To: From: Re: Date:
Jack Black, Esq. Michael Ross, Esq. Necessary Disclosures for an Online Advertiser’s Terms and Conditions April 28, 2009
MEMORANDUM OF LAW #2 This memorandum of law will address the necessary disclosures that must be made in an online advertiser’s Terms and Conditions. These disclosures are derived from specific Federal statutes - such as the Federal Trade Commission Act, the Truth in Lending Act, the Fair Credit Billing Act - as well as official Advertising Guides drafted by the FTC, which become law under the authority of the FTC Act. This memo will also address what steps one of the largest affiliate networks is taking in response to the increasing popularity of fake blogs, or “flogs”, as a common method of online marketing. Facts Our client is an online retailer that sells weight loss supplements online. The client wishes to know what disclosures and other provisions it must include in its Terms and Conditions, which is agreed to by all purchasers of their products. Applicable Law and Analysis The Federal Trade Commission attempts to protect consumers from falling prey to false and misleading advertising on the Internet. When determining the legality of a client’s billing policies, or when drafting an advertiser’s Terms and Conditions, there are numerous Federal statutes to consider: I. The Fair Credit Billing Act (15 USC 1666) The Fair Credit Billing Act is important if you are a creditor billing customers for goods or services. The Act requires you to acknowledge consumer billing complaints
promptly in writing and to investigate billing errors. The Act prohibits creditors from taking actions that adversely affect the consumer's credit standing until the investigation is completed, and affords other consumer protections during disputes. The Act also requires that creditors promptly post payments to the consumer's account, and either refund overpayments or credit them to the consumer's account. II. FTC Guide §251.1: Concerning the Use of the Word “FREE” and Similar Representations A product that's advertised as free if another is purchased - "buy one, get one" indicates that the consumer will pay nothing for the one item and no more than the regular price for the other. Ads like these should describe all the terms and conditions of the free offer clearly and prominently. When making ``Free'' or similar offers all the terms, conditions and obligations upon which receipt and retention of the ``Free'' item are contingent should be set forth clearly and conspicuously at the outset of the offer so as to leave no reasonable probability that the terms of the offer might be misunderstood. Stated differently, all of the terms, conditions and obligations should appear in close conjunction with the offer of ``Free'' merchandise or service. For example, disclosure of the terms of the offer set forth in a footnote of an advertisement to which reference is made by an asterisk or other symbol placed next to the offer, is not regarded as making disclosure at the outset. However, mere notice of the existence of a ``Free'' offer on the main display panel of a label or package is not precluded provided that (1) the notice does not constitute an offer or identify the item being offered ``Free'', (2) the notice informs the customer of the location, elsewhere on the package or label, where the disclosures required by this section may be found, (3) no purchase or other such material affirmative
act is required in order to discover the terms and conditions of the offer, and (4) the notice and the offer are not otherwise deceptive. (See http://www.ftc.gov/bcp/guides/free.htm.) III. Negative Option Offers (16 C.F.R. §425.1) The Negative Option Rule applies to sellers of subscription plans who ship merchandise like books or compact discs to consumers who have agreed in advance to become subscribers. The Rule requires that ads clearly and conspicuously disclose material information about the terms of the plan. Further, once consumers agree to enroll, the company must notify them before shipping to allow them to decline the merchandise. Even if an automatic shipment or continuity program doesn't fall within the specifics of the Rule, companies should be careful to clearly disclose the terms and conditions of the plan before billing consumers or charging their credit cards. IV. The Electronic Fund Transfer Act The Electronic Fund Transfer Act establishes the rights, liabilities, and responsibilities of participants in electronic fund transfer systems. The EFTA requires participants to adopt certain practices when they deal with transaction accounting and preauthorized transfers and error resolution, and sets liability limits for losses caused by unauthorized transfers. V. Truth in Lending Act (15 USC §§1601-1667) The Truth in Lending Act requires creditors who deal with consumers to disclose information in writing about finance charges and related aspects of credit transactions, including finance charges expressed as an annual percentage rate.
Concerns about “FLOGS” I. FTC Regulations The FTC has put out a guide outlining the rules governing the use of testimonials and endorsements in online advertising. (http://www.ftc.gov/bcp/guides/endorse.htm.) The FTC defines testimonials and endorsements as “any advertising message (including verbal statements, demonstrations, or depictions of the name, signature, likeness or other identifying personal characteristics of an individual or the name or seal of an organization) which message consumers are likely to believe reflects the opinions, beliefs, findings, or experience of a party other than the sponsoring advertiser.” In general, e n d o r s e m e n t s r e f l e c t experiences o f the m u s t al w a y s beliefs, or
h o n e s t endorser .
opinions, findings,
t h e
A statement that not all consumers will
get the same results is not enough to qualify a claim, and testimonials and endorsements can't be used to make a claim that the advertiser itself cannot substantiate. Connections between an endorser and the company that are unclear or unexpected to a customer also must be disclosed, whether they have to do with a financial arrangement for a favorable endorsement, a position with the company, or stock ownership. Finally, expert endorsements must be based on appropriate tests or evaluations performed by people that have mastered the subject matter.
II.
Response of Affiliate Networks Clickbooth, a leading affiliate network based out of Sarasota, Florida, has taken
the lead in policing its affiliates and cracking down on the use of flogs. In establishing its
policy, Clickbooth cited several primary concerns, such as ensuring full disclosure and transparency to consumer; ensuring there was no bias in review process, and ensuring the authenticity of the blog. To address these concerns Clickbooth has created the following guidelines that all Blog and Review sites must comply with: If Publisher Website adds user value and non promotional content is available and significant affiliate does not need to post “Advertisement” at the top of the page. However, if the review or blog site's sole purpose is advertising, the website must contain the verbiage at the top of the site labeled “Advertisement.” Each such Publisher Website must contain distinct and legitimate content, substance and material. The Content appearing on each such Publisher Website including but not limited to testimonials, blog posts, and comments, must be entirely an accurate representation that is truthful and verifiable. Any testimonials appearing on such Publisher Websites must be accurate, truthful, verifiable and from individuals that have given their permission for such testimonials to be used by the Publisher in the manner so used on the applicable Publisher Websites. Where you have compensated an individual for the use of his/her testimonial, that fact must be disclosed, prominently, on the applicable Publisher Website immediately below or adjacent to the subject testimonial. Monetary compensations for testimonials are not allowed. Each such Publisher Website must have an asterisk next to Links to products leading to a disclaimer that contain a clearly worded disclaimer disclosing the fact that the proprietor of the Website has a commercial relationship whereby it
receives compensation for referrals that result in sales of the product(s) featured on the Website. Review websites must disclose review process and steps taken to ensure a fair review. A fair review consists of tests or benchmarks conducted under the exact same conditions for all products reviewed. Each such Publisher Website should have images/videos that represent the consumer depicted, any images/videos used for dramatization must be explained with a disclaimer. IP address of user comments and other user submitted content must be retained and verified for authenticity.