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Deceptive Business Practices & The FTC Act

By John DiGiacomo

Businesses that engage in deceptive and unfair internet practices are subject to injunctions and large monetary damage awards under the Federal Trade Commission Act (“FTC Act”). Just as importantly, the owners and principals of businesses can be held personally liable. In the case discussed below, FTC v. Ross, the website owner was fined $163 million by the court.

What is the Federal Trade Commission Act?

The FTC Act, now codified at Title 15, Section 45 of the U.S. Code, gives the Federal Trade Commission (“FTC”) the authority to bring actions against entities that “use[] unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” The FTC Act now applies to deceptive business practices and advertising on the internet and, in recent years, the FTC has brought many cases against internet companies alleging unfair and deceptive business practices.

In the mid-2000s, the FTC began suing companies with lax cybersecurity where such laxity resulted in loss of confidential consumer data to hackers.

The FTC has sued companies for a variety of other web-related violations including:

  • Misleading customer reviews — In re: the Matter of Amerifreight, Inc. See our discussion here.
  • Downloading spyware and other software onto users’ computers without permission — FTC v. MaxTheater, Inc., No. 05-CV-0069-LRS (US Dist. E.Dist. Wash. 2005)
  • Deceptive advertising related to spyware removal software — FTC v. Ross, below.
  • Fraudulent online efficacy claims, failure to disclose online testimonials were paid and fraudulent use of “health” website to promote product — FTC v. NPB Advertising, Inc., Case No. 8:14-cv-1155-T-23TGW (US Dist. M.D. Fla. 2016)
  • Falsely claiming that content/profiles were user-created when they were mostly computer generated and overstating value of membership fee — Fanning v. FTC, 821 F. 3d 164 (1st Cir. 2016); see our discussion here.
  • Failing to properly and fully disclose “negative options” related to online purchase of services — FTC v. Credit Bureau Center, LLC, Case No. 17 C 194 (US Dist. N.D. Ill. 2017)

Available Remedies: Injunctions, Money Judgments, Personal Liability

The FTC Act authorizes the Commission to seek cease and desist orders if it finds that a method of competition or practice violates the FTC Act. The FTC has been held to have wide discretion framing its order to prevent respondents from engaging in similar practices in the future. The FTC is not limited to prohibiting the unfair or deceptive practice in its as-then-used form, but also in forms that could be expected in the future and based on technology and industry trends.

The courts have held that the FTC has the ability to seek and obtain monetary damages. Further, under some circumstances, personal judgments can be obtained against the owners of websites that willfully violate the FTC Act.

The case of FTC v. Ross, 743 F. 3d 886 (4th Cir. 2014) is a good example of many of the points discussed herein. In that case, the FTC sued a software and internet company and several of its high-level executives and its founder for running an internet “scareware” scheme. According to the evidence, the defendants sent advertisement to web-users telling them that a scan of their computers had been performed that the scan had detected a variety of dangerous files, like viruses, spyware, and “illegal” pornography. However, in reality, no scans were made. As a result of the “scareware” ads, consumers were manipulated into purchasing the defendants’ computer security software.

The court entered summary judgment against the corporate defendants and held a bench trial concerning the culpability of the founder of the company (the other individuals having settled). After trial, the trial judge ruled that the founder, Kristy Ross, has the authority to control the company and that she did directly control and participate in the scheme. The court noted that Ms. Ross personally financed corporate expenses, oversaw a large number of employees and was personally involved in creating the deceptive advertisements. From that it was clear that Ms. Ross had actual knowledge of and authorized use of the deceptive “scareware” marketing scheme.

As such, the court found her personally liable and entered judgment against her for more than $163 million.

The case of FTC v. LeadClick Media, LLC, 838 F. 3d 158 (2nd Cir. 2016) illustrates the further point that affiliated companies can be held liable for another’s deceptive practices under certain circumstances. LeadClick involved misleading practices by a LeadClick client called LeanSpa and various “fake news” websites. LeanSpa marketed and sold weight loss products. LeadClick managed a network of third-party-created websites that, through use of banner ads, email marketing, search-engine placements, etc., directed internet traffic to LeanSpa (and other clients). Not all, but some of these third-party websites were so-called “fake news” websites. These fake news sites looked like genuine news sites: They had logos styled to look like news sites and contained “news” articles. The articles typically claimed that independent tests had been performed and that such tests showed the efficacy of this-and-that weight loss product. The websites also frequently included a “consumer comment” section, where purported “consumers” praised the products, but the consumer content was invented.

The FTC brought suit to shut down the whole scheme. There was no question that the “fake news” websites had committed deceptive business practices and no doubt that LeanSpa had done the same. However, LeadClick vigorously argued that it had not engaged in any unfair or deceptive practices. LeadClick did not itself create fake news sites and did not sell or have anything to do with the manufacture of LeanSpa’s products.

However, the courts rejected LeadClick’s arguments. Both the trial and the circuit court held that LeadClick itself had engaged in deceptive practices because

  • It knew that fake news sites were prevalent in its marketing network
  • It knew that some of its customers (such as LeanSpa) were using fake news sites
  • It approved all of the sites in its marketing network
  • It could remove a site from its marketing network
  • It occasionally provided its customers with content that was used on the fake news webpages

Under those facts, the courts affirmed the FTC’s assessment that LeadClick had itself engaged in unfair and deceptive business practices.

Businesses engaging in deceptive business practices on the internet are subject to injunctions and large monetary damage awards under the FTC Act. Just as importantly, and as shown above, the owners and principals of businesses can be held personally liable.

Contact Revision Legal

To learn more about FTC policies and consumer protections, contact the professionals at Revision Legal. Revision Legal offers a wide array of legal services related to the internet, business law and consumer protection.  We can be reached by using the form on this page or by calling us at 855-473-8474.

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