On every score, the court held these claims were false – that, in fact, only a few people made money and the vast majority lost, including on expensive coaching programs. Further, the court said that disclaimers, such as ones stating that results would vary, and that time, effort and “common sense” would be necessary to be successful, were ineffective to dispel the misleading “net overall impression” that handsome profits could be made, quickly and easily, from the programs.

In perhaps its most legally significant finding, the court also ruled that defendants violated the TSR by failing to disclose the terms of their continuity programs not just before the customer agreed to the sale, but even before the customer divulged credit card information. The text of the TSR states only that terms must be disclosed before a consumer “consents to pay,” but the court, citing FTC compliance guidance on the TSR, construed the text to require that disclosure be made even earlier, before the seller or telemarketer requests account information.

Since the start of 2011, Internet sellers of negative options have been required by the Restore Online Shoppers’ Confidence Act (“Rockefeller Law”) to disclose terms before billing information is provided. Now, with the decision in John Beck Amazing Profits, there is case law to back up the FTC view that this requirement should extend to telemarketing sales as well. DR marketers of continuity programs should take heed and review their scripts (and websites) to make sure all material disclosures are made not just before the consumer says, “OK,” but even before he pulls out his card.

As for the case itself, it’s not quite over. The parties have been asked to tell the court how much it should order in consumer redress and whether it should ban Hewitt and Gravink from infomercials – for life. The FTC is seeking more than $450 million, and it goes without saying that it is pushing for a ban.

Could these include Internet “make-money” schemes (like “turnkey” web stores, or how to make money on Google or through social media marketing)? The answer, if yes, could have huge implications for the viability of Internet biz-op marketing given the onerous disclosure requirements of the rule.

“Business opportunity” is defined, in pertinent part, as a solicitation to start a business in which the seller offers to “provide outlets, accounts, or customers, including … Internet outlets, accounts, or customers, for the purchaser’s goods or services.”

“Providing outlets, accounts or customers” means, in pertinent part, “requiring… recommending …[or] “providing a list of…[or] collecting a fee on behalf of … lead-generating companies…or otherwise assisting the prospective purchaser in obtaining…outlets, accounts, or customers.” It does not include providing “advertising and general advice about business development and training.”

The FTC document explaining the Biz-Op Rule hardly discusses Internet-based work-at-home opportunities, yet the explicit inclusion of “Internet outlets, accounts, or customers” within the definition of “business opportunity,” and identification of “lead-generating” support as one form of covered seller assistance, leaves no doubt of the FTC’s intention to enforce the rule against Internet make-money schemes it believes are violating the Rule and can fit within the business opportunity definition. The commission already has identified online biz-ops as a prime enforcement target in its campaign to protect the “financially distressed” consumer and has brought a number of cases against them, including one involving a turnkey web-store business that recently went to trial and is awaiting decision in FTC v. Commerce Planet.

To the extent such digital stores are deemed to be “outlets” or “accounts,” and helping Internet biz-op purchasers to get leads is deemed to be “providing customers,” then the rule will apply and the FTC will have a powerful new weapon to deploy in the online marketing arena.

At its core, the new rule is a disclosure regulation, requiring detailed written disclosure, in a prescribed form, of certain material information, including the basis of earnings claims – the sine qua non of biz-op offers. A covered seller must disclose, at least seven days prior to sale: who it is; whether it’s making an earnings claim; whether it, its affiliates, or key personnel have been involved in any legal actions; whether it has a cancellation or refund policy; and a list of purchasers within the last three years. If the seller makes earnings claims, has been involved in legal actions, or has a cancellation or refund policy, it must provide supplementary information substantiating the earnings claims, identifying the legal actions, and stating the key terms of the cancellation/refund policy.

Obviously, a 7-day advance disclosure requirement of this scope and depth is incompatible with the sale of biz-ops by direct response marketers “as we know it,” online (or off). We will know soon enough, through FTC enforcement actions and/or further guidance, what types of Internet make-money schemes it believes fall within the scope of the new Biz-Op Rule (violation of which carries a $16,000 penalty per instance). Meanwhile, online biz-op sellers: beware of your potential exposure and proceed with care.

This year, the FTC has laid out further its vision of compliant affiliate monitoring in much-awaited settlements of two big Internet marketing cases: Central Coast Nutraceuticals and 1021018 Alberta Ltd., d.b.a. Just Think Media and their respective head honchos, Graham Gibson and Jesse Willms. Gibson and Willms both were engaged in negative option marketing through affiliate programs. In addition to banning them for life from using negative options (a now standard FTC remedy), the FTC orders against Gibson and Willms impose super tough affiliate policing requirements that amount to a de facto ban on affiliate marketing because there is no way they can be satisfied, at least on a large scale.

The Gibson and Willms orders require one or the other of them to:

• Obtain the full name, physical address, E-mail address, phone number and bank account of every affiliate
• Provide each affiliate and affiliate network a copy of their FTC order and obtain a signed statement acknowledging its receipt
• Inform each affiliate and network that engaging in conduct prohibited by the order will result in immediate termination and forfeiture of all monies owed the affiliate
• Require each affiliate or network, prior to the use of any marketing materials, to provide all marketing materials, the URL location for the materials, the URL of any hyperlink contained in the materials, and the range of date the materials will run
• Review all marketing materials for compliance and, if they don’t comply, inform the affiliate or network that approval is denied and no payment will be made for sales coming from those materials
• Thoroughly investigate any complaint against an affiliate or network
• Immediately terminate and stop paying any affiliate or network who they learn is violating the order
• Refund, within 5 business days, each consumer whose sale came from a non-compliant affiliate or network

On the surface, these requirements don’t seem particularly unreasonable. What’s wrong with getting affiliates’ addresses and making sure they use truthful ads? Online merchants, however, often work with hundreds of affiliates, or with networks consisting of hundreds or thousands of sub-affiliates, many dispersed on far-away continents. Affiliate ads can be changed in a keystroke, making monitoring of their every iteration impossible.

Faced with such obligations applicable to globe-spanning networks (including the refund liability), why would Gibson or Willms, or any merchant, want to engage in affiliate marketing? The obvious answer (if they’re sane) is, they wouldn’t.

Affiliate misconduct occurs, and the FTC has a legitimate interest in encouraging and, where necessary, forcing merchants and networks to make reasonable efforts to deter it. Prompt termination of known bad actors is appropriate and should be required, as in Legacy Learning. The super-policing ordered in these cases, however, is, as a practical matter, impossible for any merchant, even the most compliance-conscious, to carry out, at least on any sizable scale.

Rather than pretending Gibson and Willms could still engage in affiliate marketing if they would “just comply” with these requirements, it would have been more honest for the FTC to ban them altogether. And if these policing duties are what the FTC expects of all online merchants and affiliate networks, then the FTC should be even more direct and just announce a complete ban on affiliate marketing by everyone.

Fortunately, the U.S. Supreme Court, in a series of recent decisions, has given marketers new armor with which to defend themselves preemptively against plaintiffs’ suits: mandatory arbitration of consumer disputes. Last month, in CompuCredit Corporation v. Greenwood, its latest pronouncement on the subject, the Supreme Court barred a class action for violation of the Credit Repair Organization Act (CROA) on the grounds that CompuCredit’s credit card agreement required arbitration, and that CROA did not prohibit arbitration as the sole method of dispute resolution.

The court, in a majority opinion by Justice Antonin Scalia, went out of its way – the dissent said too far – to read CROA to permit a credit repair provider to compel arbitration over litigation. CROA is a very pro-consumer statute, affording, among other protections, a three-day cooling off period with right to cancel, and forbidding collection of fees until the seller has performed. To ensure the means to enforce those protections, it explicitly granted the consumer the “right to sue” a credit repair organization that violates CROA, and prohibits the “waiver” of any consumer rights afforded under the statute.

Seems plain enough, doesn’t it? “Right to sue” means right to sue in court, right? That’s what the Ninth Circuit below and the dissent by Justice Ruth Bader Ginsburg said was the obvious, “plain English” understanding of the phrase. But the majority had something else in mind. It said “right to sue” doesn’t mean the right to sue in court, but only the right to enforce the credit repair organization’s “liability” for “failure to comply” with CROA, which right also could be enforced in binding arbitration. The parties remain “free” to specify arbitration, the court said, so long as the “guarantee of the legal power to impose liability . . . is preserved.” Since CompuCredit had contractually provided for binding arbitration that was subject to judicial enforcement, plaintiff’s right to “impose liability” was protected.

Whether or not the majority’s “sophisticated” interpretation of the meaning of “right to sue” constituted an act of “legal legerdemain” that failed to honor Congress’ intent in enacting CROA, it demonstrates an unmistakable bias in favor of allowing sellers to avoid class actions and other consumer lawsuits by mandating binding arbitration of disputes. CompuCredit, on top of the court’s earlier pro-arbitration decisions, is a potential godsend to DR marketers that could be the next shakedown target. Mandatory consumer arbitration clauses now have the full backing of the highest court in the land. If you don’t have an arbitration provision in your customer contracts or terms and conditions now, you should. It could save your business.

Under its statute, the CFPB cannot carry out its most important functions, including regulating “non-bank” financial businesses, such as payday lenders, mortgage companies and debt collection agencies, until it has a director. Exploiting this leverage, Republican senators recently filibustered the nomination of President Obama’s choice to head the agency, former Ohio Attorney General Richard Cordray, a highly qualified candidate whose credentials were not in dispute. These senators opposed the appointment of a director until the structure and powers of the CFPB were fundamentally altered by replacing a single head with a bipartisan commission, subject the agency’s budget to the congressional appropriation process (funding currently comes from the Federal Reserve), and making it easier for other banking regulators to veto the CFPB’s rules.

With Democrats unwilling to bow to these demands, the Cordray nomination seemingly died, leaving the CFPB leaderless and powerless. Without a director, it can do little more than take consumer complaints, promote consumer financial education and issue reports. Its most concrete action has been to propose simplified mortgage forms. These and other initiatives would remain unenforceable, however, and the ambitious reform agenda of its backers still stymied, until a director was appointed.

Defiantly, President Obama has now done just that, without Senate confirmation. On January 4, exercising his constitutional appointment power while Congress is in recess, he named Cordray to the CFPB post. The appointment is only short-term, however, and more problematically, Congress technically was not in “recess,” (thanks to GOP wrangling of Senate procedure), which places the appointment in uncharted legal territory and invites an almost certain court challenge. Thus, even with the President’s daring end run maneuver, the effectiveness and future of the CFPB are still very much in doubt.

Consequently, this could still leave the FTC as the primary cop on the consumer financial protection beat – a duty this hyper-aggressive FTC will be only too eager to discharge. Alone or with state authorities, the FTC has brought nearly 500 cases during the past three years aimed at protecting the “Great Recession” consumer from allegedly dubious schemes, including debt relief, foreclosure rescue, payday lending, grants and business opportunities. Most recently, it obtained multi-million dollar judgments in a mortgage modification and foreclosure relief action; a court order requiring a payday lender to pay nearly $300,000 for illegally trying to garnish borrowers’ wages; and a $29.8 million judgment in a government grants case.

With 13 million Americans still unemployed, and millions more still struggling to get by, the FTC has said that consumer financial protection will continue to be a top priority. DR financial marketers should remain on high alert. While the CFPB may be handcuffed for now, the fiercely energized FTC remains on the enforcement prowl.

The year 2011 will be remembered as the Year of Privacy at the FTC – the time in which it tackled the “Four Horsemen of the Internet” to make the loudest statement possible about privacy standards it expects online firms and social media networks to uphold. First came Twitter, which agreed in March to settle charges of data security breaches and to put in place a comprehensive information security program that will be subject to independent audits over 10 years.

That same month, Google agreed to settle charges it made misrepresentations that led consumers to join its Buzz social media network without their consent, and did not adequately disclose that certain personal information (E-mail contacts) would be made public by default. Like Twitter, Google agreed to implement a comprehensive privacy program, but to submit to independent audits not for 10 years, but 20.

Now, at the end of November, comes Facebook, which just agreed to settle FTC claims it deceived consumers by telling them they could keep their information private, and then allowed it to be shared and made public. Under the settlement, Facebook is barred from making misrepresentations about the privacy of consumers’ personal information; must let consumers expressly opt in (rather than only opt out) to changes that override their privacy preferences (i.e., on sharing of their “Friends List,” or sharing of personal information with advertisers); and, like Google, must establish a comprehensive privacy program that will have to undergo independent audits for 20 years.

Sandwiched between these high-profile actions against the Internet’s behemoths, the FTC found time last month to issue a consent order against ScanScout, an advertising network that places video ads on websites for advertisers, settling charges it deceptively claimed consumers could opt out of receiving targeted ads by changing their browser settings to block cookies. The order requires a prominent notice on ScanScout’s home page that it collects information about consumers’ activities to send them targeted ads, together with a hyperlink to an opt-out mechanism; protects an opt-out choice for at least five years, unless the consumer changes it; and directs ScanScout to embed a hyperlink in its targeted ads that also leads to the opt-out mechanism.

Whether or not an FTC case against the fourth Internet Horseman – Amazon – is in the works, the actions it has taken against companies big and small in 2011 certainly back up its chairman’s pronouncement that privacy is, and will continue to be, a leading priority. To avoid mandatory audits yourself, you may wish to review your practices for compliance with FTC online privacy requirements.

Usually, the FTC would challenge them in the more “gentlemanly” forum of an administrative proceeding, rather than resorting to the ex parte temporary restraining order (TRO)/asset freeze ambush route in federal court they’ve perfected against smaller, weaker DR firms. It then would let them off with a slap on the wrist consent agreement and no monetary penalty whatsoever.

In short, for years the FTC has been applying a double standard in advertising enforcement, severely punishing the little guys in the DR industry, who lacked the financial firepower to defend themselves, and treating the big boys with kid gloves.

To its credit, the current FTC administration has begun to level the enforcement playing field a bit between powerful national advertisers and DR marketers. Cracks in the long-entrenched double standard have begun to appear during the past two years, with actions targeted against large drug makers and retailers like Bayer, Rite Aid, and CVS (as well as Nivea skin care maker Beiersdorf) that actually made them pay six-figure or low seven-figure civil penalties or consumer redress for advertising infractions. Now, finally, it may have been split wide open with the action taken in September against Reebok for allegedly falsely advertising “toning shoes,” which were claimed to provide extra tone and strength to leg and buttock muscles.

In a settlement of the charges brought against Reebok (in federal rather than administrative court, notably, but without a TRO/asset freeze), the FTC not only imposed the normal injunctive prohibitions against future false or unsubstantiated advertising claims, but forced Reebok to pay $25 million, which will be refunded to consumers directly from the FTC or through a court-approved class action lawsuit. Now, $25 million isn’t going to break the back of a company the size of Reebok, in the way that a hefty redress judgment can destroy a smaller DR marketer – especially in an industry that saw toning shoes sales reach $1 billion in 2010. But it is still real money to consumers, who shelled out $60-100 for a pair of the shoes, and represents one of the largest, if not the largest, consumer redress settlements the FTC has ever garnered from a national advertiser.

Whatever the impact of the settlement on Reebok’s bottom line, it is encouraging, and long past due, to see the FTC finally start to take a stern tone with big advertisers, too, and make them – as well as their counterparts in the direct response arena – pay when they cross the line. Hopefully the FTC double standard is dead once and for all.

While a flurry of bills have been introduced, “The Commercial Privacy Bill of Rights Act of 2011,” co-sponsored by Senators John Kerry (D-Mass.) and John McCain (R-Az.), seems poised to be the prime legislative vehicle. It could be blended with a House bill, the “Consumer Privacy Protection Act of 2011,” introduced by Reps. Cliff Stearns (R-Fla.) and Jim Matheson (D-Utah). Neither includes DNT, but should Congress decide to give consumers that option, there is no shortage of DNT measures, including ones introduced by Sen. Jay Rockefeller (D-W.Va.), Rep. Jackie Speier (D-Calif.), and jointly by Reps. Ed Markey (D-Mass.) and Joe Barton (R-Texas).

Both Kerry-McCain and Stearns-Matheson adopt the FTC’s “Fair Information Practice Principles” (notice, choice, consent, data access/security), create “safe harbors” for FTC-blessed privacy programs, would largely preempt state privacy laws, and would not allow a private right of action. Their chief differences are that Kerry-McCain is more prescriptive and would delegate substantial rulemaking powers to the FTC, while Stearns-Matheson relies more on disclosure and self-regulation.

Kerry-McCain not only would require privacy policy disclosure, it would set baseline legal standards. These would include not only clear notice of privacy practices, including usage of personally identifiable information (PII), but the right of individuals to opt-out of unauthorized uses of PII, including third-party datasharing for behavioral advertising, and to opt-in for use of sensitive PII (such as financial, health, etc.) and any transfers or uses that were materially different from those specified in the privacy policy and that created a risk of harm. Consumers also would be entitled to access and correct their PII. The FTC would be given broad rulemaking authority to implement the law and both the FTC and state attorneys general would have the power to enforce it.

Stearns-Matheson, by contrast, would require companies to publish privacy policies describing their collection, use and transfer of PII (which many, of course, already do), but stops short of mandating standards or empowering the FTC to establish standards.

Thus far, Kerry-McCain has garnered the most support, including backing from the White House and major technology companies, though consumer group sentiment is mixed. However, a national online privacy law seems assured. The stakes are high for marketers, consumers, and the future of behavioral advertising.

Irreparable damage that is unjustified could have been avoided if only the FTC had taken care to look at the facts first, and distinguished these marketers from the true frauds that do prey on financially vulnerable consumers. But the FTC has decided to condemn the direct response payday industry as a whole.

As usual, the FTC sued on the basis merely of some consumer complaints, without careful examination of the upsell disclosures themselves. The reported complaints were from 0.0004 percent of all customers. That’s one of every 2,300 consumers! The disclosures themselves were clear, prominent and unavoidable, in full compliance with FTC online disclosure guidelines – a fact not contested by the FTC.

Defendants retained FTC compliance counsel early on, followed their advice, and obtained strong compliance opinion letters from three advertising lawyers, including two FTC veterans, who concluded the disclosures were “more than adequate” to meet FTC requirements.

None of this mattered to the FTC. It barreled ahead anyway, shutting down a legitimate marketer that was offering valuable and appreciated services to thousands of financially distressed Americans, and wreaking financial havoc upon its owners and their families.

The point here is not to lament that the FTC made a bad mistake and unfairly wronged compliant marketers. The point is to send a warning out to DR marketers selling financial services to the “Great Recession Consumer” that the FTC presumptively views you as a law violator and will not hesitate to hammer you should it have the chance.

Last month, I wrote that the best way not to be ruined by the FTC is to “give it no excuse to ruin you at all.” It turns out the FTC doesn’t need an excuse. In this hostile regulatory climate, beware.

While it has used that leverage to secure many tough accords that help promote its enforcement goal of deterrence, historically it has been willing to compromise, especially on monetary relief. This is no longer the case. The FTC approach now, especially in cases involving financial offers to economically strapped (in FTC parlance, “last dollar”/”bottom dollar”) consumers, is all or nothing – “unconditionally surrender,” or we’ll see you in court.

This shift is most evident in its application of an “ability to pay” standard to consumer redress, and in a new insistence on lifetime marketing bans (rather than just restrictions) against first-time defendants. Regardless of the claimed amount of consumer injury, the FTC long has used a financial means test to reach monetary agreements. If you’ve been an FTC defendant (hopefully not!), you’ll know it requires financial disclosure statements as a condition of settlement detailing income, assets, expenses and liabilities.

In its traditional “ability to pay” formula, it usually would consider the “negative” side of the ledger and weigh liabilities against assets in determining redress. Today, while it still requires disclosure of liabilities, the only thing it really looks at are assets. If you have cash, securities, equity in a home or other property, or even a claim to “future payments” (such as a pending inheritance), the FTC will demand all or most of it as a condition of settlement, even if it effectively bankrupts you. If you don’t agree to pay, then it will seek a court judgment for the full amount of consumer injury (often millions) that you could be paying off for the rest of your life.

This is the sobering “choice” now presented to many DR marketers when sitting across the table from the FTC.

The other “option” they’re given is a lifetime conduct ban. Traditionally, the FTC has sought bans only against “recidivists” (“two-time losers” in FTC-speak). Kevin Trudeau is perhaps the most notorious poster boy for that policy. Now, it is employing a “one-strike-and-you’re-out” approach, demanding bans against DR marketers with no prior FTC record. These include bans on certain marketing methods (i.e., negative option) and sale of certain types of products (i.e., grants, employment services).

As harsh and unfair as these changes in settlement policy seem, from the FTC’s perspective, they are a necessary response to present conditions: desperate times require extreme measures. In its view, financially vulnerable consumers require maximum protection from and deterrence against unscrupulous conduct. Nevertheless, if the FTC feels it is justified to “wipe out” and ban misbehaving marketers in order to “send a message,” then it has a heightened responsibility to get its facts straight before it strikes and be sure it slams the right targets. Similarly, DR marketers have a heightened responsibility and self-interest to be sure their practices are compliant. The best way not to be ruined by the FTC is to give it no excuse to ruin you at all.