Telemarketing and Direct Mail Issues

Advertising and sales on the Web are governed by legal restrictions on telemarketing and direct mail sales. For a more detailed discussion of telemarketing laws, see Chapter 2 (B), above. (1) The FTC’s Mail and Telephone Order Merchandise Rule (http://www.ftc.gov/bcp/conline/pubs/buspubs/mailorder/) applies to merchandise orders placed on the Internet. The Rule sets forth requirements for making promises about shipments, notifying customersaboutdelays,andrefundpolicies.See“SellingonTheInternet: Prompt Delivery Rules,” http://www.ftc.gov/bcp/conline/pubs/alerts /intbalrt.htm; FTC v. Auctionsaver, LLC, et al., (S.D. Cal. 2002), http://www.ftc.gov/opa/2002/05/internetauctionfraud.htm (companies that auctioned computer products on Internet sites but allegedly failed to deliver merchandise that consumers paid for were charged with violating Mail and Telephone Order Merchandise Rule); FTC v. PeoplePC, Inc., FTC File No. 012-3045 (N.D. Cal. Aug. 23, 2002) (FTC filed a complaint against a company that failed to notify consumers in advance that their deliveries would be delayed, provide them with an opportunity to cancel their orders or consent to the delay, or send them cancellation refunds within the time frame required. The company also failed to “clearly and conspicuously” provide consumers with pre-sale warranties covering the merchandise they purchased or at least information on how the warranties could be obtained before the purchase in violation of the Pre-Sale Availability Rule).

(2) California Business & Professions Code Section 17538 applies legal restrictions on telephone and mail order sales to the Internet. The statute includes requirements regarding shipping of goods, delays and refund policies. It also requires vendors on the Internet to disclose their addresses and return/refund policies by email or on their Web pages and to provide a toll-free means of resolving disputes. [edit] Advertising to Children

The FTC is actively monitoring advertising on the Web that is directed toward children. See “The ABC’s at the FTC: Marketing and Advertising to Children,” and “How to Comply with the Children’s Online Privacy Protection Rule,” The Children’s Advertising Review Unit (CARU) of the Council of Better Business Bureaus has updated its guidelines to cover marketing to children via the Internet. See also Implementing the Children's Online Privacy Protection Act: A Federal Trade Commission Report to Congress (February 2007).

Related consumer Web sites

The National Consumer League’s National Fraud Information Center & Internet Fraud Watch Web site at http://www.fraud.org informs consumers about Internet scams. The California Alliance for Consumer Protection Web site at http://www.consumeradvocacy.com contains links to several resources concerning Internet consumer protection issues. The Better Business Bureau maintains a list of companies that have pledged to meet the BBB Online Reliability standards for online business practices on its Web site. See http://www.bbbonline.org/consumer.

Contests & Sweepstakes

Many Web sites offer contests, sweepstakes or similar promotions to attract visitors and customers. However, these promotions must comply with a variety of federal and state laws.

Lotteries

Lotteries are prohibited by federal and state laws (though most states have amended their laws to allow state-run lotteries). Lotteries consist of three elements: consideration, chance and prize. Any promotion that has all three elements is likely an illegal lottery, and should be re-structured to eliminate one or more of these elements.

(1) Consideration. Consideration can take the form or payment, purchase, or expenditure of time or effort. Although it has moved away from this position, Florida originally held Internet access fees constitute consideration, and thus any online contest or sweepstakes involves consideration. Other states may hold that Internet access constitutes consideration. (i) Alternate means of entry. Offering an alternative means of entry that is free (e.g. entry via postcard or toll free call) in an online contest or sweepstakes may eliminate the element of consideration. Online entries and entries by alternate means must have the same opportunity to win. (2) Chance. The majority view under federal and state law holds that in a contest that involves both chance and skill, courts will look to whether chance is the “dominant element.” In states that follow the minority view, if the contest has any element of chance, it is an illegal lottery if consideration and prize are also present.

Contests

A contest is a game of skill in which the winner(s) is awarded a prize, and in which an entry fee or other consideration may be charged.

(1) Because skill-based contests, such as athletic competitions, usually do not involve the element of chance, consideration may be allowed. However, in a few states it is illegal to require participants to pay an entry fee, and such contests must be registered with the state in advance. Therefore, a national contest must exclude residents of these states and/or satisfy any registration requirements.

(2) The entrant must be required to meet a reasonable standard of skill (for example, a contest to guess how many beans are in a jar will not be considered a game of skill). Criteria for selection of the winning entry must be clearly disclosed.

Sweepstakes

A sweepstakes is a promotion in which chance is involved in determining the winner (e.g., a random drawing). (1) Registration. Florida and New York require registration and bonding for any game of chance in which the total value of the prizes exceeds $5,000. Rhode Island requires registration of games of chance conducted by “retail establishments” where the value of the prizes exceeds $500.

Official Rules

All contests and sweepstakes must be governed by a set of Official Rules. The Rules should be clearly posted on the promoter’s Web site.

Advertising/Promotion of Contests

Advertising and promotions of contests must include at a minimum: (1) an accurate description of available prizes and number thereof; (2) a statement of the odds of winning a prize (or statement that the odds of winning depend on the number of eligible entries received); (3) any restrictions on who may enter (e.g., open to U.S. residents only, residents of X states excluded); (4) actual retail value of prizes; (5) the date by which entries must be received; (6) the date(s) by which the prizes will be awarded; and (7) the name and address of the promoter. A list of winners must be provided, either online or by mail upon request.

Advertising via U.S. mail

The Deceptive Mail Prevention and Enforcement Act regulates advertisements sent through the U.S. mail that contain entry materials for sweepstakes and contests. The Act requires in part that all mail advertising a sweepstakes or skill contest must conspicuously disclose all applicable rules. The FTC and the Direct Marketing Association have both published articles that discuss compliance with the Act. See “Prize Offers: You Don’t Have to Pay to Play,” ; “Sweepstakes Do’s and Don’ts for Marketers,”

Record Retention

Pursuant to state laws,the following information should be retained for two years following the completion of a contest or sweepstakes: (1) a copy of the Official Rules, (2) copies of all solicitations/ advertisements; (3) names and addresses of winners, (4) a record of the total number of entries and the date the prize was delivered, (5) and an affidavit of the person conducting drawing (if applicable).

Subscriptions

The FTC’s Negative Option Rule (16 C.F.R. § 425.1) applies to sellers of subscription plans who ship merchandise such as books or CDs to consumers who have agreed in advance to subscribe. The Rule requires advertisements to clearly and conspicuously disclose material information regarding the terms of the plan. Once consumers enroll, the company must notify them before shipping to allow them to decline their merchandise. See “Pre-notification Negative Option Plans,”.