The FTC filed a lawsuit earlier this month in the U.S. District Court for the District of Utah charging telemarketers with violating the FTC Act and the Telemarketing Sales Rule.  The FTC alleges that defendants deceptively claimed their “business coaching” would help consumers earn thousands of dollars a month by starting a home-based Internet business.

According to the complaint, the defendants’ telemarketing operation relied on “leads” supplied by other companies.  Typically, these were consumers who had purchased some work-from-home-related product or service online for less than $100. For a fee or a percentage of defendants’ sales, the company that sold the product or service would encourage the buyer to contact an “expert consultant” or “specialist” to see if they qualify for an “advanced” coaching program.  However, when the consumer called to speak to a “specialist” they were merely routed to defendants’ telemarketers.

According to the lawsuit, the defendants then charged consumers up to $13,995 for their purported business coaching program, which merely provided information that was already freely available on the Internet.  Ultimately, most people who bought the service did not develop a functioning business, earned little or no money, and ended up deeply in debt.

The FTC filed a lawsuit this week against Lending Club, a peer-to-peer lending company that operates an online marketplace for personal loans.  The lawsuit accuses Lending Club of luring consumers to its website with online advertisements promising “no hidden fees,” only to go ahead and deduct significant “up-front” origination fees from the loan proceeds.  As a result, customers were surprised when the amount that actually showed up in their bank account was less than the “Loan Amount” they thought they had signed up for.

According to the FTC, this deception is made worse by the fact that Lending Club never adequately discloses the up-front fee to consumers during the entire online application process.  The fee is only mentioned once—inside an explanatory “pop-up bubble” that only appears if the applicant happens to click or tap on a relatively small and inconspicuous icon. Because applicants are not required to click or tap on the icon in order to move forward with their loan application, many applicants never saw the disclosure at all.

“This case demonstrates the importance to consumers of having truthful information from lenders, including online marketplace lenders,” said Reilly Dolan, acting director of the FTC’s Bureau of Consumer Protection, in a statement. “Stopping this kind of conduct will help consumers make informed choices about loan offers.”

This case is a reminder of advertisers’ responsibility to ensure that advertisements are honest and forthcoming, especially in the ever-changing landscape of online advertising.  Some key takeaways:

  • If a disclosure is needed to prevent an online ad from being deceptive or unfair, it must be clear and conspicuous. This rule applies to all forms of online advertising, including paid blog posts or ads on social media platforms.
  • The “clear and conspicuous” rule also applies across all devices and platforms that consumers may use to view the ad. Advertisers must therefore ensure that required disclosures function properly on all programs and devices.
  • Putting necessary disclosures in hyperlinks or “pop-up bubbles” is strongly discouraged, particularly where the disclosure involves important information like additional costs or consumer safety. Where they are used, ensure the link is labeled accurately and that it functions properly regardless of device or platform.

Earlier this week, the Federal Trade Commission (“FTC”) announced a settlement with PayPal, Inc. over allegations that Venmo, a PayPal-owned mobile payment and social networking application, misled customers on issues relating to account transfers and privacy settings and enabled fraud through inadequate security practices.

Founded in 2009, Venmo lets users easily transfer money to one another and share information regarding such payments through a social network feed.  From a user perspective, Venmo operates a lot like any other major social media network, letting users “pay” each other in the same way you “tag” a friend in an Instagram post.  Thanks to its familiar social media-style interface and the ease with which it lets users split everyday expenses like bar tabs and rent payments, Venmo quickly became a favorite among millennials and college students.

According to the FTC, however, Venmo’s perceived simplicity was deceptive.  In a complaint originally filed against Venmo-parent PayPal in 2016, the FTC alleged that Venmo’s notification policy misled consumers and constituted a “deceptive or unfair practice” under Section 5(a) of the Federal Trade Commission Act.  Under the policy, Venmo notified users that funds were credited to their account before Venmo had reviewed and verified the underlying transaction.  According to the complaint, this practice resulting in unexpected delays and reversals.  It also created an ideal environment for fraud.  By falsely conveying to sellers that transactions had cleared, scammers were able to buy goods and services with fake or fraudulent information, leaving sellers with nothing when the transactions were ultimately reversed.

The FTC further charged that Venmo misled consumers about the privacy of information about their transactions.  Under the application’s default settings, whenever a user pays or is paid through the application, a description of the transaction and its participants is shared with all of the user’s “friends” in a social networking feed.  While Venmo offers privacy settings that let users limit who can view their transactions, it failed to accurately explain to users how those privacy settings actually work.

Additional charges alleged that Venmo misrepresented the extent to which consumers’ accounts were protected by “bank grade security systems” and violated the Gramm-Leach-Bliley Act’s Safeguards and Privacy Rules.

“This case sends a strong message that financial institutions like Venmo need to focus on privacy and security from day one,” acting FTC chairman Maureen Ohlhausen said in a statement.  “Consumers suffered real harm when Venmo did not live up to the promises it made to users about the availability of their money.”

For businesses dealing directly with consumers, this case underscores the importance of taking your duty to educate consumers about your product seriously, especially when it comes to how customer information will be used.  Such businesses should regularly review disclosures and other consumer-facing messages to ensure they are not only accurate but also consistent with reasonable consumer expectations.  And whenever costumers are given options as to how their information will be used, make sure those options are clearly conveyed and, perhaps most importantly, honor their choices.

Customer feedback is a two-way street.  On the one hand, positive customers reviews can inspire trust in potential new customers who might otherwise be apprehensive about purchasing products or services from an unfamiliar company.  Negative reviews, on the other hand, typically have the opposite effect.  As such, businesses may be tempted to stifle or “bury” negative customer feedback in order to preserve their reputation.  Businesses that engage in such complaint suppression tactics, however, run the risk attracting the ire of federal enforcement agencies.

For example, just last week, a federal court ruled that the Federal Trade Commission (“FTC”) is likely to prevail in its case against World Patent Marketing, Inc. (“WPM”), a business that has marketed and sold research, patenting, and invention-promotion services to consumers since 2014.  According to the FTC, WPM intimidated and threatened customers to prevent them from complaining and to compel them to retract complaints, often through cease and desist letters from WPM’s lawyers frivolously insisting that such conduct constitutes unlawful defamation or even criminal extortion.

The court agreed with the FTC that WPM’s tactics likely violate Section 5(a) of the FTC Act, which proscribes any unfair act or practice that “is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”  The court explained that complaint-suppression tactics like those employed by WPM cause substantial consumer injury “because they serve to limit the flow of truthful information” about the quality of a business’s services to prospective consumers, making it “nearly impossible for consumers to make informed decisions.”

The court also found that there are no countervailing benefits to such tactics, as “existing customers do not benefit from having their complaints suppressed and prospective consumers do not benefit from being denied access to material information.”  To the contrary, suppressing customer complaints in this manner permitted WPM  “to hinder competition and harm legitimate competitors in the marketplace.”

This case highlights a need for businesses to take special care when responding to customer complaints and negative online reviews.  However damaging a bad Yelp review may be for your business, getting sued by the federal government is certainly worse.

When done correctly, sweepstakes and prize contests can be an effective tool for building brand awareness and gaining customers.  However, businesses that fail to abide by applicable statutes and regulations when using these promotional devices can suffer disastrous consequences, including civil enforcement actions, government inquiries, or even criminal penalties.

For instance, earlier this month, the Federal Trade Commission (FTC) announced it had sent more than $532,000 in restitution payments to victims of a vacation prize scheme.  The scheme, conducted primarily by VGC Corp. of America between 2008 and 2011, involved a promotion offering expensive vacation packages to callers who correctly answered a simple trivia question.  All callers (regardless of whether they answered correctly) were told they had won the vacation package but had to pay an “administrative fee” before they could collect.  Callers were later informed of several limitations and restrictions to the offer, but only after they had already paid between $200 and $400 in fees.

This case serves as a reminder of the need for businesses that implement these kinds of marketing tactics to have at least a basic understanding of the statutory and regulatory framework.  A number of federal laws require that certain disclosures be “clear and conspicuous” in contest promotions, including but not limited to all rules and conditions of the promotion and the odds of winning any given prize.

Additional regulations may apply depending on the particular type of contest or giveaway at issue.  Promotions in which prizes are awarded to members of the public on the basis of skill or knowledge (“skill contests”), or where the gift or prize is available to all recipients who respond according to the companies’ instructions (“premium offers”), can typically require payment in order to participate.  However, promotions that award prizes to consumers by pure chance (“sweepstakes”) cannot require payment of any kind, as whenever a sweepstakes-style contest requires a payment, it risks crossing the line into an illegal lottery.

Any businesses considering implementing these kinds of promotional devices should take the time to understand these distinctions and abide by all disclosure requirements.  If the past is any indication, the FTC and other federal agencies will continue their strict enforcement of these rules.

Paul Fling writes:

Fraud, deception, and unfair business practices are problems all companies and consumers are bound to come across. That is where the Federal Trade Commission (“FTC”) comes in. The FTC enforces federal consumer protection laws—in particular, laws focused on preventing fraud, deception, and unfair business practices. Largely, the FTC enforces federal antitrust and other unfair business practice laws to encourage fair competition in the marketplace and to keep consumer prices low.

U.S. Federal Trade Commission Building, Washington, D.C.Put simply, the FTC protects America’s consumers and promotes competition. For example, the FTC credits its anti-competitive antitrust enforcement efforts with improving access to health care—first, by helping prevent anti-competitive agreements that may raise health care prices, and second, by encouraging innovation in health care. Additionally, the FTC shields consumers from internet and telemarketing scams, price-fixing schemes, and even false and deceptive advertising. According to the FTC, its efforts benefit consumers in two crucial areas: their health and their economic well-being.

The FTC enforces over 70 laws. Those laws include acts that are familiar to many companies and consumers, such as the Federal Trade Commission Act, the Telemarketing Sale Rule, the Identity Theft Act, the Fair Credit Reporting Act, and the Clayton Act. However, the FTC has some level of responsibility in enforcing laws in a much wider range of areas, such as trademarks, credit reporting, internet privacy, college scholarship fraud, money lending, underage drinking, and more. With respect to advertising, for example, the FTC keeps an especially close watch on ads regarding food, medications, dietary supplements, alcohol, and tobacco—including monitoring and writing reports that assess alcohol and tobacco marketing practices.

The Federal Trade Commission Act provides the FTC with power to prevent unfair competition and business practices, seek retributions for injuries to consumers, conduct investigations, and make legislative recommendations. Consequently, the FTC enforces many of its wide-reaching laws under the Federal Trade Commission Act. A full list of laws the FTC may enforce and other information regarding FTC enforcement can be found on the FTC’s website.


Paul Fling is a summer associate, based in the firm’s Minneapolis office.

You’ve done your due diligence and you are sure that the content of your advertisement is accurate and fully substantiated with reliable data. All good, right? Not necessarily.

It’s a good first step – but the FTC and advertising laws are not limited to content, they also require that the context and presentation of the advertisement not be misleading or deceptive. The FTC recently re-affirmed this rule in explaining its standards for so-called “native advertising.”

Copyright: adiruch / 123RF Stock Photo
Copyright: adiruch / 123RF Stock Photo

Native advertising is advertising that matches the design, style, and behavior of the digital media in which it is disseminated. One aim of a native advertisement is to blend in with the organic content of a website. Native advertising has been on the uptick in the past several years as advertisers try to convince increasingly savvy internet users to click on their advertisements. According to the FTC, however, a well-designed native advertisement may well be impermissibly deceptive.

In its recent pronouncement, the FTC did not rewrite the rules applicable to contextual advertising; but it made clear that the rules apply to native advertising just like all other advertising.

So what are the rules and what should be done to ensure compliance with them?

According to the FTC, the rule is as follows:

“Deception occurs when an advertisement misleads reasonable consumers as to its true nature or source, including that a party other than the sponsoring advertiser is the source of an advertising or promotional message, and such misleading representation is material.”

Pretty simple – all expect for what qualifies as “material.” Fortunately, the FTC provides a definition of what they consider material:

“[A] misleading representation is material if it is likely to affect the consumers’ choices or conduct regarding the advertised product or the advertisement, such as by leading consumers to give greater credence to advertising claims or to interact with advertising with which they otherwise would not have interacted.”

In other words, if the context and design of the advertisement misleads consumers into believing it is not an advertisement paid for by the advertiser, it very well may be deceptive under the FTC’s rule.

So what factors can an advertiser consider in developing a native advertisement?

Consider the entire context surrounding the advertisement. In assessing whether an advertisement is misleading, the FTC will consider the net impression of the advertisement, not just the statements in isolation. The FTC will “scrutinize the entire ad, examining such factors as its overall appearance, the similarity of its written, spoken, or visual style to non-advertising content offered on a publisher’s site, and the degree to which it is distinguishable from such other content.”

Consider the target of the advertisement. In some circumstances, the target audience for an advertisement will be an important consideration. For example, the FTC may apply different considerations to advertisements directed at children versus those directed at educated, sophisticated consumers.

Consider using a clear disclosure. Time and again, the FTC has suggested or required the use of a clear disclosure that an advertisement disguised as something else is, in fact, an advertisement. The classic example is the use of the word “ADVERTISEMENT” in sufficiently large and clear text on an advertisement in a newspaper that is disguised as a news article. Such disclosures will not always be sufficient – it will always depend on the full context of the advertisement.      

Don’t rely on the consumer “figuring it out” later on. The FTC considers deception harmful and illegal even if the consumer can later figure out that what he or she just clicked on was an advertisement by, for example, looking at the landing page or speaking to a sales representative. Curing the deception after the fact is, under the FTC’s guidelines, likely insufficient.

Read and know the rules. A good starting place is to read the FTC’s Enforcement Policy Statement on Deceptively Formatted Advertisements. And when in doubt, consult with an attorney experienced in advertising law.