Navigating the Web of Rules Governing Internet Advertising


Internet advertising revenue totaled $5.5 billion in 2001, compared with a mere $20 million in 1995.1 Advertising online is predicted to reach $20 billion by 2010, accounting for 5.3 percent of all media ad billings.2

Internet advertising offers businesses a new and entirely different medium with which to attract consumers and maintain brand loyalty. Current online options include pop-ups, pop-unders, banners, splash pages and text-based ads. More creative forms of online advertising are inevitable, including ads customized for wireless applications. Consumer acceptance - or tolerance - of these emerging forms of advertising is still being tested. While the medium of Internet advertising presents an array of new choices for businesses, the rules that apply to those ads are likely to be familiar.

Internet ads cannot be unfair or deceptive

Section 5 of the Federal Trade Commission Act ("Act") forbids "unfair or deceptive acts or practices" in trade or commerce.3 A practice is unfair if it causes or is likely to cause a substantial injury that is not outweighed by other benefits to consumers and is not reasonably unavoidable by the consumers.4 A practice is deceptive if it is a material representation or omission that is likely to mislead consumers and affect their decisions or behavior with regard to a specific product or service.5 These basic requirements apply equally to the online advertising world.

Like other media forms, an Internet ad must disclose material facts regarding a consumer transaction. In FTC v. Audiotex Connection, Inc., No. CV-97 0726 (E.D.N.Y. 1997), the FTC pursued Audiotex for deceiving customers in violation of Section 5 of the Act by failing to disclose material facts about the costs incurred with visiting its website. There, Audiotex invited consumers to visit its "free adult sites" and directed them to download a special image viewer in order to view the website. Audiotex did not disclose that the image viewer was a software program that disconnected consumers from their own local service, connected them with a phone number in Moldova, and caused consumers to incur charges in excess of $2 per minute. FTC and Audiotex entered into a consent decree, in which Audiotex agreed to credit consumers for the telephone charges totaling $2.74 million and to disclose material facts regarding the costs of the transaction.6

As Internet scams have become more elaborate, the FTC has become increasingly sophisticated in its enforcement efforts and has formed the International Netforce, composed of the FTC, eight state law enforcers in the United States, and four Canadian agencies that coordinate efforts to investigate and enjoin various Internet scams. As part of the International Netforce, the FTC obtained a temporary restraining order in FTC v. BTV Industries, CV-8-02-0437 (D. Nev. 2002), preventing a scam that sent an unsolicited email to consumers informing them they had won a Sony PlayStation or other prize sponsored by Yahoo, and instead routed them to a adult Internet site and charged them $3.99 per minute for the connection. The FTC alleged in its complaint that the defendants' bait-andswitch practices were deceptive under the Act (informing consumers they won a prize, the e-mail was from Yahoo, and the connection to the website was free) and violative of the Pay-Per-Call Rule by not disclosing that the consumers were being connected to the website via a 900-number.7 Both Audiotex and BTV Industries demonstrate the FTC's committed efforts to protect online consumers from deceptive practices.

Not only must online advertisements disclose material facts, but those disclosures must also be clear and conspicuous. In FTC v.Dell Computer and Micron Elecs., FTC File Nos. 982 3563 & 982 3565 (1999), the FTC charged both Dell and Micron with disseminating deceptive ads. Dell's Internet ads stated that consumers could purchase new computer systems by making low monthly payments. The ads failed to adequately disclose that the payments were for a lease, not a purchase, and the disclosure used inconspicuous print in the ad. Micron's Internet ads for computer leasing omitted fees due at lease signing (about $250) and buried information about the term of the lease in unreadable blocks of fine print at the bottom of the ads. The FTC reached a settlement agreement with Dell and Micron, which required the companies to use disclosures that were clear, readable and understandable by the consumer.8

Some popular forms of Internet advertising have the unique ability to seemingly capture the attention of the consumer. While this is arguably the ultimate goal of all advertising, holding an audience captive may also constitute an unlawful practice under the Act. For example, in FTC v. Zuccarini,No. 01-CV-4854 (E.D. Pa. 2001), the FTC obtained a preliminary injunction against the defendant for engaging in unfair or deceptive practices by redirecting consumers to websites they did not intend to visit and by obstructing them from exiting websites.9 The defendant's tactic was to register common misspellings of domain names and to then redirect consumers' browsers to one of his sites. He would then "mousetrap" consumers by forcing them to view pop-up ads each time they would click on the "close" or "back" button. Consumers would have to click on ads, generating 10 to 25 cents for the defendant from advertisers for each click.

As advertisers develop new and different ways to hold consumers' attention, the FTC also surfs the web looking for what it believes are unfair or deceptive practices. For example, the FTC enjoined a failed dot-com,Toysmart.com, Inc., from selling its customer data as part of its assets. See FTC v.Toysmart.com, LLC, No. 00- 11341 (D.Mass. 2000). Toysmart.com's privacy policy provided that consumers' names, addresses, billing information, and shopping preferences were never shared with a third party.10 The FTC therefore asserted that Toysmart.com's solicitation of bids for such personal information was a deceptive practice under the Act.

The FTC is not the only entity that regulates online advertising. Recently, the Food and Drug Administration ("FDA") stated it would make a case-by-case determination as to whether claims made by food and dietary supplement manufacturers on websites constitute labeling or advertising. In 1971, the FTC and the FDA entered into a Memorandum of Understanding and agreed that the FTC would regulate food advertising while the FDA would regulate food labeling. Traditionally, labeling is viewed as the actual written or graphic material on the label of a product that is present at the point of retail sale. Advertising is the newspaper, television or radio promotion that is not present at the point of sale. The FTC allows food manufacturers to make advertising claims that are not allowed by the FDA's labeling standard, such as statements that a food is low in sodium or high in calcium. The FDA has argued that some websites that sell food or dietary supplements have blurred the line between labeling and advertising. Depending on the circumstances of distribution, food and dietary supplement manufacturers may have to comply with both labeling and advertising laws.11

Disclosures must be clear and conspicuous

Recognizing it is challenging to make a clear and conspicuous advertising disclosure on an interactive website, the FTC has issued guidelines regarding Internet disclosures.12 A disclosure is material information that must be given to the consumer about the terms of the transaction. The FTC recommends the advertiser consider the placement of the disclosure in the ad and its proximity to the related claim. It is best if the claim and the disclosure can be viewed together by the consumer on the same screen. If that is not possible, then there should be an explicit instruction such as "see below for important information on diamond weights" to encourage the consumer to scroll. If the disclosure is lengthy, a hyperlink to the disclosure may be appropriate if it is obvious and is consistent with the other hyperlinks used in the ad. One word hyperlinks, such as "disclosure" may be inadequate without further information regarding the type of information available.

Additional considerations include the prominence of the disclosure, the existence of items in other parts of the ad that might distract the consumer, the need to repeat the disclosure if the ad is lengthy, the volume and cadence of the disclosure in an audio message, the duration of a disclosure in a visual message, and the ability of the intended audience to understand the language of the disclosure. Disclosures should always be made before an online purchase. Indeed, the FTC encourages the disclosure to be made "when the consumer is considering the purchase."

Traditional FTC guidelines apply to the Internet as well

FTC rules that apply to written, printed, or direct mail advertising may also apply to Internet advertising. For example, Guides Concerning the Use of Endorsements and Testimonials in Advertising applies to endorsements that consumers are likely to believe.13 The rules regarding endorsements are not limited to a certain form of media, and therefore apply equally to online advertising. Similarly, the Telemarketing Sales Requirements that apply to direct mail may also apply to direct e-mail.14 If an e-mail invites a consumer to call a vendor to purchase goods or services, that telephone call and subsequent sale must comply with the same requirements.

Consumer privacy laws also apply to information acquired by businesses through the Internet. The nation's largest advertising company, DoubleClick, Inc., learned the hard way that using consumers' information without their permission could be a violation of privacy. Following DoubleClick's announcement that it would be integrating personally identifiable consumer information with cookies it places on consumers' computers, several class action lawsuits were filed against DoubleClick, alleging violations of state and federal privacy and fraud laws. See In Re DoubleClick Inv. Privacy Litigation, 00-CIV-0641 (S.D.N.Y. 2002). Consumers charged, among other things, that DoubleClick wrongfully gathered information by placing cookies on their computers without their permission, and invaded their privacy by tracking and recording their movements. DoubleClick reached a settlement resulting in the dismissal of all pending lawsuits, in which it agreed to obtain explicit permission from consumers before combining personally identifiable information with data it collected in the past, to routinely purge data collected online, and to not use data collected in a manner materially inconsistent with its privacy policy.15

In sum, Internet ads, like all forms of advertising, must be fair and truthful. Disclosures regarding material facts must be clear and conspicuous. Consumer information collected through online advertising must be consistent with posted privacy policies and industry practices.





Footnotes:

1 See Industry Analysis: Online Advertising Down, But Not Out, Broadband Networking News, Feb. 12, 2002, available at www.lexis.com.

2 See A Sobering Look at Internet Advertising, Cable World, Dec. 3, 2001, available at www.lexis.com.

3 15 U.S.C. §45(a).

4 15 U.S.C. §45(n).

5 "Deceptive" acts or practices are not defined by 15 U.S.C. §45, et seq., but the FTC has defined deception in a policy statement. See FTC Policy Statement on Deception, dated Oct. 14, 1983, available at www.ftc.gov/bcp/policystmt/addecept.htm.

6 The Amended Complaint, as well as the Consent Decree and Order, are available at www.ftc.gov. See also Victims of Moldovan Modem "Hijacking" Scheme To Get Full Redress Under FTC Settlements, Press Release, Nov. 4, 1997 and FTC Says Internet Scam Re-Routes "Surfers" to International Telephone Lines, Press Release, Feb. 19, 1997, both available
at www.ftc.gov.

7 The Complaint, Temporary Restraining Order, and Press Release are available at www.ftc.gov/opa/2002/04.btv.htm.

8 The Complaint against Dell is available at www.ftc.gov/os/1999/9905/dellcomplaint.htm. The Complaint against Micron is available at www.ftc.gov/os/1999/9905/microncomplaint.htm. See also Dell Computer and Micron Electronics Settle FTC Charges that Ads Misled Consumers About the Costs of Leasing Computers, Press Release, May 13, 1999, available at www.ftc.gov/opa/1999/9905/dell.htm.

9 The Preliminary Injunction is available at www.ftc.gov/os/2001/10/cupcakepi.pdf. See also Cyberscam Targeted by FTC, Press Release, Oct. 1, 2001, available at www.ftc.gov/opa/2001/10/cupcake.htm.

10 The Amended Complaint is available at www.ftc.gov/os/2000/07/toysmartcomplaint.htm. The Stipulated Consent Agreement and Final Order is available at www.ftc.gov/os/2000/07/toysmartconsent.htm.

11 See FDA Letter on Labeling Food Products Presented or Available on the Internet, available at www.cfsan.fda.gov/~dms/labwww.html.

12 See Dot Com Disclosures, available at www.ftc.gov/bcp/conline/pubs/buspubs/dotcom/index.html.

13 See 16 C.F.R. §255(b).

14 See 15 U.S.C. §6101 et seq.

15 Information regarding the settlement is available at http://settlement.doubleclick.net.