Friday, July 14, 2006
Marketing Campaign Using Solicitation Checks May Violate Federal Law
By TINA BAY, Staff Writer
Businesses may not solicit customers by using materials that appear on their face to be rebate checks, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The panel affirmed a summary judgment ruling by Chief U.S. District Judge Robert S. Lasnik of the Western District of Washington, concluding that certain mail solicitations for internet service violated the Federal Trade Commission Act’s “deceptive acts or practices” prohibition as a matter of law.
Section 5 of the act bars business from engaging in practices that are likely to mislead consumers acting reasonably under the circumstances, in a way that is material.
Alleging violations of Sec. 5, the Federal Trade Commission sued Ian Eisenberg and Chris Hebard and their internet service companies over a marketing campaign that drew in customers using cashable checks.
Eisenberg and Hebard in the late 1990s formed Electronic Publishing Ventures, LLC and its four subsidiaries, Cyberspace.com, LLC; Essex Enterprises, LLC; Surfnet Services, LLC; and Splashnet.net, LLC.
From 1999 to 2000, the subsidiaries mailed out millions of solicitations that featured checks, usually for $3.50, which were addressed to the individual recipients and contained the recipients’ phone number in the memo line. Each check, attached to an invoice-type form that included columns labeled “account number” and “discounts taken,” was designed to be detached at the perforated line for deposit or cashing.
Though the back of each check and invoice contained small-print disclosures that cashing or depositing the check constituted agreement to pay for the advertised internet service, no such disclosures were on the face of the solicitations. Promotional inserts included with each check also contained disclosures only on the back.
At least 225,000 of the small business and individuals who received the solicitation checks deposited or cashed them, resulting in monthly charges on their regular telephone bills—despite the fact that, in 99% of the cases, the customers never actually logged onto the service. A number of customers complained to the companies about being misled by the solicitations.
Lasnik granted the FTC’s request for a permanent injunction against continued solicitation by Eisenberg, Hebard and their companies. Ruling that the defendants violated the act as a matter of law, the judge concluded that the defendants owed consumers over $17.6 million in redress.
The judges agreed that the mailers were clearly deceptive and affected customers in a material way because they increased the likelihood that consumers would unwittingly obligate themselves to pay for the internet service.
Judge Diarmuid F. O’Scannlain, writing for the court, said:
“A solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation also contains truthful disclosures.”
Despite the disclaimers on the back of the materials, she explained, the solicitations created the deceptive impression that the check was a refund or rebate rather than an offer for services.
“We cannot accept [the defendants’] contention that the nearly 225,000 consumers billed for unwanted internet service acted unreasonably when they cashed or deposited the solicitation check,” O’Scannlain wrote.
The panel also affirmed Lasnik’s ruling that Eisenberg was liable in his individual capacity because he was clearly aware of the checks’ form and content.
The case is FTC v. Cyberspace.com LLC, 04-35428.
Copyright 2006, Metropolitan News Company