Cramming has been a huge problem on landline bills for years, resulting in more than two-dozen FTC cases against the practice. Now, as part of the FTC’s efforts to extend consumer protection principles to the new frontier of mobile marketing, last month it filed its first case against mobile cramming, alleging that Wise Media LLC and its principals placed recurring unauthorized charges on mobile phone bills and should be subject to an asset freeze, consumer redress and injunctive relief.

In the alleged scheme, Wise Media billed consumers for so-called “premium SMS” subscription services that sent periodic text messages containing horoscope alerts, “flirting tips,” “love tips” and the like. A merchant like Wise Media is known in this sphere as a “content provider,” which may offer digital content (such as a game that can be played on a phone) that can be purchased by the consumer using text messaging. The charge for the service then goes on the consumer’s cell bill.

In this instance, Wise Media offered its premium SMS services through various short codes. For example, it offered a subscription service called “HoroscopeGenie” which was supposed to provide three horoscope-related messages a week by text message, using the short code “27140.” In another, it advertised a subscription service called “Long Life Love Tips,” which purportedly provided three “flirting tips” a week, using the short code “84930.” Each subscription cost $9.99 a month and automatically renewed each month.

The essence of the FTC’s complaint, however, is that Wise Media placed these charges on consumers’ mobile phone bills without consumers ever knowingly signing up for the services. The complaint claims consumers got text messages suggesting they had been subscribed to Wise Media’s services, which they thought were spam and ignored. It says consumers were charged even if they sent text messages back saying they didn’t want the services. It also alleges that Wise Media’s charges on consumers’ bills were cryptic, and that many consumers consequently didn’t catch them and paid the bill in full. Wise Media also allegedly made it difficult for consumers who did notice a charge to dispute it and get a refund.

With the increasing use of mobile phones as a platform for delivery and payment of third-party services, the FTC anticipates that the problem of mobile cramming will only grow. Accordingly, it already has followed up on this maiden enforcement action by holding a public roundtable on May 8 to get the views of consumer advocates, regulators and industry on strategies for combatting mobile cramming. One strategy, which it has already recommended to the Federal Communications Commission (FCC), is to require wireless carriers to give customers the option to block all third-party charges from their bills. It also is encouraging consumers to scrutinize their mobile phone bills more carefully, looking for odd variations in the amount due and for services they haven’t ordered.

What will make a disclosure “clear and conspicuous” in a digital ad? The FTC’s criteria are:

• Placement and prominence of the disclosure and how close it is to the related claim
• Whether the disclosure is unavoidable
• Whether other parts of the ad distract from the disclosure
• Whether the disclosure needs to be repeated to ensure it’s seen
• Whether the language is understandable

The disclosure must be as close as possible to the relevant claim. Key information (i.e., price, health, safety) must always appear with the claim and hyperlinks are disfavored. If hyperlinks are necessary for space reasons, they can be used so long as they satisfy the tenets of “clear and conspicuous,” namely:

• The link is obvious and placed as close as possible to the relevant information
• It’s labeled to convey the nature and significance of the linked information (“see details” is not okay)
• It takes consumers directly to the disclosure on the click-through page
• The disclosure on the click-through page itself is noticeable and understandable

The revamped guide also strongly discourages scrolling to find a disclosure, especially horizontal scrolling on smaller screens which consumers rarely do (any need to scroll horizontally can be solved by having a mobile-optimized site). When scrolling can’t be avoided, effective text or visual cues need to lead consumers to the disclosure. Pop-ups are another FTC disclosure non-favorite since they can be easily blocked and are often ignored.

Where space constraints are acute, such as in tweets, the revised guidance encourages repetition of disclosures (such as republishing in “re-tweets”) and allows abbreviated disclosures as long as consumers understand them. For example, “Ad” should be adequate to indicate a tweet is sponsored, but not necessarily “#spon.”

Since mobile and social media ads are still so new, the FTC expects advertisers to monitor the effectiveness of disclosure techniques, keeping what works and improving what doesn’t. Over time, FTC “test cases” will further illuminate the meaning of “clear and conspicuous” in digital advertising. In the meantime, it behooves digital advertisers to study the whole 53-page document (including its 22 mock ads), located at www.ftc.gov.

The Commission went farther, however, faulting the ALJ for not finding enough misleading claims and for not imposing a stricter substantiation standard of two controlled human clinical trials (RCTs). In so doing, the FTC majority went too far for Commissioner Maureen Ohlhausen, who parted ways on the issues of claim interpretation and substantiation in a thoughtful separate statement that sets the table for the next round of this heavyweight bout, to be played out in the U.S. Court of Appeals (and then, quite possibly, in the Supreme Court). Which view prevails – hers or the majority’s – will shape an important area of FTC advertising jurisprudence and the nature of health advertising for food and dietary supplements for some time to come.

In the Ohlhausen view, the majority went too far in two ways: it exceeded its authority by finding a number of “implied” disease claims based on its own facial reading of POM’s ads rather than extrinsic evidence showing that consumers perceived the claims, too; and it imposed an excessive substantiation requirement (two RCTs).

On claim interpretation, the majority said the FTC has the “common sense and expertise” to find implied claims without the need for evidence of consumer perception, as long as those claims are “reasonably clear.” Thus, it didn’t need extrinsic evidence to find a number of implied disease efficacy claims the ALJ said he couldn’t find.

For example, the majority found an implied heart disease claim in statements that POM juice will help “keep your ticker ticking” and the “sooner you drink it, the longer you will enjoy it.” It also found an implied prostate cancer claim in the phrase, “Drink to prostate health,” and language equating POM juice to “good medicine.” And implied “establishment” (“clinically proven”) claims were inferred from study references, notwithstanding the presence of qualifiers such as “preliminary,” “promising” or “hopeful.” These adjectives didn’t negate the “clinically proven” claim because, in the majority’s judgment, they “provide a positive spin on the studies.”

Commissioner Ohlhausen disagreed with many of these findings. She would have required extrinsic evidence to prove establishment claims where study qualifiers were used. She also would have demanded proof of implied efficacy claims where POM’s ads referenced health maintenance without mentioning disease, or where, in her opinion, the majority conflated disease treatment claims with prevention/risk reduction claims.

On substantiation, the majority held that RCTs are required not only for disease-related establishment claims, but also for efficacy claims, which don’t convey a level of proof. To be an RCT, a study has to: 1) be placebo-controlled, randomized and, where feasible, double-blinded; 2) test known predictors of the incidence of the disease; and 3) produce results that are statistically significant. Further, POM would need to have not one but two RCTs.

Ohlhausen said this was overkill, writing, “Although it might provide the Commission with some subjective comfort, requiring two RCTs does so at the expense of limiting consumer access to potentially useful information. The product at issue is an admittedly safe food product – a type of fruit juice. To set an unnecessarily high bar for such a product is in tension with…our policy commitment to avoid imposing ‘unduly burdensome restrictions that might chill information useful to consumers in making purchasing decisions.’”

She also cited First Amendment concerns to the extent the two-RCT requirement conflicts with the commercial speech doctrine’s preference for “disclosure over outright suppression.” Overall, noting that substantiation standards and claim interpretation are “inextricably linked,” Ohlhausen cautioned that if the FTC is “too quick to find stronger claims than the ones consumers actually perceive, then we will inadvertently, but categorically, require an undue level of substantiation for those claims.”

Ohlhausen’s separate statement has crystallized the central questions for appellate review of the majority decision in this case. Will the higher courts defer to the FTC’s asserted expertise to find implied claims in almost every instance without empirical evidence of how consumers actually perceive the claims? And will they favor “disclosure” or “outright suppression” in evaluating the RCT substantiation requirement for disease claims (and, indirectly, weight loss claims, since the FTC also now requires two RCTs for them)?

The future of health-related advertising for food and dietary supplements hangs in the balance, for there can be no doubt that a prohibitively expensive two-RCT requirement (or even one) for disease, weight-loss and perhaps other health claims will result in the “outright suppression” of useful consumer information.

Perhaps in response to this consumer class action onslaught, the U.S. Supreme Court lately has been giving new heft to mandatory arbitration clauses, which also contain “class” waivers. In 2011, in AT&T Mobility LLC v. Concepcion, which addressed whether an arbitration clause could bar classwide arbitration, the court overruled a California Supreme Court decision that had said such a bar was “unconscionable” and thus unenforceable. The court held that the California rule was preempted by the Federal Arbitration Act because non-consensual class arbitration violates the Act’s “liberal policy favoring arbitration,” in that it “sacrifices arbitration’s informality,” is “more likely to generate procedural morass than final judgment,” and “greatly increases risks to defendants.”

Last year, in CompuCredit Corp. v. Greenwood, the Supreme Court also barred a class action under the Credit Repair Organization Act (CROA), saying CROA did not prohibit arbitration as the sole method of dispute resolution. The court went out of its way to reach this conclusion. Even though the statute explicitly granted the “right to sue” a credit repair organization under CROA, the court said “right to sue” doesn’t mean the right to sue in court, but only the right to enforce “liability” for “failure to comply” with CROA, which right also could be enforced in binding arbitration. Since CompuCredit had contractually provided for binding arbitration that was subject to judicial enforcement, the plaintiff’s right to “impose liability” was protected.

Against this tide, last month a California appellate court, perhaps still smarting from the slap to its state supreme court in Concepcion, struck down an arbitration and class waiver clause on “unconscionability” grounds. In Natali v. Import Motors Inc., the court said the arbitration provision at issue was unconscionable because it was “adhesive” (one-sided in defendant’s favor), was buried in the contract, and the plaintiff was given no chance to review it.

The court got around Concepcion by saying it only limited an “unconscionabilty” defense that “disfavors arbitration,” and a conclusion that a one-sided arbitration provision in favor of the drafter is unconscionable “does not rely on any judicial policy judgment” disfavoring arbitration. In short, Natali reads Concepcion to place no limit whatsoever on “unconscionability” as a defense to enforcement of an arbitration/class waiver clause so long as, in the words of Concepcion, it doesn’t interfere with the “fundamental attributes of arbitration” (like classwide arbitration would).

The lesson of Natali, and its reading of Concepcion, for direct response marketers is that if they wish to limit their litigation exposure in an effective manner through the use of mandatory arbitration and class waiver provisions, then it is imperative those provisions be fair, balanced and conspicuously disclosed to consumers.

In its second report of the year on the subject, the FTC released, “Mobile Apps for Kids: Disclosures Still Not Making the Grade” in December. Based on a broad survey of kids’ apps, the report found a continuing, discouraging and dispiriting gap between the actual privacy practices of children’s apps and the disclosure of those practices to parents.

A principle of online privacy protection of children, enunciated in the Children’s Online Privacy Protection Act of 1998 (COPPA) and the FTC’s COPPA Rule issued under the Act (and, not coincidentally, also strengthened last month), is preservation of parents’ rights to control the personal information that websites and online services, including mobile apps, collect, use and share on their kids. According to the FTC report, mobile apps are still failing to give parents the information they need to determine what data is being collected from their children, how it’s being shared, or who will have access to it.

In addition, more and more are including interactive features – such as connecting to social media – and providing information to third parties like ad networks, without telling parents about it. Those companies use the information (like geolocation, device ID, or even phone number) gathered from multiple apps to develop detailed profiles of a child’s online behavior that can then be used to send product pitches – all without the child’s parents having the slightest clue.

Illustrative of the problem, the FTC survey found that:

• Only 20 percent of the children’s apps disclosed any information about their privacy practices
• Nearly 60 percent of the apps are sending information from the device to the app developer or a third party
• Nearly 60 percent had advertising within the app, with only 15 percent disclosing it prior to download
• More than 20 percent had links to social networks, with less than 10 percent disclosing it
• Nearly 20 percent allow for in-app purchases, with inadequate disclosure of that fact

Using whatever “bully pulpit” it has, the FTC exhorted all the key players in the mobile app industry – app stores, app developers, ad networks, etc. – to step up their game in helping parents control their kids’ access to and use of mobile apps. The key to effective parental control is better and timelier (before download) disclosure of the apps’ privacy practices, including offering simple, understandable choices about permitted data collection and sharing and greater transparency about how data is collected, used and shared.

In case jawboning isn’t enough, the FTC also let it be known that it has launched multiple law enforcement investigations of mobile app entities for possible COPPA violations.  Following on the heels of its first COPPA enforcement action against a mobile app developer and its strengthening of the COPPA Rule, this announcement is further evidence of the growing FTC risk facing mobile app developers and companies who don’t take seriously enough their legal (and moral) obligation to protect the privacy of children.

If they’ve been on the wrong side of the FTC all this time, then why weren’t they sued earlier? One guess is that, individually, they weren’t important enough enforcement priorities before. But now, the new Biz-Op Rule gives the FTC a powerful weapon to wield against an entire marketing sector – “work-at-home” programs – it sees as populated with hucksters seeking to grab the “last dollar” from financially-distressed “Great Recession” consumers.

Once confined to the realm of vending machine businesses and the like, and limited to biz-ops costing $500 or more, the Rule now covers “work-at-home” offers carrying no purchase minimum. It requires detailed written disclosure, in a prescribed form, of several items of information, including the basis of earnings claims – the sine qua non of biz-op offers. The seller must disclose, at least seven days prior to sale: a) who it is; b) whether it’s making an earnings claim; c) whether it, its affiliates, or key personnel have been involved in any legal actions; d) whether it has a cancellation or refund policy; and e) a list of purchasers within the past three years. If the seller makes earnings claims, has been sued, or has a cancellation/refund policy, it must provide supplementary information substantiating the claims, identifying the suits, and stating the key cancellation/refund terms. The disclosure document must be provided even if the seller is not making earnings claims.

A seven-day disclosure requirement of this type will kill many biz-ops, including ones that offer legitimate opportunities to struggling consumers. It is particularly nonsensical for work-at-home offers that initially may cost nothing (except shipping and handling) or only a modest amount. Consumers considering a tryout or purchase of an income opportunity with minimal financial risk don’t need such overprotection, and small businesses shouldn’t face extinction to provide it.

There may be hope, though. Biz-Op Rule defendants need to read the Rule carefully to see if it even applies to them. Its definition of “business opportunity” doesn’t apply to just any work-at-home program but only to those based on a solicitation to “enter into a new business” that involves a “required payment” and in which the seller offers to “provide outlets, accounts or customers, including … Internet outlets, accounts or customers, for the purchaser’s goods or services.” It does not include providing “advertising and general advice about business development and training….”

Parsing this definition, Biz-Op Rule targets, in constructing their defense, need to ask themselves: 1) Do my customers actually become their “own bosses,” selling their own goods or services to their own customers, or are they just “finders” for my products? 2) Do I actually “provide outlets, accounts or customers” to my customers, or concrete assistance in obtaining them, or am I really just offering advertising and general business help? 3) Are my customers really making a purchase “payment” if my offer is initially free with at most only shipping and handling fees and a chance to cancel?

If you’re a work-at-home opportunity seller and the answer to any of these or other coverage questions is no, the heavy-handed new Biz-Op Rule may not apply to you. If so, then the next challenge may be getting the FTC or a judge to agree.

Specifically citing the FTC recommendation and several reported data privacy and security lapses, last month Rockefeller launched a major investigation of the data brokerage industry, sending letters to nine of its most prominent members – Acxiom, Experian, Equifax, Transunion, Epsilon, Reed Elsevier (Lexis-Nexis), Datalogix, Rapleaf and Spokeo. The letters ask them to answer detailed interrogatories aimed at finding out: 1) what data about consumers they collect; 2) how specific it is (i.e., to consumers, computers or devices); 3) how they obtain it (including sources, contracts and amounts paid); 4) who buys it (including customer names, contracts and amounts paid); 5) how it’s marketed, sold and used; and 6) what notice, access, dispute and opt-out rights, if any, they offer consumers. Responses were due by Nov. 2.

Because it is a small agency (albeit with enormous power), the FTC has developed new methods in recent years to increase its “bang for the buck” in Internet fraud enforcement. This has included joint “sting” operations with state attorneys general, working in concert with Visa and Master Card to curtail negative option marketing by tightening the vice they hold over credit card processors, and building chargeback-based cases against Internet marketers by first subpoenaing “back-end” merchant account records from their processors. Now, with Sen. Rockefeller once again on its side and on the march, the FTC also stands a good chance of achieving maximal compliance leverage in the area of consumer privacy protection by “going to the heart” of Big Data itself – the data brokers that, like the payment processors, control the toll gates and make it all happen.

Earlier this year, the Commission held a public workshop to hear and discuss ideas for updating its “Dot-Com Disclosures” guidelines (created in 2000) to fit the new world of digital marketing, including social media and mobile advertising. Proposed revisions are expected to be out for public comment before the end of the year. Meanwhile, in an interim attempt to respond to the marketing chaos surrounding the tsunami of “apps” now flooding mobile devices, the FTC recently published a guidance document for app developers entitled, “Marketing Your Mobile App: Getting It Right from the Start.”

It’s a primer on truth-in-advertising standards and basic privacy principles for a burgeoning industry of mostly 20-somethings who probably have thought as much about FTC compliance as they have about planning for retirement. While intended for the “uninitiated,” it also could serve as a refresher on elementary FTC advertising and privacy standards for the more experienced direct response marketer. It’s available at www.ftc.gov.

The publication offers the following advertising guidance:

• Tell the truth about what your app can do. An app developer needs to understand that just about anything it says about its product – whether on a website, in an app store, or within the app itself – is a claim, and anything it doesn’t say that’s material to a buying decision could be a misleading omission. Objective claims for an app require solid proof (“competent and reliable evidence”) before they’re made, and if it’s a health or safety claim, it may need to be competent and reliable scientific evidence. Also, the meaning of a claim is what the “reasonable consumer” thinks. Look at your advertising from the perspective of “average users,” not app experts. The FTC already has taken action against app developers who made unsubstantiated claims their apps could treat acne, and no doubt is already on the prowl for its next app targets.
• Disclose key information “clearly and conspicuously.” The tight space constraints of mobile platforms present unique challenges in complying with this basic FTC requirement, and for the FTC itself in developing effective disclosure guidelines. Nevertheless, whatever new guidance the FTC gives to mobile advertisers in its revamped “Dot-Com Disclosures,” undoubtedly it will be aimed at ensuring that material disclosures about an app or other product are big and clear enough for average users to notice and understand them.

On privacy, the publication tells apps developers to:

• Practice “privacy by design.” Incorporate privacy protections into your practices and default settings by limiting data collection, securely storing data, and getting express user consent for non-apparent data collection or sharing.
• Be transparent. Be up front about your data collection and sharing practices.
• Honor your privacy promises. Whatever assurances your privacy policy provides about data security or use of personal information, live up to them. In the dozens of privacy cases already brought by the FTC, most have been for broken privacy promises or broad privacy statements that failed to disclose the extent of data collection/sharing. Avoid these pitfalls and you will decrease your odds of being the target of an FTC privacy action yourself.

While acknowledging the severity of the judgment, the court felt it was justified in the circumstances. So-called “fencing-in” relief that bans or circumscribes future conduct must bear a “reasonable relation” to the unlawful conduct. Whether it does, and what its scope should be, depends on how serious and deliberate the violation was, how easily it can be transferred to other products, and the defendant’s prior history (i.e., is he a “recidivist”?).

On each count, the court found evidence to support the ultimate fencing-in relief of lifetime bans against Hewitt and Gravink. Each had a “long history of blatantly disregarding the law,” including repeated state violations involving the same products in this case and prior FTC orders involving infomercials for different products.

This history showed not only a propensity to break the law but how easily their “technique of deception” could be applied to other products. Further, their violations were “serious, pervasive and continuous,” resulting in injury of nearly $500 million to almost 1 million consumers, and their personal involvement was “extensive and highly deliberate.” Considering all this, the court said any fencing-in less restrictive than a lifetime ban would be “ineffective” to prevent future violations.

With regard to the $480 million, the court said it was warranted because this was the total amount consumers had paid, minus chargebacks and refunds. Hewitt and Gravink argued $5.5 million should be deducted, as the amount of “wealth” consumers had derived from the products sold. The court said no, stating that “whether the consumer is lucky enough to make a profit or some small amount of money … is irrelevant to the issue of whether defendants’ representations were deceptive and misleading.”

Following other recent FTC triumphs resulting in substantial money judgments against individual defendants ($18 million in Commerce Planet, $30 million in Grant Connect), the extraordinary redress award and conduct bans ordered in John Beck illustrates again the high-risk FTC environment DR marketers are operating in today. Should you become an FTC target, you probably will not be allowed to settle unless you agree to give the FTC everything you have. And should you (understandably) refuse to do that, as the defendants in these cases did, and duke it out in court, you could suffer a similarly hideous fate. It is, indeed, a “Hobbesian” choice, one that can be avoided for sure only by fulfilling your FTC obligations in the first place.

The class action in Fraley et al. v. Facebook took dead aim at Facebook’s “Sponsored Stories” program that has been its most effective advertising method and is a central plank of its business strategy to “monetize” those 900 million users (and, not coincidentally, salvage its plummeting stock and battered post-IPO reputation on Wall Street). “Sponsored Stories” are popular with advertisers because consumers are much more likely to recall and respond to an ad if it came with a plug from a Facebook friend. They also tend to blend into the news feeds and thus don’t seem like traditional ads, which increases their effectiveness.

The “right of publicity” protects against the commercial exploitation of a person’s name and likeness without consent. Facebook contended its users gave “implied consent” every time they clicked “like” or posted a favorable comment. It also said it didn’t need consent to exploit them in advertising because sponsored stories were actually “news,” since all Facebook users were “public figures” to their friends. This novel theory of “fair use” will never be tested, at least in this case, because after a year of litigation, Facebook agreed to a settlement that bans it from converting its users into unwitting endorsers of its advertisers’ products.

Under the settlement, Facebook must disclose to all users that their names and likenesses may be used in “Sponsored Stories” ads, thereby ensuring it has their permission for such uses. In addition, users will have greater ability to see and control which of their “likes” and posts appear in Sponsored Stories.

While the settlement protects the rights of Facebook users to control the use of their preferences and identities in Facebook advertising, it leaves open the interesting question whether an advertiser’s use of a person’s “like” or a post as an endorsement may violate Federal Trade Commission (FTC) requirements that endorsements represent a person’s honest belief about a product based on personal use and experience. Consumers can “like” a product for any number of reasons having nothing to do with the merits of the product itself (i.e., to qualify for promotions, get new product updates, or receive some other tangential benefit). Many will never even buy or use it.

To “like” a product on Facebook is not necessarily to truthfully “endorse” it, even if you will now be able to give your informed consent to its use as an advertising plug on Facebook under the class action settlement. As Facebook moves past this legal challenge to its prized “Sponsored Stories” program, it will be interesting to see if, at some point, it doesn’t face an even bigger challenge from the FTC.