[Senate Hearing 111-513]
[From the U.S. Government Publishing Office]
S. Hrg. 111-513
AGGRESSIVE SALES TACTICS ON THE INTERNET AND THEIR IMPACT ON AMERICAN
CONSUMERS
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 17, 2009
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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54-917 WASHINGTON : 2010
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii KAY BAILEY HUTCHISON, Texas,
JOHN F. KERRY, Massachusetts Ranking
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California JOHN ENSIGN, Nevada
BILL NELSON, Florida JIM DeMINT, South Carolina
MARIA CANTWELL, Washington JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota DAVID VITTER, Louisiana
TOM UDALL, New Mexico SAM BROWNBACK, Kansas
MARK WARNER, Virginia MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
Bruce H. Andrews, General Counsel
Ann Begeman, Acting Republican Staff Director
Brian M. Hendricks, Republican General Counsel
Nick Rossi, Republican Chief Counsel
C O N T E N T S
----------
Page
Hearing held on November 17, 2009................................ 1
Statement of Senator Rockefeller................................. 1
Statement of Senator LeMieux..................................... 3
Prepared statement........................................... 4
Statement of Senator Dorgan...................................... 5
Statement of Senator Udall....................................... 52
Statement of Senator Klobuchar................................... 54
Statement of Senator Nelson...................................... 56
Witnesses
Ray France, Former United States Paratrooper..................... 6
Prepared statement........................................... 8
Linda Lindquist, Citizen of Sussex, Wisconsin.................... 9
Prepared statement........................................... 10
Robert J. Meyer, Gayfryd Steinberg Professor of Marketing, The
Wharton School, University of Pennsylvania..................... 11
Prepared statement........................................... 13
Florencia Marotta-Wurgler, Associate Professor, New York
University School of Law....................................... 24
Prepared statement........................................... 25
Prentiss Cox, Associate Professor of Clinical Law, University of
Minnesota Law School........................................... 39
Prepared statement........................................... 41
Appendix
Hon. Mark Pryor, U.S. Senator from Arkansas, prepared statement.. 99
Response to written questions submitted by Hon. Claire McCaskill
to:
Robert J. Meyer.............................................. 99
Florencia Marotta-Wurgler.................................... 101
Response to written question submitted to Professor Prentiss Cox
by:
Hon. John D. Rockefeller IV.................................. 102
Hon. Claire McCaskill........................................ 106
AGGRESSIVE SALES TACTICS ON THE
INTERNET AND THEIR IMPACT ON
AMERICAN CONSUMERS
----------
TUESDAY, NOVEMBER 17, 2009
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:58 p.m. in room
SR-253, Russell Senate Office Building, Hon. John D.
Rockefeller IV, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
The Chairman. This hearing will come to order. I'll make an
opening statement.
Every single day, millions of American consumers sit down
in front of their computers to make travel plans, to send
somebody some flowers, or to order movie tickets or sundry
other transactions. For many Americans, shopping online is now
as routine as going to the grocery store for milk. According to
a recent survey, 59 percent of all adult Americans have now
purchased goods or services over the Internet.
Shopping online is, in fact, an exciting new way for people
to learn about products, to compare prices, and to find a good
bargain. In tough economic times when Americans are doing all
they can to make ends meet, every nickel, every dollar counts.
But when we go online to buy things, we all have a few very
important expectations about how we should be treated,
regardless of how and where we make a purchase. First of all,
we expect the merchants that we do business with to treat us
honestly, fairly, and we expect that on the Internet.
We expect online merchants to clearly explain their prices
and their terms to us, so that we know exactly what we're
getting if we decide to spend our money at their websites. And
when we agree to buy something from them, we expect merchants
to protect our credit card and other financial information that
we share with them.
That's why it is so darn disturbing to me to learn through
our investigation that we've done in this committee, over
300,000 pages of research, what's happening to millions of
American consumers every day who are shopping on the Internet,
including the two consumers we have invited to testify today.
What's happening is that many online merchants have decided
to betray their customers' trust. For a few extra bucks in
profits, these merchants pass their consumers' personal billing
information on to mysterious companies with names like
Affinion, Vertrue, Webloyalty, companies that have a long,
troubling history of misleading sales practices.
From the consumers' point of view, here's how it happens.
Section one: the scam. You're shopping online and you decide to
send somebody flowers or buy a plane ticket or a movie ticket
or whatever, or even order a pizza. You type in your home
address, you type in your e-mail address and other information
necessary to process the sale.
Then at the very end of the process you do the really
important thing. You pull your wallet out. You type in your 16-
digit credit card or debit card number, and you press
``Purchase.''
What our Committee has been investigating is what can
happen to you after you have made that purchase. It's truly
unbelievable. While you think that you're going through the
final checkout process--and I associate this with buying books
on AOL.com. I mean, there's a definite checkout process that
takes a number of steps. What's really going on is that some
very sophisticated online businesses are tricking you into
signing up for useless membership clubs.
These businesses take the credit card number you typed in
for your purchase and they use it to enroll you in a bogus club
with names like ``Reservation Rewards,'' ``Great Fun,'' ``Value
Max,'' ``Shopping Service.'' Most consumers don't realize
they've been scammed until months later when they notice that
the club has been charging their credit card $10.95 a month or
whatever.
Why does this matter? A ten dollar monthly charge may not
sound like a big deal to some people in this room. There are
these numbers to consider. Today as we conduct this hearing,
there are more than 4 million American consumers whose credit
cards are being charged by these clubs. And most of these 4
million customers don't even know that it's happening.
According to a report the Commerce Committee staff
presented to me about this problem, these online scams have
made more than $1.4 billion through these tactics and charged
more than 30 million American people.
Consider these numbers for a moment. That is a lot of money
and simply outrageous to me and, frankly, I think it's un-
American, and I know you share my views. I suspect you share my
views.
What I find most outrageous about these scams are the
reputable online businesses that are willing to take part in
these scams. Committee staff has provided me with a list of 88
well-known online businesses that each made more than a million
dollars through sharing their customer credit card information
with Internet scammers, so they get what they want.
We have printed copies of this if anybody is interested.
Several of them have already withdrawn since they knew this was
going on, that we were going to have this hearing. They have
already--USAirways, Continental Airlines, et cetera, they've
withdrawn from all this, or say they're about to get rid of all
of this.
But we've all heard of these companies and we've probably
shopped at some of their websites.
Conclusion: America is a country of businessmen and
businesswomen. We all have great respect for enterprising
people who have developed good products and sell them in our
competitive marketplace. But we are here today because we want
to highlight the very important point that tricking customers
into buying goods and services they do not want is not OK, not
even close. It's not ethical, it's not right, and it's not the
way business should be done in America, and it should be
stopped. It will be stopped.
American consumers shouldn't have to worry that their
favorite websites are ripping them off during the checkout
process. The checkout process is complicated.
We haven't completed this investigation yet, but what I've
learned about these business practices so far is very, very
troubling and, to be frank with my colleagues who are here,
starting with this hearing today I'm thinking that the
Committee needs to start thinking about legislative steps to
make sure that this process comes to a complete halt. We did it
with telemarketing. We did it with phone scams. We can do it on
the Internet.
That's the end of my statement. Senator LeMieux, do you
have a statement you'd like to make?
STATEMENT OF HON. GEORGE S. LeMIEUX,
U.S. SENATOR FROM FLORIDA
Senator LeMieux. Thank you, Mr. Chairman. I want to commend
you for holding this important hearing. The Chairman has a
great record and reputation for fighting fraud and having this
hearing today to talk about these issues is extremely important
to the people of this country, as well as the people of
America, the people of Florida who I represent.
We have too many hardworking Floridians who are being
scammed in transactions just like that, and one of our great
Floridians, Mr. Ray France, is here today, and he has fallen
prey to these exact type of predatory techniques on these post-
transaction marketers. People are often unaware that they have
signed up for these scams. That's why they are scams.
I had a chance to meet with Mr. France today, Mr. Chairman.
He is an American hero. He served our country bravely in the
Army as part of Airborne. In fact, he was so committed, Mr.
Chairman, to be in the Airborne that when he sought to enlist,
they said no, you can't be in the Airborne, and he fought and
he fought and he fought, and they said: Well, you can be in the
Airborne, but you have to give up your $12,000 bonus we were
going to give you for joining the Army. And he said: That's OK
because I want to serve my country and that's why I'm
volunteering for the Army.
He was injured in Iraq fighting for our freedom. Now he
came home and was living his life as a good Floridian, and he
gets scammed. But like the good Army soldier that he is, he
went after these fraudsters and he tracked them down and he
helped figure out what they were doing and why they were doing
it. You'll hear more from him today.
Mr. Chairman, I call this post-transaction marketing
``click-and-scam.'' You go on, you're purchasing something like
you described on AOL, buying a book or whatever it may be, and
then all of a sudden this pop-up comes up. You think it's one
of those normal sort of disclosures that no one reads. You
click it to go through with your transaction, and all of a
sudden you're signed up for ten dollars a month, like you said.
These fraudsters are out there stealing from our people. My
Attorney General in Florida, Bill McCollum, is doing a great
job going after these folks and he has filed several actions
and is working hard against them. But we need to do more, and
you are drawing light to this problem, Mr. Chairman, and I
really appreciate it because the people of this country need to
know through information that these scams are out there. The
best prophylactic they can have against these scams is knowing
about them.
Then later, as you suggest, perhaps we need to increase
penalties or help on the enforcement side so we can stop these
fraudsters from stealing from our people.
I really appreciate you having this hearing today, Mr.
Chairman. Thank you.
[The prepared statement of Senator LeMieux follows:]
Prepared Statement of Hon. George S. LeMieux, U.S. Senator from Florida
Mr. Chairman, thank you for holding this important hearing. The
aggressive online, click-and-scam, marketing techniques highlighted
today are a problem in Florida and across this country, and I support
your leadership in getting to the bottom of this.
In Florida, far too many good, hardworking Americans, like Mr.
France, are falling prey to the kind of predatory techniques used by
these so-called ``post-transaction marketers.'' Often, people are
unaware that they have purchased anything until the notice a fee added
to their credit card bills.
Because the process for signing up is hidden and fees are generally
small, these companies are able to capture consumers and bill them for
months and months with very little effort and very little risk.
In these times of economic hardship, when Americans are trying to
find ways of tightening the belt and making ends meet, it is simply
unconscionable to allow this practice to continue.
Unfortunately, the experiences described by Mr. France and Mrs.
Linguist dealing with these companies are far too common. I had the
opportunity to sit down with Mr. France this morning, and I can tell
you that this Committee would be hard pressed to find a finer and more
decent and proud American soldier to testify than this man. He is proud
to have served this country, and he continues to serve our country here
today.
As we will hear from the professors testifying today, these
practices are designed to lure consumers in using familiar looking
websites, capture their information without their knowledge, and bill
them for services they have no interest in. As Mr. Meyer stated in his
testimony, these practices are ``marketing'' as is understood and
taught--this click-and-scam fraud is an elaborate con perpetrated
against consumers for the sole purpose of generating profit without any
exchange of value.
At the state level, officials are working to end these deceptive
practices, but they need help. Just like other forms of consumer
protection, we need to use Federal resources and standards at the front
end to discourage these activities, rather than attempting to chase
down bad actors after the fact.
Florida's Attorney General, Bill McCollum, get countless complaints
about companies using deceptive techniques to lure and bill consumers,
and they are working aggressively to prosecute companies that have
violated Florida's consumer protection laws. They doing a great job,
but could use some assistance. The practices described here today are
so prevalent on the web and in on-line purchases, that Federal action
is needed.
Simply put, this click-and-scam fraud is unacceptable, and we need
to put a stop to it. I look forward to working with the Chairman and
the rest of the Committee to meaningfully address this issue.
Again, I would like to thank the Chairman for holding this
important hearing.
The Chairman. Thank you, Senator.
Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much.
In the last Congress I held a couple of hearings on the
issue of Internet privacy. The question is what's happening to
information that they have on virtually all of us--what sites
do we visit, where do we navigate? I made the point then that
if somebody followed you when you went to the shopping center
and made notes about everywhere you went, everything you looked
at, and so on, the question in your mind would be: Why are you
following me, number one? And number two, who are you selling
the information to about where I went and what I did?
Well, the privacy issue is very important. We held two
hearings on it and I hope that we will get some legislation
together, which I've been working on, on that issue.
But this is another piece of this issue of the Internet,
the online activities. First of all, advertising on the
Internet is what supports the Internet. The Internet is a
remarkable thing. I mean, no one wants to withdraw the support
that is necessary for the Internet to exist and survive. Online
commerce is very important as well. That's what we're talking
about, online commerce.
But the question for all of this with online commerce is,
who uses our credit card information and for what purpose? When
you put your credit card information in in order to purchase
something, as Senator Rockefeller indicated, you would always
expect, especially on a reputable website, that that's not
going to be shared with anybody, that that's protected.
Well, we find out now by some good work by some
investigators on our staff that that's not the case. The issue
of post-transaction marketing, data passing, free-to-pay
conversions--I mean, that's all a fancy way of describing
practices that are engaged in by people that ought to be
ashamed of themselves, really ought to be ashamed of
themselves.
Websites--I guess I've been to all these websites: Fandango
to buy movie tickets, I've certainly done that. Pizza Hut,
Continental Airlines. You have people go to websites that you
know are reputable and then they do this bait-and-switch and
that website is used by somebody else that pops something else
that say ``Free,'' except it's just free for a bit. Then it's
the monthly billing they're after. And, oh, by the way, the
reputable website shifts your financial data to the company
that pops up the ad that says ``Free'' and is trying to sucker
you into this.
I mean, that's unbelievable to me. Now, when you see things
that are shameful, it seems to me that you would expect that
that would stop immediately. But shame is not always an emotion
that persuades people who are making a lot of money to stop.
My understanding is that Affinion and some of the others
that the Chairman mentioned have changed some of their
practices since this investigation began, and we welcome that.
But there are others out there, and I think this is a really
important reason to have a hearing.
At the root cause here, the question is who gets financial
information and how is it used or how is it misused? This
investigation has turned up, I think, some shoddy business
practices that have to stop, and I don't think they'll stop on
their own necessarily. I think the Chairman has suggested there
may well need to be required some legislation here, and I
appreciate that work and the work of the Committee.
Let me just finally quickly say I appreciate the witnesses
who have been here and who are going to present testimony
today. We thank you for traveling and being with us and
shedding some light on these issues.
The Chairman. Thank you, Senator.
Incidentally, the work that Webloyalty and some of the
others have pulled back a little bit is totally insufficient. I
think some of our legal scholars are going to make that very
clear.
Ray France, we're very proud to have you here. Linda
Lindquist, you also. Florencia Marotta-Wurgler, who is an
Assistant Professor at New York University School of Law, you
too. Professor Prentiss Cox, University of Minnesota Law
School--you're one panel, so you're all one person. Professor
Robert Meyer, Wharton School, University of Pennsylvania, who's
done a lot of work on all of this.
Mr. France, let me go to you first, if I might. Sort of
pull that microphone up. First of all, I'd like to thank you,
as the Senator did, for your service to our country, for your
bravery, turning down that $12,000.
STATEMENT OF RAY FRANCE,
FORMER UNITED STATES PARATROOPER
Mr. France. It was actually 13.
The Chairman. OK. A superhero plus. Now I think we've got
to defend you from some scams, and we're going to.
In your testimony you made the point that when you made a
purchase on a website called Intelius----
Mr. France. Yes, sir.
The Chairman.--you got automatically signed up in a so-
called membership club called Value Max, and then Value Max
started charging you $19.99 a month; is that correct?
Mr. France. That is correct, sir.
The Chairman. Oh, that would seem fair. Starting with you,
Mr. France, forget my questions and make a statement.
Mr. France. OK, sir.
The Chairman. Questions will follow.
I do this quite frequently.
Mr. France. It's your show, sir.
The Chairman. That is true.
[Laughter.]
Mr. France. First of all, I would like to thank you,
Chairman Rockefeller, and Ranking Member Hutchison, for
inviting me out to speak. I would also like to thank the
Senator of my beautiful home State of Florida for his kind
words. It was unexpected, but greatly appreciated.
My name is Raymond France. I'm a former United States
paratrooper and a two-time combat veteran. I fought in
Afghanistan and Iraq. In Iraq, I received a traumatic brain
injury when my Humvee was struck by an IED which exploded next
to my vehicle. I was awarded the Purple Heart and now I have a
service-connected disability of 100 percent.
Early this year, I paid to use the service of an online
company called Intelius to look up people on the Internet. It's
just an informational website. I had used this company in the
past and was familiar with their website and their services. On
this particular occasion, just like before, I got the
information I was looking for, entered my billing information,
and completed the transaction.
The next day the fee I paid posted to my account, just as
usual. About 2 or 3 months later, I was notified by my bank
that my account had been overdrawn. I was unsure how this could
happen since I live on a fixed income and I support myself
within those means.
I went to the bank to figure this out. At first they were
only able to tell me it was due to an automatic withdrawal that
was active on my account at the time. Eventually the bank was
able to give me the name of the company that made these
withdrawals, Value Max. The bank manager also informed me that
this had been a reoccurring transaction that I had supposedly
agreed to. They were unable to give me any more information.
I had no idea who this company was and still to this day do
not know what they do. I started searching the web in hopes of
finding some way of contacting this company. What I found was
hundreds of blogs asking the same question as I. Eventually I
found an e-mail address for Value Max and sent an e-mail, to
which I received no reply.
Later on I found a phone number. When I called, the person
who answered repeatedly asked for personal information on
myself, things such as social security number and e-mail
addresses. When I was reluctant to give up this information, I
was told I had reached the wrong division of the company and
needed to call another branch in another state.
This process repeated itself quite a few times, and through
it all I still had no answers. So, I decided to write the
Better Business Bureau. Quite some time passed with no reply
from Value Max. Then I received an e-mail from the Better
Business Bureau.
Value Max had told them they would refund my money, but
that it was my fault because I had agreed to a free 4-day trial
and then a $19.99 fee every month after that. According to
them, I had agreed to this when I used the service of the
company I mentioned earlier, being Intelius.
In total, this all took over 8 months, and the refund took
even longer. If my account had not been overdrawn, who knows
how long before I would have noticed these withdrawals?
I'm a disabled vet who loves his country and served her
with pride. Though I may not have it as bad as some of the
soldiers returning from the front lines, I do have a lot of
challenges I must face due to my service-connected
disabilities. But this company, Value Max, caused me both
financial and mental hardship. It took me close to a year to
recover my money, money that I did not give them permission to
take.
I am 27 years old. I use the Internet constantly. I both
understand it and am able to utilize it with ease. I have even
earned college credits in computer applications. With that
said, I believe it is easy to see I would not have agreed to a
financial obligation which I knew nothing about nor wanted.
It is still unclear to me at this point how they were able
to access my account. That is, unless you consider the fact
that this company chooses to use deceiving methods in
correlation with other companies to take advantage of online
consumers. This is nothing short of theft.
My country promised to take care of me when I returned
home. But without laws to govern these unethical practices,
instead my country is allowing me to be taken advantage of.
This is a problem that must be resolved. It is not just vets
who are victims, but all Americans. If not today, then tomorrow
or next week. The bottom line is, if left unchecked these kind
of practices will spread out of control. Now that this issue
has been brought to light, it is imperative that the leaders of
this great country are proactive and aggressive in putting an
end to it.
Thank you.
[The prepared statement of Mr. France follows:]
Prepared Statement of Ray France, Former United States Paratrooper
Thank you, Chairman Rockefeller and Ranking Member Hutchison, for
inviting me to speak with you today. My name is Raymond France. I am a
former United States Paratrooper and a two-time combat veteran. I
served in Afghanistan and Iraq where I suffered a traumatic brain
injury when an I.E.D. exploded next to my vehicle. I was awarded the
Purple Heart and now have a service-connected disability rating of 100
percent.
Early this year I paid to use the services of an online company
called, ``Intelius'' to look up people on the Internet. I had used this
company in the past and was familiar with their website and services.
On this particular occasion, just like before, I got the information I
was looking for, entered my billing information and completed the
transaction. The next day the fee I paid for the service was posted on
my account as usual.
About 2 or 3 months later, I was notified by my bank that my
account had been overdrawn. I was unsure how this could have happened
since I live on a fixed income and support myself within those means. I
went to the bank to figure this out. At first they were only able to
tell me it was due to an automatic withdrawal that was active on my
account. Eventually the bank was able to give me the name of the
company that made these withdrawals, Value Max. The bank manager also
informed me this had been a recurring transaction that I supposedly
agreed to. They were unable to give me any more information.
I had no idea who this company was and still to this day do not
know what they do. I started searching the web in hopes of finding some
way of contacting this company. What I found was hundreds of blogs
asking the same question. Eventually, I found an e-mail address for
Value Max and sent an e-mail to which I received no reply. Later I
found a phone number. When I called, the person who answered repeatedly
asked for personal information on myself. When I was reluctant to give
up this information I was told I reached the wrong ``Division'' of the
company and needed to call another branch in another state. This same
process repeated itself quite a few times and through it all I still
had no answers. So I decided to write the Better Business Bureau. Quite
some time passed with no reply from Value Max. Then I received an e-
mail from the B.B.B.
Value Max had told them that they would refund my money but it was
my fault because I had agreed to a free 4-day trial and then a $19.99
fee every month after that. According to them I had agreed to this when
I used the service of the company I mentioned earlier. In total this
all took over 8 months. And the refund took even longer. And if my
account hadn't been overdrawn, who knows how long it would've been
before I noticed these withdrawals.
I am a disabled Vet who loves his country and served her with
pride. Though I may not have it as bad as some soldiers returning from
the front lines I do have a lot of challenges I must face due to my
service-connected disability. But this company caused me both financial
and mental hardship. It took me close to a year to recover my money.
Money that I did not give them permission to take. I am 27 years old. I
use the Internet constantly. I both understand it and am able to use it
with ease. I have even earned college credits in computer applications.
With that said I believe it is easy to see I would not have agreed to a
financial obligation I knew nothing about nor wanted. It is still
unclear to me at this point how they were able to access my account.
That is unless you consider the fact that this company chooses to use
deceiving methods in correlation with other companies to take advantage
of online consumers. This is nothing short of theft.
My country promised to take care of me when I returned home but
without laws to govern these unethical practices, instead my country is
allowing me to be taken advantage of. This is a problem that must be
resolved as it is not just Vets who are victims but all Americans. If
not today then tomorrow, or next week. The bottom line is if left
unchecked these kinds of practices will spread out of control. Now that
this issue has been brought to light it is imperative that the leaders
of this great country are proactive and aggressive in putting an end to
it.
The Chairman. Thank you very much.
Ms. Lindquist.
STATEMENT OF LINDA LINDQUIST,
CITIZEN OF SUSSEX, WISCONSIN
Ms. Lindquist. Good afternoon. My name is Linda Lindquist
and I am from Sussex, Wisconsin. In April 2007, my 19-year-old
daughter and I went to temporarily live in Atlanta, Georgia. My
daughter had sustained a spinal cord injury in January 2007
while downhill skiing and was a quadriplegic. She started to
get movement back in her legs and both my husband and I felt
that she needed to go to a specialty spinal cord facility in
order to give her the best possible opportunity for recovery.
This would mean that my husband would have to care for our
other three children solo back in Wisconsin.
One of the best things about being in Atlanta was meeting
and socializing with other families in the same situation. One
of our favorite things to do was to go to the movie theater. In
July 2007, I started purchasing tickets from movietickets.com.
I remember that at the end of the transaction on the
confirmation page was a coupon stating ``Get $10 off your next
purchase.'' So I clicked on the coupon because it seemed that
it was a legitimate offer from movietickets.com and I thought
they were a reputable website.
The next page needed my personal information. I then
decided that I did not have enough time to fill out that page,
so I closed out of the website.
Approximately 2 weeks later, again I purchased tickets on
movietickets.com. This time, however, I did start to fill out
the personal information, but after going to the next page I
realized that this was probably a scam. At no time did I ever
include my credit card information or knowingly agree to any
terms and conditions.
After 4 months of physical rehab, my daughter was beginning
to make great improvements and our stay ended up being
lengthened by another year. We finally returned home in August
2008 and finally, in October 2008, my husband was paying our
bills and asked me to take a look at the credit card statement.
There were two charges for $10 each, one from Reservation
Rewards and one from Shoppers Discounts. I did not know what
these charges were for, but I told my husband that I would find
out.
I first called the 800 number that was listed on the credit
card statement under Reservation Rewards. I spoke with a
customer service representative, who told me that I had signed
up for Reservation Rewards and Shoppers Discounts online after
a movie ticket purchase on movietickets.com. I told the
representative that I had not knowingly signed up for this
service and asked how they had gotten my credit card number.
She stated that movietickets.com gave them my credit card
number.
I then asked what service exactly I was paying for. She
stated they offered coupons and discounts for restaurants and
hotels. I told the representative that I had never gotten any
correspondence from them, either online or via mail, regarding
my so-called membership and also to tell me how much money I
had paid to date. She replied that I had paid $320. I was
shocked. I asked if I could get a refund for my money since I
had no idea that I had even subscribed to the service. She
stated that she would cancel my membership and could credit me
the last month's payment of $20.
At that time, I did not think I had any other options as
far as getting my money back, but the more I thought about it
the more I was upset with movietickets.com. Here was what I
thought was a reputable website, when in reality they were
allowing this scam at the end of the purchase.
I then went on movietickets.com and sent them an e-mail
regarding the money I had lost due to them giving my credit
card number to a scam. Approximately 30 days later I had gotten
a correspondence from them stating that I would be getting a
full refund.
I am a college-educated person who is online every day. I
have made hundreds of online purchases over the last 10 years.
I have seen many scams and offers on the Internet and have only
been lured in by one, this one, due to the fact that the scam
was associated with a reputable website and required just one
click.
Just last week, in fact, when I purchased the airline
ticket for my son to travel here to Washington, D.C., with me
on AirTran Airways, what should appear on their confirmation
page but a ``Get $20 cash back'' offer from Great Fun? You can
bet that I will be sending AirTran an e-mail regarding my
disappointment in their choice of an affiliate.
Thank you.
[The prepared statement of Ms. Lindquist follows:]
Prepared Statement of Linda Lindquist, Citizen of Sussex, Wisconsin
Good afternoon. My name is Linda Lindquist and I am from Sussex,
Wisconsin. In April 2007, my 19-year-old daughter and I went to
temporarily live in Atlanta, Georgia. My daughter had sustained a
spinal cord injury in January 2007 while downhill skiing and was a
quadriplegic. She started to get movement back in her legs and both my
husband and I felt that she needed to go to a specialty spinal cord
facility in order to give her the best possible opportunity for
recovery. This would mean that my husband would have to care for our
three other children, solo, back in Wisconsin.
One of the best things about being in Atlanta was meeting and
socializing with other families in the same situation. One of our
favorite things was to go to the movie theater. In July 2007, I started
purchasing tickets from movietickets.com. I remember that at the end of
the transaction on the confirmation page was a coupon stating, ``Get
$10 off your next purchase,'' so I clicked on the coupon because it
seemed that it was a legitimate offer from movietickets.com and I
thought they were a reputable website. The next page needed my personal
information. I then decided that I did not have enough time to fill out
the form, so I closed out of the website. Approximately 2 weeks later,
I again purchased tickets on movietickets.com. This time, however, I
did start to fill out the personal information, but after going to the
next page, I realized that this was probably a scam. At no time, did I
ever include my credit card information or knowingly agree to any terms
and conditions.
After 4 months of physical rehab, my daughter was beginning to make
great improvements and our stay ended up being lengthened by an
additional year. We finally returned home in August 2008. In October
2008, my husband was paying our bills and asked me to take a look at
our credit card statement. There were two charges for $10, one from
Reservation Rewards and one from Shoppers Discounts. I did not know
what these charges were for but I told my husband that I would look
into it. I first called the 800 number that was listed on the credit
card statement.
I spoke with a customer service representative who told me that I
had signed up for Reservation Rewards and Shoppers Discounts online
after a movie ticket purchase on movietickets.com. I told the
representative that I had not knowingly signed up for this service and
asked how they had gotten my credit card number. She stated that
movietickets.com gave them my credit card number. I then asked what
service, exactly, I was paying for. She stated that they offer coupons
and discounts for restaurants and hotels. I told the representative
that I had never gotten any correspondence, either online or via mail
regarding my so-called membership. I then asked her to cancel my
membership and also to tell me how much money I had paid to date. She
replied that I had paid $320. I was shocked! I asked if she could
refund my money since I had no idea that I had even subscribed to this
service. She stated that she would cancel my membership and could
credit me the last month's payment of $20.
At that time, I didn't think I had any other options as far as
getting my money back, but the more I thought about it, the more upset
I was with movietickets.com. Here was what I thought was a reputable
website, when in reality they were allowing this scam at the end of the
purchase. I then went on movietickets.com and sent them an e-mail
regarding the money I had lost due to them giving my credit card number
to a scam. Approximately 30 days later, I had gotten a correspondence
from movietickets.com stating that I would be getting a full refund.
I am a college-educated person who is online everyday. I have made
hundreds of online purchases over the last 10 years. I have seen many
scams and offers on the Internet and have only been lured in by one,
this one, due to the fact that the scam was associated with a reputable
website and required just one click. Just last week, in fact, when I
purchased the airline ticket for my son to travel to Washington, D.C.,
with me on AirTran Airways, what should appear on their confirmation
page, but a ``$20 cash back offer from Great Fun''. You can bet that I
will be sending Airtran an e-mail regarding my disappointment in their
choice of an affiliate. Thank you.
The Chairman. Thank you very much.
Professor Meyer.
STATEMENT OF ROBERT J. MEYER, GAYFRYD STEINBERG PROFESSOR OF
MARKETING, THE WHARTON SCHOOL,
UNIVERSITY OF PENNSYLVANIA
Mr. Meyer. Thank you. Good afternoon. My name is Robert
Meyer. I am the Gayfryd Steinberg Professor of Marketing at the
Wharton School of the University of Pennsylvania, where I have
served on the faculty since 1990. Throughout my career, my
research has focused on the study of consumer decisionmaking,
particularly the psychological processes that lead consumers to
adopt novel goods and services. In addition to my research, I
have spent the past 27 years teaching the practice of marketing
at the undergraduate, graduate, and executive levels in both
the United States and abroad.
I was invited by the Committee to offer testimony on a
class of post-transactional marketing methods used by firms to
sell subscription memberships in third-party benefit programs
online. I originally became familiar with these practices while
serving as an expert in a class action suit involving a direct
marketing company in 2007 and more recently while serving as an
expert for the Iowa Attorney General's Office.
My overall opinion of these practices is threefold. First,
the sales methods used by these firms do not constitute
marketing as the term is commonly understood and practiced by
ethical businesses and as is taught in major schools of
management. In almost all cases, the membership programs being
offered to consumers hold limited, if any, value, no attempt is
made to communicate information about the programs in a way
that would allow informed choices by consumers, and the firms
who use these methods display little interest in building or
nurturing long-term relationships with the contacted consumers.
In contrast, the sales methods are the cornerstone of a
scheme in which firms seek to earn profits by luring consumers
into paying for memberships in programs that they would not
subscribe to given their full awareness.
Second, while the substantive content of these sales
practices varies, the deception is achieved through a
coordinated set of communications that display distinctive
common architecture. These include the use of web designs that
obscure the relationship that exists between the first and
third-party sellers, offering enticements of free premiums or
incentives that consumers will have little chance of ever
obtaining, creating false beliefs that no financial risks are
incurred by agreeing to the transaction, and by creating exit
barriers that make it difficult to avoid and/or recover
unintended membership payments, such as by making continued
membership the default option for consumers who are not fully
cognizant of what they have signed up for.
Third, the architecture achieves deception by exploiting a
series of well-known psychological biases that are known to
limit consumers' abilities to make fully-informed choices in
markets. The most general of these is the creation of web
environments that lead consumers to make decisions using
automated or unconscious processes that do not fully consider
all the information that is available on a website or presented
in a decision setting.
Examples include site designs that create the false
impression that the offer is being made by a familiar, trusted
seller, designs that misdirect consumers' attention away from
text that might describe the true nature of the transaction,
and by exploiting tendencies to choose default or accept
options when there is confusion about what the correct course
of action would be in a web session.
I should also note that the lack of ethicality of these
practices is inflated by the fact that they are often targeted
at vulnerable populations who are ill-equipped to absorb the
financial losses they impose. Specifically, the practices may
be particularly effective when targeted to consumers of limited
means, for whom the small cash enticements promised by the
programs would represent significant financial assets, and/or
older consumers who have limited experience navigating the web.
Naive consumers with limited web experience may be taken in
for no other reason than harboring beliefs that the sellers on
the web follow the same norms of ethical exchange that they
have come to expect in traditional markets, where payment for
goods and services is a volitional choice of the consumer, not
something one has to opt out of.
Finally, the persistence of these sales schemes also pose a
long-term risk to legitimate businesses who conduct sales in an
ethical manner over the web. As these practices proliferate,
the negative experience of consumers who are taken in by these
schemes may serve to foster feelings of mistrust toward
legitimate sellers, thus impeding the growth of a major modern
channel of commerce.
Thank you.
[The prepared statement of Mr. Meyer follows:]
Prepared Statement of Robert J. Meyer, Gayfryd Steinberg Professor of
Marketing, The Wharton School, University of Pennsylvania
Chairman Rockefeller, Ranking Member Hutchinson, members of the
Committee:
My name is Robert Meyer. I am the Gayfryd Steinberg Professor of
Marketing at the Wharton School of the University of Pennsylvania,
where I have served on the faculty since 1990. Prior to arriving at
Penn, I served on the marketing faculties at the University of
California, Los Angeles and Carnegie-Mellon University. Throughout my
career my research has focused on the study of consumer decisionmaking,
particularly the psychological processes that lead consumers to adopt
novel goods and services. In addition to my research, I have spent the
past twenty-seven years teaching the practice of marketing at the
undergraduate, graduate, and executive levels both in the United States
and abroad. My complete curriculum vitae is available at http://
marketing.wharton.upenn.edu/documents/cv/Meyer_Vita_Dec
_2007.pdf.
I was invited by the Committee to offer testimony on a class of
post-transactional marketing methods used by firms to sell subscription
memberships in third-party benefit programs on line. I originally
became familiar with these practices while serving as an expert in a
private class-action suit involving a direct marketing company in 2007,
and more recently while serving as an expert for the Iowa Attorney
General's office. The selling methods of concern are those where a
customer makes a volitional purchase at a familiar website and is then
transferred--often without their awareness--to a separate site
maintained by a third-party. At this new site the customer is typically
offered a free premium (such as a gift card or discount) for agreeing
to trial membership in a program offering an array of benefits, such as
the potential ability to obtain price discounts from known retailers.
If the customer agrees to this trial, the credit card information that
was provided to the first party during the original transaction is
automatically transferred to the third party. If the customer does not
cancel the membership within the trial period, the third party then
uses this billing information to charge the customer a monthly
membership fee. A common characteristic of these transactions is that
many consumers unwittingly agree to the trial memberships without being
cognizant that they have purchased anything or are at financial risk,
and, as a result, they incur several months of membership charges
before they are able to cancel.
Overall Assessment
My overall opinion of these practices is threefold:
First, the sales methods used by these firms do not
constitute marketing as the term is commonly understood and
practiced by ethical businesses and as is taught in major
schools of management. In almost all cases the membership
programs being offered to consumers hold limited if any value,
no attempt is made to communicate information about the
programs in a way that would allow informed choices by
consumers, and the firms who use these methods display little
interest in building or nurturing long-term relationships with
contacted customers. In contrast, the sales methods are the
cornerstone of a scheme in which firms seek to earn profits by
luring customers into paying for memberships in programs that
they would not subscribe to given their full awareness.
Second, while the substantive content of the sales practices
varies, this deception is achieved though a coordinated series
communications that display a distinctive common architecture.
These include the use of web designs that obscure the
relationship that exists between the first and third party
sellers, offering enticements of free premiums or incentives
that consumers will have little chance of ever obtaining,
creating false beliefs that no financial risks are incurred by
agreeing to the transaction, and by creating exit barriers that
make it difficult to avoid and/or recover unintended membership
payments, such as by making continued membership the default
option for consumers who are not fully cognizant of what they
have signed up for.
Third, this architecture achieves deception by exploiting a
series of well-known psychological biases that are known to
limit consumers' abilities to make fully informed choices in
markets. The most general of these is the creation of web
environments that lead consumers to make decisions using
automated or unconscious processes that do not fully consider
all of the information that is available or presented in a
decision setting. Examples include site designs the create the
false impression that the offer is being made by a familiar,
trusted, seller, designs that misdirect consumer's attention
away from text that might describe the true nature of the
transaction, and by exploiting tendencies to choose default
``accept'' options when there is confusion about the correct
course of action in a web session.
I should also note that the lack of ethicality of these practices
is inflated by the fact that they are often targeted at vulnerable
populations who are ill-equipped to absorb the financial losses they
impose. Specifically, the practices are likely to be particularly
effective when targeted at consumers of limited means for whom the
small cash enticements promised by the programs would represent
significant assets, and/or older consumers who have had limited
experience in navigating the web. Naive consumers with limited web
experience may be taken in for no other reason than harboring beliefs
that the sellers follow the same norms of ethical exchange that they
have common to expect in traditional markets, where payment for goods
and services is a volitional choice made by the consumer, not something
one has to opt out of.
Finally, the persistence of these sales schemes also pose a
potential long-term risk to legitimate businesses who conduct sales in
an ethical manner over the web. As these practices proliferate, the
negative experience of consumers who are taken in by these selling
schemes may serve to foster feelings of mistrust toward legitimate
sellers, this impeding the growth of a major modern channel of
commerce.
In the sections below I elaborate the basis of this opinion. The
discussion is partitioned into two phases. I first provide an overview
of the approach to selling used by firms and describe the common
architecture that characterizes most web scripts. I then discuss the
psychological mechanisms that explain why these scripts are effective
in deceiving consumers into purchasing memberships in programs that
have no material value.
The Deceptive Architecture
Overall Structure
Although the web designs and program scripts used by the third-part
firms vary in their specific content, almost all display a common
architecture that is comprised of six essential parts:
An initial legitimate sales setting. A customer first visits
a familiar first-party website in which they make a volitional
purchase using a credit card provided by the customer;
A disguised link and enticement. After making the purchase
customers are taken to a landing page maintained by a third-
party seller that describes an opportunity to realize a free
benefit, such as dollars off a previous purchase or a cash gift
card. This page is disguised to look like it is maintained or
endorsed by the first party seller, such as by featuring the
first party seller's logo on the website.
Distraction and confusion ploys. The landing page then
describes the conditions required to receive the premium in a
way that minimizes the likelihood that a consumer will pay
close attention to its details, and potentially misconstrue
what the premium is being awarded for. This is achieved by
including distracting elements in the website--such as fake
surveys--that direct the consumer's attention away from
critical details about the membership program and its terms.
Concealment of the payment mechanism. The landing pages
never require customers to provide their credit card or billing
information, an omission that fosters beliefs that nothing has
been purchased, and that the consumer faces no financial risk
going forward.
Post-acceptance retention ploys. To maximize the chances
that monthly charges are incurred before the consumer can
cancel, the firm employs such tactics as the use of modest
charge levels and nondescript program names that are likely to
be overlooked in consumers' monthly credit card statements, and
requiring consumers to be an active member of the program for a
longer than the ``free trial'' period before the promised
premium is be awarded.
Negative-option pricing. Finally, the centerpiece of the
architecture is a negative-option pricing scheme that makes
acceptance of membership the default action for consumers,
shifting the burden of effort in the sales process from the
seller to the consumer. Whereas in traditional markets it is
the burden of the seller to convince the buyer that offered
goods or services are worth paying for, under negative-option
pricing the default assumption is the opposite, making it the
responsibility of the consumer's to take action to stop payment
if he or she feels the good or service is not worthwhile.
Figures 1 through 3, I provide examples of how these elements are
implemented. Figures 1a-1c illustrates the sequence of web pages that
would be viewed by a customer who makes a purchase at Vistaprint, a
familiar online merchant of pre-printed gift cards, labels, and home
office supplies (www.vistaprint.com). As shown in Figure 1a, when the
consumer concludes his or her purchase at Vistaprint, he or she does
not leave the site, but is rather taken to a new page--seemingly still
part of the Vistaprint site--that promises $10 cash back on the
previous purchase as a ``special thank you'' for their purchase (Figure
1b) . The website also seems to imply that the primary condition for
receiving the cash back is the completion of a short survey that
prominently appears on the right-hand side of the page (Figure 1c).
What few consumers likely realize, however, is that both the ownership
of the page and the survey are ruses; this new site is not part of the
V istaprint site, but is a page maintained by an unaffiliated third-
party direct marketing firm (in this case, Vertrue) who has no
intention of using or analyzing the survey data. Rather, the goal of
the survey is to direct the consumer's attention away from dense text
to the left that describes the real purpose of the site, which is
attract monthly memberships in a subscription program. Specifically, by
agreeing to apply for the $10 cash-back discount the customer is
consenting to trial membership in a program that costs $14.95 a month,
and is giving Vertrue permission to secure his or her credit card
information from Vistaprint for billing purposes (Figure 1d).
Variations this same general sequence of tie-ins and mis-directs are
illustrated in Figures 2 and 3 (a-c).
What is not depicted in the Figures is that the sequence of
deceptive actions continues after the customer consents to
participate--often unknowingly. Few consumers, for example, will ever
receive the promised $10 ``cash back'' in the Vistaprint solicitation.
The reason is that Vertrue, the direct marketer, deliberately attempts
to minimize redemption rates by requiring the consumer to complete two
phases of forms that must be completed and mailed back in, a process
that takes up to 8-10 weeks. Because active membership is typically
required at the time the refund is awarded, customers who manage to
cancel their memberships within the ``free trial'' period never receive
the promised premium. Finally, for those few customers who are aware of
their membership in these programs and attempt to utilize their
advertised benefits, they will quickly encounter similar usage
barriers. To illustrate, most programs promise discounts on gift cards
that can be used at well -known merchants, but these can be secured
only if the customer first purchases the cards at full price, then
endures similarly-lengthy transaction costs to realize the savings. As
a result, actual usage of the benefits of these programs is typically
negligible--either because customers are never aware that they are
members, or the costs of making claims are such as to render the
programs useless.
Summary Assessment
It is my belief that these aspects of the web scripts--from the
opening link to the programs themselves--form a carefully-crafted
scheme for generating revenue by fostering and then arbitraging
ignorance: maximizing the number of customers being makes lured in to
the sales scheme on the front end, and then minimizing the number of
customers who had the knowledge or ability to withdraw from it on the
back end.
Each aspect of the script plays a clear-cut role in achieving this
goal. The initial setting of a familiar website not only provides a
mechanism for securing the customer's credit card information without
their knowledge, but also fosters a misplaced sense of trust in the
legitimacy of the subsequent disguised appeal by the third-party
seller. The use of monetary enticements and distracters then lures
customers into signing up for a membership program whose terms and
conditions are not understood, or, in many cases, without the
consumer's conscious awareness that they have signed for anything.
Finally, once agreement is secured from customers, an array of post-
sale concealment tactics are used to insure that at least some charges
are incurred by consumers before they discover their purchasing
mistake.
How and Why the Schemes Work
A remarkable feature of the numerous consumer complaints that have
been filed with better business bureaus and state attorney general
offices in connection with these practices is the ubiquity of claims by
consumers that they have no recollection of ever having consented to
membership in programs--even when confronted with evidence to the
contrary. What is notable about these schemes is thus that their effect
goes well beyond simply misleading consumers as to the real value of
the trial memberships that they are consenting to. Rather, they induce
many consumers to take actions that they have no conscious awareness
of, and whose consequences are discovered only months after the initial
web contact.
While a number of factors contribute to the effectiveness of these
schemes, the most fundamental is that they work by exploiting one of
the most fundamental frailties of human decisionmaking: the tendency to
make decisions using automated--and often unconscious--heuristics that
respond to only limited aspects of an information environment. As noted
by Kahneman (2002), human decisionmaking is currently widely seen as
being governed by two cognitive systems: automated rules or heuristics
(System I) that produce rapid actions and perceptions over which we
have little conscious control, and a deliberative or reasoned rules
(System II) that more carefully consider features of the environment,
and over which we have considerable conscious control. The deceptive
sales schemes used by direct marketers work by endowing websites with
features that encourage decisions to be made by System I (instinctive)
processes, while suppressing features that would activate System II
(reasoned) processes--processes that would otherwise alert and
discourage consumers from signing up for programs that have little real
value.
To elaborate on this idea, the schemes described above lure
consumers into consenting to memberships by fostering and exploiting
the following four decision biases that are often associated with
System I (automated) problem solving:
Optimism biases that cause consumers' to selectively
interpret the information provided by the firm in a favorable
(or trusting) light;
Conditioned-response biases, in which certain behaviors and
perceptions are automatically triggered when a decisionmaker is
exposed to familiar cues;
Inter-temporal judgment biases, which include tendencies to
overweight short-term prospects and to postpone deliberations
when there is uncertainty about the best course of action;
Status-quo (default) biases, or the tendency to prefer
inaction (accept the status quo) to action when confronted with
uncertainty in a decision environment.
Each of these biases and how they induced unintentional choices in
response to the web schemes will be described and illustrated in turn.
The Optimism Bias
A central starting element of the various schemes is an initial
tie-in to a familiar website--typically one that the consumer had just
made a volitional purchase--followed, in most cases, by the promise of
a free premium--such as cash, gift card or dollars-off the previous
transaction. These features have two likely psychological effects.
First, the tie-in works to insure that the feelings of positive affect
and trust that the consumer had developed in the course of the initial,
volitional, transaction would persist while the consumer was reading
and processing the information presented in the new landing page. If
consumers believed that the web screen they were viewing was merely a
continuation of the same exchange with the initial seller, they would
have little reason to ``raise their antennas'' when viewing this new
information--thus making it more likely this new information would be
processed using System I (automated, heuristic) thought processes
rather than System II (deliberative).
The second effect is that when these feelings of trust are
accompanied by an offer of a free reward (a positive cue), this new
information would be processed not just in a heuristic manner, but also
with a positive bias. The basis of this conclusion is the large
literature on biases in human inference, which has repeatedly laid
credence to the adage that people tend to ``hear what they hope to
hear'' when processing information. The academic term for this is
confirmatory or goal-motivated reasoning (e.g., Kunda 1990; Weinstein
1980; Meyer, Zhao, and Han 2007) . Once a decisionmaker has a goal or
desired outcome in mind for a task, he she will selectively process
that information that consistent with the goal rather than
inconsistent. Hence, for example, when asked to estimate how long it
will take to finish a project people consistently underestimate
durations--an effect called the ``planning fallacy'' (e.g., Buehler,
Griffin and Ross 1994 ). The reason this arises is that when estimating
completion times people are more likely to imagine those scenarios that
lead to early completion than late. Likewise, when imagining how useful
new-product features will be prior to their adoption, consumers often
over-estimate later use by the same mechanism: given that the goal is
to use features, scenarios in which we indeed use them come to mind
more readily than those in which we do not.
The same mechanism would be at work here. Given the goal of
obtaining cash back on a purchase or a free gift card consumers would
have been motivated to selectively process information in a way that
most easily rationalize their attainment--such as by believing that the
offers were legitimate and there would not be ``catches'' that put them
at risk. In short, once a consumer adopted a belief that the lures were
real and being made by a seller for which he or she felt trust, he or
she would have been hooked; the consumer would have no motivation to
search for and/or interpret information on the site such in a way that
would disconfi rm this belief.
Conditioned Response Biases
A central feature of System I processes is that consumer
perceptions and behaviors are often driven more by the cues consumers
expect to see an environment rather the cues that are objectively
there. Hence, in the same way that a hiker in a forest who has a phobia
for snakes might jump when seeing a rope on the ground, when processing
website information consumers may be prone to perceive and respond to
what they expect to website to contain rather than what it objectively
does.
The schemes considered here are designed to exploit these illusory
perceptions. For example, a consumer who quickly views the solicitation
illustrated in Figure 1b-1d and sees the Vistaprint logos would presume
that it is a Visatprint site, which would trigger a set of expectations
about the kind of content and offer terms that would be normally be
associated with a legitimate Vistaprint promotion. For example, a
consumer would naturally assume that the survey on the page was there
as part of Vistaprint's marketing research efforts, and that the ``$10
cash back'' was being awarded as an incentive for completing this
survey--a well-established practice. Likewise, and most critically, the
consumer would have no perception of having purchased anything (or
committing to purchase) after having clicked the ``yes'' button at the
bottom of the survey for the simple reason that all of the cues that
are normally when making a purchase from Vistaprint--such as provision
of credit card information and a description of what is being
purchased--are absent. The fact that some many consumers leave the site
unaware that they have committed to making a purchase is thus not
surprising; for most, the transaction was never perceived as such.
Another example of the exploitive use of conditioned responses is
given in Figures 3a-3c, which shows a different kind of solicitation
tied to the I ntel ius people-search site (www.Intelius.com) . When a
customer visits the Intelius site, for a small fee they can get a
report of available public information on a person of interest. After
paying the fee with a credit card, they click a red button that says,
``confirm the purchase and show my report'' (Figure 3a). But when
clicking this button, they are not shown the report, but are rather
unexpectedly taken to a new site maintained by Vertrue designed to
solicit membership in a benefit program called ``24 Protect Plus.'' A
central feature of the page is a request for an e-mail address, under
which is a prominent red button labeled ``yes and show my report''--
presented in the same font as the earlier button. Having no
expectations of having to navigate a promotion, and simply wanting to
see the report that has been paid for, many consumers will reflexively
click the red button again--an action that will trigger automatic
membership.
Inter-temporal Judgment Biases: Hyperbolic Discounting and Preferences
for
Deferral
One of the most robust findings in studies of decisionmaking is
that when consumers are asked to consider options that promise up-front
benefits at the expense of delayed costs they tend to put excessive
weight on the former--a bias known as hyperbolic discounting (e.g.,
Loewenstein and Prelec 1992; Trope and Lieberman 2003). This bias helps
why consumers who are exposed to the prospect of a free premium in
exchange for trial membership in a program might under-attend to fine-
print descriptions of its terms and conditions, such as the what would
be required to cancel. When considering the notion of afree-trial
period, consumers would tend to mentally focus more on the pleasure
that will be derived from the up-front premiums (e.g., the promise cash
back) than the costs of time and energy that might be involved in later
canceling the service--something that would lead them to accept trial
membership in a program that they would later regret.
Curiously, the third-part promoters of these schemes then exploit
this bias again after a consumer accepts membership as a means of
discouraging attempts to claim the premium or utilize their membership
programs. As noted above, redemption typically requires the consumer to
incur significant up-front transaction costs (such as sending in forms
and/or paying full price for gift cards), with benefits being
significantly delayed by multiple week ``processing times''. A consumer
prone to hyperbolic discounting would thus likely conclude that the up-
front effort is not worthwhile, thus fulfilling the firm's hope that
they will never utilize the program benefits that they signed up for.
A tendency for consumers to be lured by prospects of free trial
periods could also be explained by the widely-documented tendency to
defer deliberations when presented with choices for which the best
course of action is uncertain (e.g., Tversky and Shafir 1992). In many
cases such instincts are rational; deferral allows more time for a
thoughtful analysis of the decision problem and/or allows other options
to emerge that are superior to the ones currently being considered
(Meyer 1997). In other cases the appeal lies simply in a preference for
making errors of omission rather than commission; in most consumer
contexts decisions not to buy a product are more easily reversible than
decisions to buy (Dhar 1997; Samuelson and Zeckhauser 1988).
The web schemes can be seen as exploiting this instinct as a way of
``freeing them'' from the need to read in close detail terms and
condition of the programs and learn about their benefits. Consumers are
encouraged to believe that the effortful task of deciding whether the
program can be delayed until later, whereas the benefits of the prize
can be enjoyed immediately. In other words, the consumer is persuaded
to believe that they are not immediately purchasing anything or
contracting for any future purchase; they are being awarded a free
prize simply if they would agree to consider the programs for possible
purchase at a later point.
Status-Quo Biases
The payment mechanism used by the third-part sellers--negative-
option pricing--here is an unusual one. While negative-option pricing
is sometimes justified on the basis of consumer convenience (to avoid
the need for effortful renewal), the motivation is anything but that;
the goal was to extract unwanted charges by exploiting another well-
known bias in consumer decisionmaking alluded to above: the preference
for default or status-quo courses of action given uncertainty (e.g.,
Johnson, Hershey, Meszaros, and Kunreuther 1993; Kahneman, Knetch, and
Thaler 1991; Samuelson and Zeckhauser 1988).
Once the firm has access to the consumer's credit card information
and charge authorization, they are, in essence, holding the consumer's
wallet hostage. The longer it takes for consumers to discover that they
have unwittingly signed up for membership, or the longer it takes for
them to discover that the benefit programs have limited value, the more
money they make as pure profit; each month of delay means more charges
to the consumer.
Consistent with this, the firms set up significant barriers to
charge detection. The monthly charges levels--typically $14.95--are
designed to be low enough to just fall under the radar screen for many
consumers who do not careful reconcile their credit card statements
each month. For consumers who focus only the size of the overall bill,
they would know something was amiss only if the total amount (or
monthly minimum payment) was significantly higher than in the past--a
perception that a $14.95 charge is unlikely to induce. In addition,
even for consumers who do carefully reconcile their bills, the firms
are careful to use program names that could easily be confused with
legitimate firms or businesses. Finally, a consumer who signs up for
one of these programs is typically sent a ``membership package'' in the
mail--but it is commonly designed to resemble a junk-mail solicitation
would be discarded by many consumers, particularly if they had no
awareness that they had signed up for anything.
The negative-option pricing mechanism essentially turns the tables
on how transactions are normally conducted in a marketplace; whereas
not buying a good or service is normally the default action in markets,
here it is the default. This is a reversal that consumers would have
had little experience dealing with, something that would likely lead to
numerous cases of automatic purchases being made for programs that they
neither wanted or, possibly, even knew they were acquiring. The
reversal also highlights an unfortunate paradox of the transaction: as
noted above, consumers were drawn to the appeal of a ``free trial''
period in the belief that it allowed them to avoid taking the overt
action of purchasing the services--when in fact, it had just the
opposite effect. By accepting the free trial they were implicitly
making the decision--which was surely unintentional--to to make
purchasing the passive act, and not purchasing the effortful one.
Conclusion and Remedies
My overall assessment of these web schemes is straightforward: they
represent an enterprise whose primary purpose is to foster and exploit
weaknesses in consumer decisionmaking in an effort to con consumers
into purchasing memberships that hold limited value and without their
fully informed consent. The combination of the sellers' perceived need
to use deceptive selling tactics and the low rate of utilization of the
benefits supposedly provided by their programs implies they did not
believe they were marketing a good or service that held value for
consumers. As such, the operation cannot be defined as either a
legitimate marketing operation or a legitimate consumer business.
In my view the suggested remedies for these practices are also
straightforward:
Negative-option pricing should be prohibited for any service
or program that enlists customers through ``free-trial''
periods. When the trial period has expired the default
assumption must be that the consumer has elected not to adopt
the program. Adoption would occur only if, at the end of the
trial period or earlier, the consumer takes a positive action
to secure membership, providing complete payment and billing
information.
Firms that partner in selling goods and services on the web
should be prohibited enacting automatic ``hand-offs'' and from
passing on customers' credit card and billing information.
While at the end of a sale at one site a customer may be
presented with the option to visit a new site offering
potential benefits, visiting the new site should require a
volitional act by the consumer. Likewise, if a new purchase is
to be made at the new site, it should require the consumer to
re-provide his or her billing information.
In such partnership arrangements, firms should also be
required to utilize web designs and scripts that make it
unambiguous that the consumer has left the original website and
is now in site managed by separate firm, so as to minimize
confusion as to the identity of the seller a customer was
dealing with.
Of course, the enactment of such remedies would likely eliminate
the profit potential current direct marketers who use the web scripts
of concern, as few consumers would voluntarily choose to pay for
memberships in the programs if fully informed. But they would have the
positive effect of precluding a recurrence of the losses suffered by
consumers who fell prey to the deceptive practices discussed here.
References
Buehler, R., D. Griffin, M. Ross. 1994. Exploring the planning
fallacy: Why people overestimate their task completion times. Journal
of Personality and Social Psychology. 67 (3) 366-381.
Dhar, Ravi (1997), ``Context and Task Effects in Choice Deferral,''
Marketing Letters Special Issue on the Time Course of Preferences, 8
(1).
Johnson, E. J., Hershey, J., Meszaros, J., and Kunreuther, H..
1993. Framing, Probability Distortions, and Insurance Decisions.
Journal of Risk and Uncertainty, 7, pp. 35-51
Kahneman, Daniel (2002), ``Maps of Bounded Rationality: A
Perspective on Intuitive Judgment and Choice'', Nobel Prize Lecture,
December 8, 2002.
Kahneman, D., Knetsch, J. L. and Thaler, R. H.. 1991. Anomalies:
The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of
Economic Perspectives, 5, 1, pp. 193-206
Kunda, Ziva. 1990. The case for motivated reasoning. Psychological
Bulletin. 108 (3) 480-498.
Loewenstein, G. and D. Prelec (1992), ``Anomalies in Intertemporal
choice: Evidence and an Interpretation,'' Quarterly Journal of
Economics, 107, 573-598.
Meyer, R. J. 1997, ``The Effect of Set Composition on Stopping
Behavior in a Finite Search Among Assortments'', Marketing Letters
Special Issue on the Time Course of Preferences, 8 (1).
Meyer, Robet, Shengui Zhao and Jin Han. 2007., ``Biases in
Valuation and Usage of Innovative Product Features'', Marketing
Science, in press.
Samuelson, W. and R. J. Zeckhauser. 1988. Status quo bias in
decisionmaking. Journal of Risk and Uncertainty, 1, pp. 7-59.
Trope, Yaacov, Nira Liberman. 2003. Temporal construal.
Psychological Review. 110 (3) 403-421.
Tversky, Amos, and Eldar Shafir. 1992. ``Choice Under Conflict: The
Dynamics of Deferred Decisions'', Psychological Science, 3 (November),
358-361.
Weinstein, Neil D. 1980. Unrealistic optimism about future life
events. Journal of Personality and Social Psychology. 39 (5) 806-820.
The Chairman. Thank you very much.
Now, Professor Marotta-Wurgler.
STATEMENT OF FLORENCIA MAROTTA-WURGLER, ASSOCIATE PROFESSOR,
NEW YORK UNIVERSITY SCHOOL OF LAW
Ms. Marotta-Wurgler. Chairman Rockefeller, members of the
Committee: Thank you for inviting me to testify on the issue of
aggressive sales tactics on the Internet and their impact on
American consumers. My name is Florencia Marotta-Wurgler and
I'm an Associate Professor at New York University School of
Law. I teach courses in contract law, ecommerce, and sales, but
much of my research focuses on contracting practices in
electronic commerce.
The key question regarding post-transaction marketing in
today's hearing is whether consumers are legitimately entering
into these transactions or whether they're being effectively
tricked into them. My general assessment based on both the
norms of online commerce and academic research is that
consumers may indeed need further protections from these
marketing practices.
My first point is that post-transaction marketing
techniques violate consumer expectations. One of the well-
established norms of online commerce is that sellers require
consumers to complete a checkout process that includes entering
their payment information whenever they want to make a purchase
online. This norm allows consumers to be comfortable with
online purchases and greatly facilitates ecommerce activity.
Post-transaction marketing techniques interfere with these
established norms. The timing of these third-party offers
interrupts the standard checkout process with the original
vendor, thus increasing the likelihood that consumers end up
subscribing to an unwanted service without even noticing,
because they were prompted to enter an e-mail address instead
of payment information for the second transaction.
So, what I would like to highlight here is that these
practices violate norms of online commerce. Consumers associate
purchases with payment details and e-mail addresses with e-mail
messages.
The next question is then whether fine print explaining the
nature of the transaction can substitute for this deviation
from norms and provide a legitimate basis for the transaction.
So my second point is that current methods of disclosure of the
terms of the post-transaction marketing offers are insufficient
to provide adequate notice. The basic problem with relying on
disclosures in fine print is that people simply don't read it.
For example, two co-authors and I have studied the extent
to which people who buy software online choose to click on and
read the fine print governing the use of the software. We found
that only one or two out of every thousand shoppers chooses to
read these contracts. Moreover, those who did actually click on
the contract spent too little time on it to have actually read
it.
In a follow-up study, we found that the prominence of the
disclosure did little to increase the probability that
contracts would be read. In fact, consumers are unlikely to
read the fine print even when sellers put the terms right in
front of them and require explicit assent by checking a box
immediately below the terms.
Even if it were the case that consumers were inclined to
read fine print, which they're not, post-transaction marketers
structure and display fine print in a format that further
discourages reading and comprehension. These marketers often
present their offers in a format that is deceptively similar to
that one used by the original selected vendor and even include
the selected vendor's brand name and logo. Consumers who are
induced to believe that they are dealing with similar vendors
can easily be lulled into complacency. Our study suggests this
is a genuine problem.
We found that even fewer than two in 1,000 consumers read
fine print when they were dealing with bigger, more reputable
sellers. This makes sense, as consumers will feel a lessened
need to read the fine print when dealing with known vendors.
Post-transaction marketing firm offers exploit this trust.
Another way in which these marketers discourage reading is
by identifying their offers as rewards or bonuses that
consumers should, in fact, be grateful to receive. The offers
also splash relatively larger-font terms on the page, such as
``Congratulations'' and ``Thank you.'' Studies have shown that
consumers focus on only a few salient aspects of a product or
service when deciding on a purchase. These bells and whistles
have the effect of diverting attention from important
information about fees.
Just as good news is conspicuously splashed on the screen,
the bad news is suspiciously hidden. The terms related to the
fees and automatic transfers of payment information appear in
small print, in the left or bottom of the page, and appear
under another layer of unrelated and boldly displayed happy
titles, such as ``Congratulations'' and ``Great News.''
The relevant disclosures appear at the end of dense
paragraphs. Of course, the problem with this is that research
has also shown that the manner in which sellers display
information affects the attention consumers pay to it. So,
given the way some of this fine print is written, even the rare
consumer who actually does take a quick look at it could be
forgiven for not understanding it.
I have a few suggestions to help remedy these problems.
First, automatic transfers of payment information from known
vendors to post-transaction marketers should not be allowed.
Instead, consumers should be asked to enter their credit card
information at each transaction. This will preserve the well-
established norms of ecommerce.
Second, they should be required to identify themselves
prominently and differentiate themselves from the original
selected vendors.
Third, they should clearly and prominently explain the fees
and services.
Finally, they should plainly explain how enrolled consumers
can cancel or seek a refund.
Thank you very much.
[The prepared statement of Ms. Marotta-Wurgler follows:]
Prepared Statement of Florencia Marotta-Wurgler, Associate Professor,
New York University School of Law
Chairman Rockefeller, Ranking Member Hutchison, members of the
Committee:
Thank you for the invitation to testify on the issue of aggressive
sales tactics on the Internet and their impact on American consumers.
My name is Florencia Marotta-Wurgler and I am an Associate
Professor at New York University School of Law. Much of my research
focuses on contracting practices in consumer mass market transactions
and especially online transactions. In other words, I study the fine
print, and whether online consumers read the fine print.
Today's hearing examines an online business practice known as
``post-transaction marketing'' in which third-party companies offer
discount subscription services for a fee while consumers complete the
check-out process from selected vendors. Consumers are generally
invited to accept these offers by entering their e-mail address.
Consumers' payment information is then automatically transferred to the
third-party marketers from the known vendors. This practice has been
the subject of numerous buyer complaints, critiques by consumer
advocates, and class action litigation.
Here, in brief, is essentially how sellers and buyers view this
practice. Marketers are likely to claim that a legitimate transaction
took place because consumers explicitly communicated assent by actively
entering their e-mail address (or, in some recent cases, the four last
digits of their credit card number). Because the fine print of the
offer discloses the fees and other key terms, the marketers argue the
assent is legitimate and not the result of an oversight or
misunderstanding.
On the other hand, consumers may argue that they didn't
meaningfully assent to the terms of the offer because based on years of
experience in both online and real-world settings, a transaction that
triggers financial obligations doesn't take place until the consumers
provide and confirm payment details, including personal financial
information, often a credit card. Consumers don't feel compelled to
read the fine print informing them that have completed a transaction
because, as everyone knows, financial obligations don't arise until a
payment is explicitly given. Moreover, the consumers would argue, if
the fine print was supposed to alert them of this change in practice,
they didn't read it because it was presented in a deceptive manner and
because consumers generally don't pay attention to fine print.
Whose interpretation is correct? The marketers' perspective that
consumers are willingly subscribing to these services, or the
consumers' perspective that they are effectively being tricked into a
transaction?
In this statement I will start with some general observations about
the nature of online transactions and then I will discuss some academic
research that is relevant to answering this question. Generally, the
well-settled norms in online commerce and research findings suggest to
me that consumers may need further protections from these marketing
practices. I will conclude by recommending some measures that might
help to address some troubling aspects of these transactions.
1. Post-Transaction Marketing Techniques Violate Consumer Expectations
Online
Consumers who access the Internet can quickly access the sites of
thousands of different vendors. The reason why consumers can
comfortably browse and window shop without having to delve into the
fine print governing each vendor's site is that, based on experience,
they know that until they follow some well-established steps, they are
not financially bound to the vendor. In almost all consumer
transactions online, consumers select a product or service and complete
a multi-step checkout process that requires entering a preferred
payment method as well as shipping and billing addresses. When the
transaction is completed, consumers are presented with a confirmation
page with details of the completed transaction. This norm of online
commerce is what allows consumers to safely explore the web, become
informed about advertisement offers, and complete transactions online.
The fact that this norm has been widely accepted and in a way
standardized has helped drive the explosive and economically beneficial
growth of online transactions.
So called ``post-transaction marketing techniques'' interfere with
these established norms, creating consumer confusion in a way that
would appear deceptive. Post-transaction marketing offers are generally
presented to consumers while they are in the process of checking out
from a selected merchant. Usually, the consumer selects a product in
the site of the selected vendor and begins a check-out process to
complete the transaction. However, instead of receiving a confirmation
page from the selected vendor notifying the consumer that the
transaction has been successful, the consumer receives a post-
transaction marketing offer from a third party vendor. The offer is
often deceptively entitled ``Reward'' or ``Bonus'' and at first glance
appears to be some sort of gift, something to be happy about. The
consumer can then accept the offer by entering his or her e-mail
address or by completing a survey. Once this step is completed, the
selected merchant will automatically transfer the consumer's payment
information to the third-party vendor and the consumer's credit card
will be automatically billed $12 a month, for example, until the
consumer notices the charge and figures out how to cancel it. An amount
of $12 is small enough often to go unnoticed, but it is large enough to
add to $50 or $100 within a few months.
This practice obviously raises concerns. The presentation of the
offer by a third party interrupts the normal checkout process with a
selected vendor. Consumers who reasonably expect to receive a
confirmation page as a signal that a transaction is finalized may be
deceived into thinking that the third-party offer is part of the
selected vendor's checkout process. Wishing to complete the transaction
with the selected vendor, consumers thus might end up subscribing to an
unwanted service without even noticing.
Alternatively, even if consumers understand that the third-party
offer is not part of the checkout-process, they nevertheless may be
deceived into subscribing because they are never prompted to enter
their payment information. Given the aforementioned norms, consumers
may thus reasonably expect that no financial obligation attaches. If
anything, by providing their e-mail address, consumers might expect at
worst to receive some advertising that e-mail account provided.
Consumers associate purchases with payment details and e-mail addresses
with e-mail messages.
So what I would like to highlight here is the violation of norms of
online commerce. Now I will turn to some academic research that
addresses the issue of whether fine print can substitute effectively
for this deviation from norms and provide a legitimate basis for the
transaction.
2. Disclosure of the Terms of the Post-Transaction Marketing Offers are
Unlikely to Provide Adequate Notice Because Research Shows that
Most Consumers Simply Do Not Read Fine Print Online
Post-transaction marketers argue that their offers adequately
disclose to consumers the terms and fees associated with the
transaction. Although this is the case, one of the reasons these
disclosures are unlikely to correct consumers' likely mistaken beliefs
is that the vast majority of consumers do not read the fine print
online.
In a recent study, two co-authors and I examined the detailed
online browsing behavior of 45,091 households with respect to 66
software vendors that made their products available online. We studied
the extent to which consumers chose to become informed about the fine
print governing the purchase and use of the products (in the context of
software, these contracts are known as End User License Agreements).\1\
Although we expected to find that relatively few consumers would bother
reading the fine print, we were surprised to find that the number was
so low.
---------------------------------------------------------------------------
\1\ ``Does Anyone Read the Fine Print? Testing a Law and Economics
Approach to Standard Form Contracts,'' Yannis Bakos, Florencia Marotta-
Wurgler, David R. Trossen (NYU Law and Economics Research Paper No. 09-
40, 2009).
---------------------------------------------------------------------------
What we found was that one or two of every thousand shoppers choose
to access these contracts. We were also surprised by how consistent
this attitude was. Consumers generally don't read contracts regardless
of age and income level. And even though consumers are only slightly
more likely to read contracts of products that command higher prices,
the percentage of people who read contracts remains tiny. Moreover,
those who did access the contract spent too little time on it to have
actually read it. The median time spent on these contracts was 29
seconds. Given that the average contract in the sample 2,277 words
long, making it impossible that the typical consumer reads more than a
tiny fraction of it.
In a follow-up study, we found that the prominence of the
disclosure did little to increase the probability that contracts would
be read.\2\ Consumers remained similarly apathetic when finding the
contract is several ``mouse-clicks'' away as when the contract appears
in the familiar link next to a box mandating consumers to click on ``I
agree'' to finish the transaction.\3\ We also found that consumers are
unlikely to read the fine print even when sellers put the terms right
in front of them and require explicit assent by checking a box
immediately below the terms. We found that consumers spent a median of
72 seconds in single checkout pages that presented the contract to
consumers (and required them to explicitly agree to it) but also
required consumers to enter their name, address, and credit card
information. A contract of this type is attached as Exhibit A of this
testimony. Given all the tasks that consumers had to complete in these
pages, I believe that it is highly unlikely that consumers spent more
than a fraction of their time reading it. (To be clear, I do not view
Exhibit A as an example of a deceptive presentation of fine print,
rather it is fairly typical contract, and of course, another aspect to
note is that the transaction is fully with the selected vendor as
opposed to a transaction connected to a third party.)
---------------------------------------------------------------------------
\2\ ``Does Disclosure Matter?'' Florencia Marotta-Wurgler and
Yannis Bakos (mimeo, 2009).
\3\ Even less than 0.1 percent of consumers that were presented
these contracts chose to access the contract.
---------------------------------------------------------------------------
The conclusion from this study is that there is an overwhelming
tendency to ignore the fine print in online transactions, regardless of
how clearly or prominently terms are disclosed. Although these studies
only give us a general picture of consumer behavior online and they are
drawn from a slightly different context, I believe that in combination
with common sense and introspective observation, these studies strongly
suggest that it is unlikely that consumers actively peruse the details
of many online transactions. To summarize, I believe that it is
unlikely that disclosure of the post-transaction marketing offers in
fine print can effectively alert consumers of the transaction that they
are undertaking.
3. Post-Transaction Marketers Structure and Display Fine Print in a Way
that Discourages Consumers From Becoming Informed About Their
Terms
I'll now turn to consider several features of post-transaction
marketers' offers that based on common sense and academic research seem
likely to further reduce the effectiveness of their disclosures.
3.1. The Method of Disclosure Exploits the Empirical Fact that
Consumers are Less Likely to Read the Terms Offered by Known
Vendors
Post-transaction marketers often present their offers in a format
that is deceptively similar to that one used by the originally selected
vendor. For example, if the vendor is a site that sells movie tickets
the third-party vendor will include pictures of popcorn and reels. In
many cases, the page with the third-party offer will have the brand
name and logo of the known vendor, implying that the new offer comes
from the known vendor. Consumers who are induced to believe that they
are dealing with familiar vendors can be easily lulled into
complacency.
Our study of consumer online behavior supports the validity of this
concern. We found that as rarely as our sample consumers accessed
contracts, they were even less likely to read when the terms were
offered by bigger, more reputable sellers.\4\ This makes sense. When
consumers become familiar with firms or know their reputation, they
will feel a lessened need to read the fine print. Post-transaction
marketing offers exploit that trust.
---------------------------------------------------------------------------
\4\ See Bakos et al., supra note 1.
---------------------------------------------------------------------------
3.2. Many Offers Are Deceptively Framed as Rewards or Rebates
Post-transaction marketers often identify their offers as rewards
or bonuses that the consumers in fact should be grateful to receive.
Offers may feature a prominently displayed coupon with a title such as
``$10 off your next purchase--Good for your next Fandango Purchase'' or
``$10 CASH BACK ON YOUR PURCHASE TODAY!'' Fandango is a very popular
vendor of movie tickets, among other products. (See for example,
Exhibits B and C.) It is natural to imagine that the new offer is part
of the original transaction.
The offers also splash relatively larger-font terms around the page
such as ``Congratulations,'' ``MEMBER REWARDS,'' and ``Thank You . . .
Please Complete Your Survey and Claim Your Reward.'' These phrases are
likely to distract attention from the disclosures that explain the new
charges associated with the new offer. Given the general emphasis on
the reward component and consumers' aforementioned expectations that
financial liability is incurred only after entering a payment method,
it seems unlikely that barely noticeable disclosures will correct
consumers' misperceptions.
Existing research supports this view. Studies have shown that
consumers focus only on a few, salient aspects of a product or service
when deciding on a purchase.\5\ By highlighting the ``reward''
component of the offer and framing it as something that the consumer
should be pleased to receive, marketers make the ``good news'' as
salient as possible.
---------------------------------------------------------------------------
\5\ See Russell Korobkin, ``Bounded Rationality, Standard Form
Contracts, and Unconscionability,'' U. Chi. L. Rev. 1203, 1243-44
(2003), for an overview of these studies.
---------------------------------------------------------------------------
3.3. Key terms are Designed and Positioned in Way That Makes it Likely
that They Will be Overlooked
Just as good news is emphasized, the bad news is suspiciously
hidden. The terms related to the fees and automatic transfers of
payment information appear in small print, in the left or bottom of the
page, and appear under unrelated and boldly displayed happy titles such
as ``Congratulations,'' ``Great News,'' ``Thank You,'' and ``Register
for Reservation Rewards and get our Money-Saving Discounts up to 50
percent . . . plus your $10 cash back incentive at your next Fandango
Purchase.'' Moreover, the relevant disclosures appear at the end of
dense paragraphs that for the most part again recite the bonus or
reward aspect of the offer. Even consumers who glance at the fine print
might think there are few strings attached. Indeed, research has shown
that the manner in which sellers display information affects the
attention consumers pay to it and, consequently, the likelihood of it
being a salient component in purchase decisions.\6\
---------------------------------------------------------------------------
\6\ See, e.g., J. Edward Russo, ``The Value of Unit Price
Information,'' 14 J. Marketing Rsrch. 193, 194 (1977). Don N.
Kleinmuntz & David A. Schkade, ``Information Displays and Decision
Processes,'' 4 Psy. Sci. 221-27 (1993).
---------------------------------------------------------------------------
To offer some perspective, the vast majority of contracts in our
study that were for the most part ignored by consumers in the sample
were clearly labeled as contracts or disclaimers, and included titles
in bold or capital letters explaining the provisions that would follow.
For example, paragraphs explaining liability disclaimers would be
titled ``DISCLAIMERS,'' or ``IMPORTANT: PLEASE READ THIS CONTRACT.'' If
contracts with clear and prominent titles were not able to successfully
catch consumers' attention, the terms of post-transaction marketers are
even less likely to do so. Indeed, they seem designed to attract as
little attention as possible.
Even if some consumers have become savvy enough to detect these
deceptive practices and stay away from them, it is well worth the
effort to help as many consumers as possible fully understand the
contract that they are being offered.
4. Recommendations
I have a few suggestions to help remedy the problems created by
post-transaction marketing techniques.
First, automatic transfers of payment information from known
vendors to post-transaction marketers should not be allowed. Instead,
consumers should be asked to enter their credit card information at
each transaction. This will preserve the well-established norm that
financial liability in these contexts arise only after the consumers
takes certain well-established steps. The benefit of clarity outweighs
any cost of inconvenience.
Second, post-transaction marketers should be required to identify
themselves prominently and differentiate themselves from the originally
selected vendors. To avoid confusion, they should not present
themselves before the transaction with the selected vendor is
completed. This will put consumers on notice that they are dealing with
a different entity.
Third, post-transaction marketers should improve the quality of
their disclosures by framing their offers in a manner that is not
deceptive and by clearly and prominently explaining the fees and
services. These disclosures should also include regular e-mail updates
reminding them of the subscription and any ongoing charges. They should
be written in short, clear, and plain language with no distracting
features.
Fourth, post-transaction marketers should implement a clear process
by which enrolled consumers can easily cancel or seek a refund. This
alternative should be prominently present in every periodic e-mail
communication with consumers.
To summarize, because post-transaction marketers present themselves
to consumers in an unexpected fashion at an unexpected juncture of the
transaction, they violate the norms of online commerce and should be
held to a higher standard of disclosure and transparency.
Thank you very much for hearing my views. I hope they are helpful
in your consideration of these practices.
Exhibit A
Exhibit B
Exhibit C
______
Statement of My Experience Signing Up for Webloyalty's Reservation
Rewards--Florencia Marotta-Wurgler, Associate Professor of Law, New
York University School of Law
On Saturday, November 14, I visited the website Fandango.com with
the intent of purchasing a movie ticket. After having selected the
ticket (for ``Where the Wild Things Are''), I proceeded to checkout.
The first step of the Fandango checkout process, entitled ``Checkout:
Order,'' required that I enter the number of tickets desired and to
either register using my existing account with my username and password
(which I did), or register as a guest. The second step, entitled
``Review,'' provided information about the date and time of the show,
the selected number of tickets, and a summary of my billing
information, including my name, e-mail address, last four digits of my
credit card number, and zip code. As I clicked on a button entitled
``Complete my Purchase,'' a large pop-up page with a prominent $10
coupon promising me $10 off my next purchase at Fandango appeared on my
screen. It is notable that I was not presented at this point with the
typical purchase confirmation page.
The page with the coupon was a typical post-transaction marketing
offer. This time the third-vendor was Webloyalty. At the top of the
page was a prominent statement ``***IMPORTANT: Limit 1 per person***.''
The $10 coupon was the focal point of the page, with notes such as
``$10 cash back incentive'' and ``$10 off your next purchase.''
Immediately to the left of the coupon a colored text read
``Congratulations . . . Here's your Special Offer for Fandango
Customers!'' followed by ``Register for Reservation Rewards and get
your Money Saving Discounts up to 50 percent . . . plus your $10.00
Cash Back Incentive on your next Fandango Purchase.'' (A copy of the
page is attached as Exhibit A of this statement.) One paragraph below,
under a title labeled ``Great News'' and after several lines
highlighting the reward component of the offer, was a disclosure of the
fees stating ``Enjoy this FREE for the next 30 days and only $12 a
month thereafter billed to the credit card or deducted from the debit
card you used at Fandango today.'' Any person in my position could
easily have ignored this last line, thus concluding that the offer came
from Fandango (after all, it was displayed during the checkout process)
and that it was for some sort of genuine reward (perhaps to create
brand loyalty).
As I scrolled down the page to enroll I was told to ``Complete the
information below and click YES to sign up for your membership in
Reservation Rewards.'' I was asked to enter the last four digits of the
credit card number I used to purchase my Fandango ticket and to enter
my e-mail address. Not wanting to stand up to reach my wallet to look
for my credit card number, I remembered that Fandango had conveniently
showed me the last four digits of my credit card number in the previous
checkout step. I clicked on ``My Account'' in the Fandango page and I
saw just the last four digits of my credit card number displayed on the
page. After simply entering these numbers and typing my e-mail address
in the Reservation Rewards page, I clicked YES and signed up for the
service.
I should note that companies typically ask users to provide the
last four digits of their credit card number as a way of verifying the
identity of the user and not as a part of a regular checkout process.
Consumers in this situation who mistakenly believe they are dealing
with Fandango would understand this request as a mere request for
identity verification. In the absence of reading the fine print,
consumers are unlikely to understand they are entering a new
transaction by simply entering the last four digits of their credit
card number.
I then checked my e-mail account to see whether I had received any
notifications explaining in detail the characteristics of the
transaction. Companies that sell products online routinely send
confirmation e-mails explaining the item purchased, the amount charged,
the payment method used, and information about shipment. The e-mail I
received was entitled ``Get Your $10 Monthly Member Bonus Today!''
(attached as Exhibit B to this Statement). The e-mail was as deceptive
as the original offer. The text, phrased as a letter, offered a
friendly reminder of the $10 discount from the next Fandango purchase.
It then listed a series of other rewards I should be able to claim as a
member of the club. Next, it explained that I could obtain these
rewards by sending an e-mail to reservation rewards. The letter was
signed by the Senior Vice President of Reservation Rewards. Disclosures
regarding the costs and payment for this service were minimal. At the
bottom of the e-mail, significantly away from the general text of the
letter, there appeared the following statement: ``You can view the
Billing Details of your membership on your Member Profile page. For
questions, e-mail customer service or call 1-800-732-7031. To use your
benefits visit Reservations Rewards.'' Just like the terms of the
original offer, this statement does not provide notice sufficient to
inform the average consumer of the nature of the services offered. The
confirmation e-mail thus does not correct any prior beliefs about the
offer being a no-strings reward.
As soon as I completed the sign-up process, I used the number
posted in the fine print of the offer to cancel my services. I was
greeted by a recording that gave me a menu of options and asked me if I
wanted to cancel my subscription. After selecting that option, the
recording asked me whether I was sure that I wanted to cancel my
subscription, and if I did not want to cancel, I should press the
number 1 on the phone, and if I did want to cancel, I should press the
number 2.
After I pressed the correct number, I was told that my subscription
was terminated. I later received an e-mail confirming my cancellation
(included as Attachment C to this statement).
Thank you very much.
The Chairman. Thank you very much.
Before I go to you, Professor Cox, you both talked about
fine print and the fine print is just the greatest scam of all
time. I see some charts over there. Do any of those have fine
print on them?
Mr. Meyer. Yes, they do.
The Chairman. I'd like to see.
I wouldn't make this the Metropolitan Art Show.
Actually, that's not as good as some that I've seen, where
they'll have ``$10'' in bright blue, a big square up at the
top, and then there will be like 5 more of those paragraphs,
small print, which I'm not 20, but I have good eyesight, and if
I had a Galilea telescope I would not be able to read that fine
print. I mean, it is absolutely impossible.
In that fine print, if I'm not mistaken, is all the damage
that they're going to do to you. But of course you don't read
it because underneath in the same bright blue that I'm thinking
of, which said ``$10,'' underneath that in big print is
``Yes.'' So what do you do? You go ``$10, yes,'' and you don't
read anything in between because--you said one out of every one
million do it?
Ms. Marotta-Wurgler. One out of every 1,000.
The Chairman. Out of 1,000 do it.
So anyway, I just want to make that point and, Professor
Cox, go on to you.
STATEMENT OF PRENTISS COX, ASSOCIATE PROFESSOR OF CLINICAL LAW,
UNIVERSITY OF MINNESOTA LAW SCHOOL
Mr. Cox. Thank you, Mr. Chairman.
For over a decade, first as an Assistant Attorney General
within the Minnesota Attorney General's Office and then as a
Law Professor, I've attempted to combat and call attention to
the practices examined here, practices that drain the financial
accounts of Americans without legitimate purpose, cause
cynicism about commerce, and harm competitors who are trying to
be honest. I'd like to make three points.
First, the practices examined here are not limited to the
Internet. They're part of a bigger problem, a problem called
``pre-acquired account marketing.'' The essence of ``pre-
acquired account marketing'' is the sale by retailers and
financial institutions of special access to consumers'
accounts, so that third parties can charge these accounts
without obtaining account numbers from consumers.
It occurs through every channel of direct marketing,
including direct mail, inbound telemarketing, as well as
Internet transactions. It involves all the Nation's largest
financial institutions at some point and continues to involve
the vast majority of the Nation's largest banks, credit card
issuers, and mortgage companies. Interestingly, it is not
something that is widespread among independent and community
bankers or credit unions.
It works by circumventing the shorthand methods we all use
to signal consent to a transaction. We know we're done when we
hand somebody our credit card, we swipe it in a machine, we
read them the number over the phone, or we enter it into the
Internet.
This problem is especially bad with those with mental
impairments due to illness or other reasons and those who do
not speak English as a primary language. They are particularly
victimized by the complexity of these transactions.
My second point is that it is difficult to control this
problem with existing deceptive practices laws and other
consumer protection laws. Like it or not, they're fully
disclosed even if in a fundamentally misleading context. This
causes some courts to struggle with whether the consumer should
be held responsible for carefully reading the fine print, as
we've gone over.
I think this is like blaming the crime victim for getting
pick pocketed in a street where it says ``Beware of
pickpockets'' on it. But the existence of disclosure does cause
some confusion in the courts.
This debate of law about deceptive practices is distinct
from the larger and more important point. Pre-acquired account
marketing, of which this is a prominent example, is a giant,
insidious sorting machine, the result of which is millions of
consumers have their accounts charged without their knowledge
and without wanting the products they've supposedly purchased.
The evidence on this point is absolutely overwhelmingly,
and I'd like to say your staff report on this, I literally got
up and cheered when I read it. It's phenomenal. It's detailed,
it's thorough, and it's beautifully presented. And it's
consistent with all the other information about this form of
marketing and other direct marketing channels.
For instance, Illinois Attorney General, Lisa Madigan, did
a phone survey of people who were supposedly active paying
members of membership clubs involving a direct mail
solicitation with live checks, involving an agreement between a
national bank and a membership club, and found literally nobody
who was aware that they were a member, even though they were
paying for it.
Iowa Attorney General, Tom Miller, did a mail survey with
Vertrue members and found essentially the same result. In my
experience with the Minnesota Attorney General's Office
prosecuting several of these cases, including one against Fleet
Mortgage Company, where people's mortgage accounts were charged
through both direct mail and telemarketing, and they did a
survey of the consumer services representatives with Fleet
Mortgage, and you got almost the same exact responses that are
reported in your staff report from those consumer services
representatives, quotes such as ``This is a fraud,'' ``This is
a scam,'' ``Why do we allow our customers to be charged like
this?''
The third and final point is that, unlike the often
difficult and tricky consumer regulatory problems where you
have to balance how exactly you intervene in the market so as
not to prevent legitimate commerce, this is one of those rare
cases where there is a clear and obvious solution: Prohibit
retailers and financial institutions from selling access to
consumers' accounts to third parties. There is no legitimate
commercial reason to do this. Consumers mostly already think
this is the law and it should be the law.
It is with great appreciation to you, Mr. Chairman, for
calling this hearing. It has been a very frustrating decade
trying to call attention to this problem, and with one fell
swoop you've already made more impact on this than a decade
worth of work by many other people who are trying to combat
this problem.
Thank you very much.
[The prepared statement of Mr. Cox follows:]
Prepared Statement of Prentiss Cox, Associate Professor of Clinical
Law, University of Minnesota Law School
It is with great appreciation that I thank Chairman Rockefeller for
holding this hearing, for exposing and carefully examining this
problem, and for his obvious commitment to protecting consumers from
abuses in the marketplace. I have had the pleasure of working with
Senator Klobuchar, from my home state of Minnesota, on consumer
protection issues, and I know she also understands the inadequacy of
current regulatory systems for protecting consumers in today's
marketplace.
Unauthorized charges for membership clubs following consumer
website purchases flow from Internet retailers selling access to the
financial accounts of their customers. This problem is part of a larger
practice known as pre-acquired account marketing, which has festered
largely unattended for more than a decade. Today's hearing is long
overdue. The business practices that are being examined in this hearing
drain the financial accounts of American consumers without legitimate
purpose.
I first encountered the problem of unauthorized account charges
resulting from pre-acquired account marketing as a public attorney
enforcing consumer protection laws. Prior to joining the University of
Minnesota Law School faculty in 2005, I worked as an Assistant Attorney
General and Manager of the Consumer Enforcement Division in the
Minnesota Attorney General's Office. I was involved in the prosecution
of a series of cases against banks, mortgage companies, retailers,
insurers and membership club sellers using pre-acquired account
marketing.\1\ For the last few years, I have studied and written about
this practice, including its rapid growth as an Internet marketing
system.\2\
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\1\ These cases included publicly filed consumer protection actions
by the Minnesota Attorney General against Fleet Mortgage Corporation,
Memberworks, Inc. (now known as Vertrue, Inc.), Damark International,
Inc. (now known as Provell, Inc.) and U.S. Bancorp.
\2\ An article examining this issue in more detail, including a
proposed model law to control the problem, can be viewed at: http://
ssrn.com/abstract=1460963. The article, entitled The Invisible Hand of
Pre-acquired Account Marketing, will be published in June 2010 in
Volume 47, Issue 2 of the Harvard Journal on Legislation.
---------------------------------------------------------------------------
Pre-acquired account marketing creates the same result in all of
its modalities--massive consumer confusion and extraordinary numbers of
consumer complaints about unauthorized charges to financial accounts.
It accomplishes this result by acting as a sorting mechanism to
identify vulnerable and distracted consumers unaware that their
accounts have been charged. My testimony will focus on how this sorting
occurs and why current laws are inadequate to control the problem. I
will conclude by asking you to consider a law that bans e-retailers,
other retailers and financial institutions from selling special access
to their customers' financial accounts. Further disclosure requirements
will not solve the problem of consumer confusion and harm caused by
pre-acquired account marketing.
I. Pre-acquired Account Marketing Results In Unauthorized Account
Charges
An Internet retailer acquires an account number, such as a credit
card number, when selling goods or services to a consumer. The consumer
enters his or her account number on the e-retailer's website when the
consumer believes he or she understands and agrees to the terms of the
transaction. Internet transactions mimic traditional retail
transactions in this respect--consumers signal consent to a charge by
providing an account number to the seller, much as a consumer swipes or
hands over a debit or credit card to a physical retailer.
A. How Pre-acquired Account Marketing Works
The flood of consumer complaints about unauthorized charges
following website purchases is the predictable result of using pre-
acquired account marketing techniques on the internet. The e-retailer
agrees to sell the consumer's account number it obtained, or sell the
ability to charge its customer's account, with a membership club
seller. After the initial e-retailer transaction, the membership seller
solicits the consumer for a free trial in a membership club or an
insurance policy. If the marketing company determines the consumer
consented, and the consumer fails to cancel in time, the marketing
company charges the consumer's account. The retailer who sold the
consumer's account number shares in the revenue.
This is the same process, with the same result, that occurs when
pre-acquired account marketing is used in other contexts, including
direct mail, outbound telemarketing and various forms of inbound call
marketing.\3\ Most of the Nation's largest financial institutions also
sell the right to charge their customers' accounts to membership club
sellers and other companies employing pre-acquired account
marketing.\4\ Credit card, checking and mortgage accounts all are
commonly accessed through pre-acquired marketing.
---------------------------------------------------------------------------
\3\ The Better Business Bureau, which rates Vertrue with a grade of
``F'', describes consumer problems with the company's business practice
as follows: ``Complaints reported to the Bureau primarily involve
claims of unauthorized charges by the Company's affiliates. In such
cases, customers reported no recollection of having agreed to the
programs that were billed to their credit card, debit card or bank
account. In some of the cases, consumers reported being charged for two
or 3 years.''
\4\ Affinion, one of the largest pre-acquired marketing seller of
membership clubs, lists its ``affinity partners'' as including ``18 of
the top 20 U.S. credit card issuers, 17 of the top 20 U.S. debit card
issuers, 5 of the top 5 U.S. mortgage companies.''
---------------------------------------------------------------------------
These are not trivial charges. Membership clubs now routinely
charge about $100 or more per year. Membership club sellers claim tens
of millions of members. Affinion alone asserts that it adds one million
members per year through Internet solicitations alone.
B. The Deception Problem with Pre-acquired Account Marketing
Consumers are confused and misled by this marketing system for
three reasons. First, this type of selling process circumvents the
short-hand methods used by consumers to indicate consent to a
transaction. In an Internet transaction, the entry of an account
number, and perhaps CVV code, alerts consumers that they are providing
that authorization. When e-retailers sell the right to charge their
customer accounts, membership club sellers can defeat consumer
expectations that withholding this information prevents consent to a
charge for the transaction.
Second, membership club sellers and other pre-acquired account
marketing companies layer multiple sales practices with deceptive
potential. These sellers invariably provide a ``free trial offer'' or
similar inducement to begin the solicitation, suggesting a lack of
commitment required of the consumer. This is consistent with the
consumer's expectation that he or she has not provided an account
number authorizing a charge. These sellers then employ a ``negative
option'' method to charge the consumer's account without further action
by the consumer if he or she fails to cancel during the trial period.
Finally, agreements purportedly entered into through pre-acquired
account marketing typically include an ``automatic renewal'' provision
so that the charge is re-assessed periodically, often at a higher rate
on later charges, until canceled by the consumer. Combining the
circumvention of short-hand consent signals and the layering of
multiple suspect sales methods makes it inevitable that many consumers
will not understand the complicated solicitation terms.
Third, pre-acquired account marketing raises special concerns for
deception of vulnerable consumers. The elderly who have substantial
mental diminishment, those with mental impairment from illness and non-
native English speakers are more susceptible to the deception potential
with this form of marketing. It is one thing to have individuals in
these groups read or enter an account number, but quite a different
experience to allow vulnerable populations to be charged for failing to
notice and comprehend complicated disclosures when they have not
provided an account number to the seller.
C. The Sorting of Distracted and Vulnerable Consumers
Membership club sellers will respond that the entire transaction
sequence is fully disclosed to the consumer. This assertion generally
is true, especially on the Internet where human deviation from script
is not possible. Are we left with a debate about whether these
disclosures are adequate to overcome the problems with consumer
deception described above? No. The fundamentally corrupt business model
that drives this form of marketing gains focus if we shift perspective
from the various experiences of millions of individual consumers during
the solicitation process to the net effect of this system on consumer
account charges.
This result occurs because pre-acquired account marketing acts as a
sorting system to identify consumers who will have their financial
accounts charged without their full understanding. Pre-acquired account
marketers (and the enabling e-retailers, banks and other companies that
sell account access) rely on a combination of consumers who never
understand the solicitation and consumers who grasp it at the time of
solicitation but fail to remember the terms of the transaction through
the trial period. For consumers in these groups who notice the charge
on their account statement, the sellers take a pro-rated amount of the
charge. The bulk of revenue lies in those consumers who do not notice
the charge and are assessed the full amount, and who later suffer
automatic renewal charges at higher rates, sometimes for years, before
canceling. These consumers not only pay all of the cost of the
membership club, but do not demand anything of value from the service
because they do not even know they are members.
This situation could present a difficult public policy problem if a
substantial number of consumers were charged for membership services of
which they were unaware, but where most members understood the process
and happily paid for the service. Mounting evidence, however, shows
this latter group is almost non-existent--that almost every consumer
charged through pre-acquired account marketing is unaware of or did not
want the membership service they allegedly agreed to purchase. This
evidence includes the following:
The Iowa Attorney General sued Vertrue, a pre-acquired
seller, in 2006. As part of the investigation, Attorney General
Tom Miller surveyed consumers that Vertrue had identified as
paying for one of its membership programs. Of the 88 club
members who returned surveys, 59 (or 67.0 percent) were unaware
of the membership and stated that the charge was totally
unauthorized, 24 (or 27.3 percent) stated that they were aware
of the club but they never used it and believed they had
already canceled, 6 (or 6.8 percent) stated generally that the
charges were ``unauthorized,'' and 3 (or 3.4 percent) gave
unclear answers that indicated some awareness of the club but
dissatisfaction with the service, including one member who
``felt coerced'' into paying for the membership.\5\
---------------------------------------------------------------------------
\5\ The Iowa Attorney General action against Vertrue was recently
tried before the trial judge and the parties currently are submitting
post-trial briefs.
In 2004, Illinois Attorney General Lisa Madigan surveyed by
telephone customers of a national bank that had cashed ``live
check'' direct mail offers for a free trial offer in membership
programs solicited under a pre-acquired account marketing
arrangement. Of the 56 bank customers who were listed as active
members of a membership program, 37 indicated no awareness that
they were club members. None of the 56 customers stated that
they were both aware of the charge and intended to sign up for
---------------------------------------------------------------------------
the program by cashing the live check.
When Minnesota Attorney General Mike Hatch sued the mortgage
subsidiary of Fleet National Bank in 2001 for pre-acquired
marketing, he presented evidence that Fleet's own customer
service agents overwhelmingly objected to these charges,
calling them ``unethical,'' ``a scam,'' and ``a fraud'' based
on their conservations with homeowners whose mortgage accounts
were charged for membership clubs and insurance policies
through pre-acquired marketing.
The data collected so far strongly supports the conclusion that
there appears to be few, perhaps almost no, consumers among the club
members who are aware they are paying for the service.\6\ This
situation makes irrelevant the issue of whether some or even most of
the consumers accepting the free trial offer understood the disclosures
at the time of solicitation. The evidence indicates that the business
model underlying pre-acquired account marketing works as a sorting
scheme that results in account charges to consumers who do not know
they have been charged and do not want the purported service.
---------------------------------------------------------------------------
\6\ This data does not include usage information for these
membership programs. It would be instructive to know how many consumers
charged for these membership clubs actually use the service, which
would be evidence of awareness of the charge. For example, many of
these membership clubs offer to their members as a primary benefit
reimbursements for certain types of purchases. If a majority of members
are taking advantage of this offer, one could infer awareness of at
least club membership, although not necessarily awareness of the
account charge.
---------------------------------------------------------------------------
After a decade of observing the membership club industry develop on
the foundation of pre-acquired account marketing, I have little doubt
that this business sector would cease to exist almost overnight if it
had to sell its products like every other retailer. In other words,
these membership clubs could not survive if they had to get consumers
to give them a credit card number to purchase the services the
membership clubs are selling.
II. Failure of Existing Law to Control These Unauthorized Charges
Current law does not control the problem of pre-acquired account
marketing, particularly in the context of e-retailers selling customer
account access in post-transaction offers. Neither laws of general
application nor specific rules in consumer protection statutes or
regulations contain adequate tools to stop this unfair practice.\7\
---------------------------------------------------------------------------
\7\ It is worth a brief word about why the market fails to control
pre-acquired account marketing. The most obvious market correction for
the problem is the adverse reputational consequences for the companies
involved in a practice that generates angry, voluminous complaints of
account theft by consumers. In fact, membership club sellers routinely
change their trade names (Memberworks became Vertrue; Damark became
Provell; Trilegiant became Affinion; etc.), which might suggest some
concern of this sort. Yet reputational problems are lessened when
consumers just respond to a direct marketing solicitation rather than
making affirmative choices to seek out the seller and because the
primary initial brand presentation with pre-acquired marketing is the
name of the retailer or financial institution, not the membership club
seller. This leads to the more promising possibility of financial
institutions and referring retailers who sell access to their
customers' accounts abandoning pre-acquired marketing because of
substantial reputational interests. Unfortunately, adverse reputational
consequences for the account issuers and referring retailers are
mitigated by the structure of the free trial offer. The solicitation is
usually closely tied to the reputation of the account issuer or
referring seller, but when consumers discover weeks or months later the
account charges on their statements that they believe are unauthorized,
the pre-acquired seller typically is listed as the initiator of the
charge. As the consumer is likely to have no idea how this charge
appeared on his or her account, there is less risk of harm to the
reputation of the financial institution or retailer that obtains
revenue from selling the access to its customers' accounts.
---------------------------------------------------------------------------
A. Legislative and Regulatory History
The most promising avenue for controlling pre-acquired account
marketing in the last decade was the prohibition against financial
institutions sharing customer account numbers enacted in 1999 as
section 502(d) of Title V of the Gramm Leach Bliley Act (codified at 15
U.S.C. 6802(d)). Unfortunately, this Act gave Federal regulators the
authority to promulgate rules for the implementation of section 502(d),
and the resulting regulations essentially made section 502(d)
meaningless as a limit on pre-acquired marketing.\8\ Even if this
prohibition had not been undermined by Federal regulators, it would not
have prevented retailers that are not financial institutions from
engaging in pre-acquired account marketing.
---------------------------------------------------------------------------
\8\ See 12 C.F.R. 40.12. Regulation P was adopted jointly by the
Federal banking regulators, the Federal Reserve Board and the Federal
Trade Commission. Regulation P allows the sharing of encrypted account
numbers. Financial institutions, therefore, can sell access to their
customers' accounts to direct marketers as long as they encrypt the
numbers given to the marketers, which does nothing to control the
problem of account charges unknown to the consumer.
---------------------------------------------------------------------------
The Federal Trade Commission promulgated amendments to the
Telemarketing Sales Rule in 2003 that put some limits on the use of
pre-acquired account marketing in the telemarketing context, 16 C.F.R.
310.4(a)(6). The amendment proposed in the initial rule-making notice
would have prevented the practice entirely, but the FTC substantially
limited the reach of the final rule while noting that it would continue
to watch the evolution of this suspect marketing practice. Again, these
rules do not apply to Internet transactions and thus would have no
impact on e-retailers selling account access.
B. Legal Actions
Lawsuits brought by state attorney generals, the FTC and private
attorneys have had some impact on pre-acquired account marketing, but
so far have been of limited value in addressing the underlying issues
driving the consumer complaints of unauthorized charges. State
attorneys general and FTC actions alleging consumer deception and
misunderstanding have been successful, but the cases against the
largest membership club sellers by state attorneys general have so far
mostly yielded only modest reforms in the form of improved
disclosures.\9\ This outcome is consistent with the theory of these
cases, which is that the solicitation process misled or deceived
consumers.\10\
---------------------------------------------------------------------------
\9\ See, e.g., Assurance of Discontinuance, In re Citibank (NYS
Dept. of Law filed Feb. 22, 2002) (multistate settlement), available at
http://www.oag.state.ny.us/media_center/2002/feb/feb
27b_02attach.pdf; Press Release, Office of the Washington Attorney
General, Settlement with Discount Buying Club Highlights Privacy
Concerns (August 4, 2000), available at http://www.atg.wa.gov/
pressrelease.aspx?&id=5010; Assurance of Discontinuance, Minnesota ex
rel. Hatch v. Damark Int'l, Inc., No. C8-99-10638 (Ramsey County Dist.
Ct. Dec. 3, 1999).
\10\ The lawsuit filed by Iowa Attorney General Tom Miller against
Vertrue, Inc. was based in part on a broader theory that encompassed
the assertion that consumers who pay for Vertrue membership clubs
rarely know they are members whose accounts have been charged for the
service. See Iowa ex rel. Miller v. Vertrue, Inc., Equity No. EQ53486
(Polk Co. Dis Crt. May 15, 2006), available at http://www.state.ia.us/
government/ag/latestnews/releases/may2006/Mem
berWorksVertuePETITION).
---------------------------------------------------------------------------
Private legal actions have had less success. Of particular interest
to the subject matter of this hearing is a multi-district litigation
case recently dismissed in the United States District Court for the
Southern District of Texas, In Re VistaPrint Corp. Marketing and Sales
Practice Litigation.\11\ Plaintiffs alleged that the post-transaction
sale of membership clubs following sales of business cards on the
VistaPrint website were deceptive and violated numerous state and
Federal laws. The court granted the defendants' motion to dismiss on
the substance of the plaintiffs' legal claims, but denied defendant
VistaPrint's attempt to have the case dismissed because the VistaPrint
form contract required that all actions by its customers be filed in
Bermuda courts. The trial court judge held that consumers ordering
business cards on the VistaPrint website had a duty to read all of the
disclosures about the free trial offer. The judge concluded that the
disclosures were sufficient to make the website post-transaction
solicitation not deceptive to the ``reasonable'' consumer as a matter
of law. The case is on appeal.
---------------------------------------------------------------------------
\11\ No. MDL 4:08-md-1994 (S.D.Tex 8/31/09), available at 2009 WL
2884727.
---------------------------------------------------------------------------
C. Consumer Misunderstanding and Abuse Is What Matters
The VistaPrint decision presents the fault line in a part of the
legal debate associated with pre-acquired account marketing. Sellers
who employ and profit from the practice stress the obligation of
consumers to search and read website disclosures that set forth this
unusual procedure leading to account charges. Consumer advocates assert
that the disclosures are insufficient to overcome the misleading
overall impression of the solicitation. While this makes for an
interesting legal theory dispute that explores the current state of the
law of deception, this argument is utterly misplaced for considering
the public policy issue presented by pre-acquired account marketing. It
is a red herring.
If the net effect of this business practice is that the
overwhelming numbers of consumers paying for a service are unaware that
their accounts are being charged year after year, we should explore how
to stop this real-world result from occurring. It should not matter
whether this result occurs because the consumer failed in his or her
alleged ``duty'' to closely read all website disclosures and thus
misunderstood the solicitation terms, because the consumer does not
speak English well and could not really understand the dense
disclosures, because the consumer understood the disclosures when using
the website but forget about the solicitation and thus failed to
exercise the negative option during the attenuated free trial offer
period, or because of any other such reason. No one should want a
practice to continue that amounts to a predacious sorting out of
consumers to have their financial accounts charged without their
awareness.
III. Prohibit Pre-acquired Account Marketing
Unlike the complex regulatory trade-offs typical when drafting
consumer protection regulations, an obvious solution exists for the
problem motivating this hearing. A retailer should be required to
obtain from the consumer his or her account number before charging the
account. Most consumers think this is the state of law now.\12\
---------------------------------------------------------------------------
\12\ See, e.g., Supplemental Comments of the Vermont Attorney
General's Office, Telemarketing Sales Rule Review Forum Before the
Federal Trade Commission, FTC File No. R411001, available at: http://
www.ftc.gov/os/comments/dncpapercomments/supplement/vtag.pdf
(describing AARP study showing a plurality (46 percent) of consumers
thought that a telemarketer could not charge a credit or debit card
without obtaining the account number from the consumer, while a
majority (51 percent) didn't think a bank account could be charged in
this manner, and another 15 percent and 13 percent, respectively,
didn't know if this type of charge was possible).
---------------------------------------------------------------------------
There is no legitimate commercial purpose supporting pre-acquired
account marketing. A seller can always avoid a pre-acquired account
marketing transaction by having the consumer provide his or her account
number. This, of course, is how the referring e-retailer got the
account number from the consumer that it later sold to the membership
club. Put another way, a seller that has the consent of the consumer to
be charged for a transaction can obtain payment by acquiring the
account number it would otherwise charge through the pre-acquired
account method. Therefore, the only benefit in allowing such conduct
derives from the seller avoiding the act of acquiring the account
number from the consumer who owns the account.
The companies employing this practice have given few reasons for
allowing the circumvention of this routine, but critical, part of a
typical consumer transaction. In amending the Telemarketing Sales Rule,
the Federal Trade Commission expressly sought industry input on this
issue and asked in its Notice of Proposed Rule-Making: ``What specific,
quantifiable benefits to sellers or telemarketers result from pre-
acquired account telemarketing?'' \13\ In its comments accompanying the
final rule changes, the FTC characterized the industry's failure to
provide a satisfactory response to this question as follows:
---------------------------------------------------------------------------
\13\ 67 Fed. Reg. at 4538.
[A]lthough business and industry representatives acknowledged
during the Rule Review that the practice of pre-acquired
account telemarketing was quite common, maintaining that it was
``very important'' to them, they provided scant information
that would help to quantify the benefits conferred by this
practice or better explain how these benefits might outweigh
the substantial consumer harm it can cause.\14\
---------------------------------------------------------------------------
\14\ 68 Fed. Reg. at 4617.
The two arguments most commonly asserted in favor of permitting
pre-acquired marketing are that it better protects consumer privacy and
that it lowers the costs of transaction. Both arguments are patently
wrong.
The privacy argument is that pre-acquired account marketing allows
fewer employees to see personal financial information because the
information is electronically transmitted from seller to seller.
Whether or not this is true, one need only reflect for a few moments to
see the irony in this position. In the archetype situation presented by
an e-retailer collaborating with a membership club seller in a post-
transaction free trial offer, the eretailer sells the consumer's
account number, or the ability to charge the consumer's account, to the
membership club without the consumer's consent to this transaction. Any
negligible benefit from the membership club's employees not seeing the
consumer's account number, if this is even the case, must be compared
to the violation of the consumer's privacy right and trust by the e-
retailer selling access to the consumer's account without the
consumer's permission. Furthermore, in situations where the actual
account number is transferred by the e-retailer, the privacy concerns
are multiplied rather than reduced.
The argument about lowering costs is equally wrong and ironic.
There is no meaningful reduction in cost to the membership club in an
Internet pre-acquired account transaction because it is the consumer
that has to enter his account information. The costs of handling this
information cannot be materially less than the costs of coordinating
with the e-retailer to obtain the information needed to charge the
consumer's account at the end of the trial period. In any case, these
costs are truly negligible compared to all the work that the membership
club must incur to implement this complex system. Just the costs of
handling tens of thousands of consumers complaining about unauthorized
charges must exceed many fold any purported savings from not having a
web system that allows consumers to enter account information.
Finally, the discussion about pre-acquired account marketing often
gets confused with the more difficult question of customer account data
retained by sellers. There are legitimate commercial reasons for a
seller to retain and re-use customer account numbers. For instance, the
customer may regularly order merchandise from that seller. Sellers
retaining account information can use that data in ways that are
beneficial to and within the expectations of the consumer, or they can
use the data in ways that mimic the deception problems of reacquired
marketing.\15\ This situation, therefore, presents the more usual
consumer protection regulatory quandary of how to proscribe the abusive
conduct without needlessly burdening legitimate commerce.
---------------------------------------------------------------------------
\15\ Statement of Basis and Purpose, Telemarketing Sales Rule, 68
Fed. Reg. at 4598 (citing to public enforcement actions resulting from
sellers using retained account information in ways that mimic the
abuses of pre-acquired account marketing).
---------------------------------------------------------------------------
The mixed character of seller retained account information does not
mean the pre-acquired account marketing practices at issue in this
hearing ever create public benefit. There is a clear line between the
following two situations: (1) a consumer voluntarily gives retailer A
his account number and retailer A uses that data in a later transaction
with the same consumer (seller-retained data); and (2) a consumer
voluntarily gives retailer A his account number and retailer A sells to
membership club seller B the right to charge the consumer's account
without the consumer providing his or her account number to membership
club seller B. The former situation may (or may not) be with the
reasonable expectations of the consumer, and may (or may not) cause
consumer confusion and misunderstanding. The latter situation, pre-
acquired account marketing, probably is not within the reasonable
expectations of many people, and definitely causes mass and nearly
universal consumer confusion and misunderstanding as to the legitimacy
of account charges for membership clubs.
Conclusion
Pre-acquired account marketing has no legitimate commercial reason
to exist yet drains the wealth of consumers who are unaware their
accounts are being charged. Consumers are exposed to these charges for
unwanted services when e-retailers, other retailers and financial
institutions sell special access to their customers' accounts in return
for a share of the gain. Congress should enact legislation to protect
American consumers from such abuse.
The Chairman. Thank you, Professor Cox. You're very kind to
the Committee and its staff.
I want to go back, Mr. France, to exactly where I was,
because I think it's very important to get this stuff on the
record so that we can achieve what some of you have called for.
We were already at the part where you said then Value Max
started charging you $19.99 a month, you said.
Mr. France. Yes, sir.
The Chairman. Had you ever heard of Value Max Club before
it started charging you $19.99?
Mr. France. Never before, sir.
The Chairman. Did you ever authorize Value Max to charge
your credit card $19.99 a month?
Mr. France. In no way knowledgeable to me, sir.
The Chairman. Did you ever give Value Max your credit card
number or bank account number?
Mr. France. No, sir.
The Chairman. If you had been asked to type in your 16-
digit credit card number to join this Value Max Club, would you
have done it?
Mr. France. No, sir.
The Chairman. Thank you.
Ms. Lindquist, I'd like to ask you--and for your son, thank
you for coming up today from Wisconsin, over, up, whatever.
Your testimony is that you were using a website called
movietickets.com, you thought that you were buying just movie
tickets, but in return, it turns out that you also bought
memberships in two clubs called ``Reservation Rewards'' and
``Shopper Discounts,'' and both of these clubs were charging
you $10 a month; is that correct?
Ms. Lindquist. Yes.
The Chairman. Had you ever heard of the Reservation Rewards
or Shopper Discounts club before these clubs started charging
you $10 a month?
Ms. Lindquist. No.
The Chairman. Did you ever authorize Reservation Rewards or
Shopper Discounts to credit your card $10 a month?
Ms. Lindquist. No, not knowingly.
The Chairman. Did you ever give Reservation Rewards or
Shopper Discounts your credit card number or your bank account
number?
Ms. Lindquist. No.
The Chairman. If you had been asked to type in your 16-
digit credit card number to join the Reservation Rewards or
Shopper Discounts club, would you have done so?
Ms. Lindquist. No.
The Chairman. So, Mr. France and Ms. Lindquist, I'm very
sorry that you got caught in this scam. You clearly did. You're
clearly highly literate, thus taking away this thing that
people can get scammed even though they don't know the Internet
very well. You know it very, very well and you got scammed.
One of our members, Claire McCaskill from Missouri, has to
be at something the Administration asked her to do. But her
mother got scammed, and she is absolutely in a rage about it,
and so she may come tearing in here in a few minutes.
Millions of other Americans have been ripped off in the
same way that you two have been. It's outrageous and we're
going to find a way to stop it.
Mr. France and Ms. Lindquist, one of the most disturbing
things we have learned in our investigation is that hundreds of
websites like Intelius and movietickets.com are selling their
customers' information to these bogus membership clubs. In
fact, we've discovered that every time a customer gets tricked
into joining one of these clubs the online merchant gets what
is known as a ``bounty.'' They literally put a price on the
customer's head.
Mr. France, how does it make you feel to learn that
Intelius got paid a bounty for selling your credit card
information to Value Max club?
Mr. France. Hard to put that into words, sir.
The Chairman. Try.
Mr. France. But the easiest, disgust that they could even
do that and enjoy it and profit off of it and believe that
they're doing right, or that they can even sleep, especially if
they're American companies, because if we claim that America is
the greatest country in the world then it starts with taking
care of our fellow citizens and not taking advantage of them.
So ``disgusted'' would have to be the best way to describe
that.
The Chairman. And you, Ms. Lindquist?
Ms. Lindquist. I would have to agree. It's shocking that
they can basically sell my credit card information to an
unknown company. Everybody I talked to that I told I was coming
here, it has happened to so many people I know, but they just
maybe got charged a month or two and then found out. Maybe
that's the goal of these companies, is just to charge these
people $10 or $20, but multiply that by millions of people.
The Chairman. Like 30 million people at different times.
You're right.
My time is up and I turn to Senator Dorgan.
Senator Dorgan. Ms. Lindquist, my understanding is you say
that you were charged by this company and never received any
product; is that correct?
Ms. Lindquist. Correct.
Senator Dorgan. No mailing from them?
Ms. Lindquist. Hmm-hmm.
Senator Dorgan. No coupons, no product of any kind?
Ms. Lindquist. Nothing.
Senator Dorgan. Does this sound like fraud to you?
Ms. Lindquist. Yes.
Senator Dorgan. So someone is charging you because they say
you purchased something from them, except you got--you received
nothing----
Ms. Lindquist. Right.
Senator Dorgan. --and they're charging your bank account.
It just seems to me--I mean, I don't know the legal niceties.
Maybe one of the professors can suggest this. But it just seems
to me if someone is taking money out of your checking account
and giving you nothing in return, that's something beyond just
shameful. There must be a legal term there.
The other issue that I find really troublesome here is that
reputable sites--I buy movie tickets online from time to time,
and you go to these sites because they're reputable,
presumably. Reputable sites are actually being reimbursed by
the companies that are scamming you, and I assume they're being
reimbursed because they're able to be a rider on that company's
website. That's where they get their customers. You show up at
the website wanting to make a transaction buying a ticket for a
movie or an airline ticket, and that brings you to this page,
and then they pop up with some sort of an ad that suggests you
get something free, and then the reputable website gives that
company your--provides that company your credit card number.
Ms. Lindquist. I know.
Senator Dorgan. Mr. France and Ms. Lindquist, that's just
unbelievable to me. That is so--in addition to being shameful,
so dishonest. I think Professor Cox said it right, that this is
a very important hearing in the sense that my hope from this
hearing is that we will find ways to shut down this activity.
There's no nice way of describing this. This is wholesale
cheating of a lot of people, and I think it just has to stop.
I had not previously, as I indicated earlier, I had not
previously been even aware of the terms that are being used.
But I'm aware there are a lot of charlatans out there looking
for ways to cheat people to the extent that they can get by
with it.
Mr. France, you indicate you have no knowledge of how
someone even got your credit card information; is that correct?
Mr. France. Absolutely not, unless Intelius worked with
this company and gave them my credit card information, put a
so-called ``bounty'' on me.
Senator Dorgan. Mr. Cox, you worked for the Attorney
General's Office of Minnesota?
Mr. Cox. I did. Senator Dorgan, Mr. Chairman, I used to run
the Consumer Protection Division at the Minnesota Attorney
General's Office. Five years, 4-1/2 years ago, I left to go to
the University of Minnesota Law School.
Senator Dorgan. It looks like we've got some consumers here
that need protecting pretty badly, right? Probably millions of
people.
But what do you make of the notion of somebody extracting
money from Ms. Lindquist and Mr. France's accounts, adding it
to their credit card, without providing a product to them,
without them even knowing they'd purchased something? That
seems to me like fraud.
Mr. Cox. Mr. Chairman, Senator Dorgan, I have been
astounded for 10 years that this goes on and on, and tried
every way to call attention to it that I could. The fundamental
problems here are that the disclosures are made, so when you
try to attack the problem you wind up in this legal battle
about the sufficiency of the disclosures.
You have to really shift focus and ask exactly the question
you're asking: Who in God's name agrees that we should allow a
practice where everyone who winds up getting charged is
unaware, essentially everyone--maybe 1 or 2 percent--is
essentially unaware that they're a member and they're being
charged for something they don't know and they don't want.
One other point. It partly works because you would think
that the market might self-correct by the reputational hit to
the eretailers with the legitimate sites or the banks that are
involved, et cetera. But the problem is when the charge comes
through, it comes through, in the name of the membership club
and all the attention is directed to the club. So, you get this
problem where the market doesn't take care of it because the
reputational interests aren't at stake.
Senator Dorgan. Let me ask. The very reputable websites are
playing ball and making money off of this scam. Maybe we ought
to take a look at saying to the reputable websites: You know
what, you allow that sort of thing to bounce up on your web
page, you've got some liability here. You better be finding out
who's using your web page, and you certainly better find out
who you're providing financial information on your consumers
to. You buy an airline ticket, Ms. Lindquist, to come out here
and if that company that you bought the airline ticket from
provides your credit card to somebody else, shame on them.
Ms. Lindquist. Right.
Senator Dorgan. They have some liability in my judgment.
They may not now, but maybe we ought to find out if there ought
not to be some way to do that.
My time is about up, but let me ask an obvious question,
Ms. Lindquist. You started by talking about your personal
situation. Tell me about your daughter? Is she better as a
result of your trip?
Ms. Lindquist. She is doing a lot better because we went to
Atlanta. She can walk with crutches short distances. She's very
lucky, but she's still walking. She still wants to get as far
as she can.
Senator Dorgan. Good for her.
Ms. Lindquist. Thank you.
The Chairman. Thank you, Senator Dorgan.
These are available if anybody wants them. These are the
bad guys that you're talking about, some very big companies
who--they like their $10 every month or their $20 every month,
and the money can go up or down at the discretion of the
scammer. So if you want a copy, we'll be glad to give it to
you.
Senator LeMieux.
Senator LeMieux. Thank you, Mr. Chairman.
Thank you, all the witnesses, for your testimony today. I
wanted to talk about some legal issues, if I could, with
Professor Marotta-Wurgler and Professor Cox. I, too, had the
honor to serve in the Attorney General's Office down in Florida
and go after unfair and deceptive trade practices with our
Economic Crimes Unit. And our folks in that office, now under
Bill McCollum, are going after these different vendors.
But I want to ask you and follow up on what Senator Dorgan
was saying, because it seems to me that an Attorney General
could go after one of these so-called reputable companies who
are enabling these scam artists to steal the information from
unsuspecting consumers. So if an airline, for example, allows
this company to operate on its website without proper
disclosures and to unwittingly take this money from consumers
on this annuity scam that happens month after month after
month, couldn't an Attorney General go under FUDTPA, the Unfair
and Deceptive Trade Practices Act, or some other statute and
hold these folks accountable?
Mr. Cox. Mr. Chairman, Senator LeMieux, yes. These cases
are a little more difficult to prosecute under what's called
UDTPA authority than you would think they are. They're just
extremely costly. As you know, they don't shake a lot of money
on Attorney Generals' offices and you have to make tough
choices between going after all kinds of bad guys.
But yes. And thank you. As an academic, I'll plug my
article. That's one of the suggestions I make in the article,
is to shift the focus away from the nature of the disclosures
to the usage and the fact that nobody knows it and to go after
these other entities. But frankly, I think the hearing you're
doing here is probably more effective at doing that than
anything else. But the answer to your question is yes and it
should happen.
Senator LeMieux. Professor?
Ms. Marotta-Wurgler. My answer is similar to that of
Professor Cox. I believe that going under UDAP might be more
effective. Clearly there are disclosures. The disclosures are
not effective. Some courts might say that in order to have
meaningful assent, particularly in fine print contracts in
consumer transactions, there has to be notice and assent must
be unambiguous.
I'm highly suspicious that, given the way the offers are
presented, assent is obtained in an unambiguous fashion. I
believe some courts would believe that assent was not
meaningful and thus not valid. However, there might be other
courts who might believe that the disclosure is in fact valid.
That's why I think that going under UDAP might be more
effective.
That doesn't mean that attacking the appropriateness of
disclosure part has no bite. It certainly does. It just might
not be that certain.
Senator LeMieux. I agree with you. If I was still in the
AG's office I would love to go after this case, because it's
not just deceptive; it's unfair. It makes no sense, Mr.
Chairman, that you can be in a situation where you're buying
movie tickets and someone signs you up for a product or alleged
product or service that you never receive, and yet you get
charged monthly for it. Just, it's outrageous. It's
unconscionable.
I think that the Chairman is right and that Senator
Dorgan's right, that there should be--and I want to follow up
on Professor Cox's comment. You should be prohibited from
selling this financial information. Businesses who are working
on the Internet should be no different than businesses who are
working in regular commerce. If I went to 7-11 to buy a cup of
coffee and used my credit card and they took my financial
information and sold it to somebody else, who then started
charging me $10 a month, we all recognize that that is
outlandish and outrageous.
It's no difference if you're on the Internet. We are now so
accustomed to these etransactions, and as you said, no one
reads these disclaimers. I don't read them, nobody reads them.
And they know that when they put them out there. It's one thing
to give you information on these disclaimers about what you can
or cannot do when you're using this product or service. It's
another thing to bury deep within that you are buying a
service, which probably is not even a real service or a real
product.
So, I commend and support the comments that were made by my
colleagues earlier that there should be a prohibition in the
law that prevents it, unless all sorts of hoops are jumped
through, all sorts of hoops which would show knowledge and
consent by the customer, that your financial information be
sold to somebody else.
And shame on these companies, these reputable companies who
are allowing this to occur on their websites.
I want to thank again, Mr. France and Ms. Lindquist, for
coming forward and spending your time and being involved here,
because you're shining light on a problem that I assume and
believe is probably affecting thousands of Americans, and but
for your willingness to come forward we might not know about
it. So, I appreciate you and I appreciate the staff that's done
such a great job in bringing these issues forward. And thank
you for all of our experts who've testified here today.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator. Thank you very much.
Senator Udall.
STATEMENT OF HON. TOM UDALL,
U.S. SENATOR FROM NEW MEXICO
Senator Udall. Thank you very much, Chairman Rockefeller. I
want, in particular, to thank you for doing this investigation
and doing this hearing today because I think it raises consumer
awareness in such a way that really brings sunlight to this
process.
As one of our witnesses said earlier, you could go and do a
lot of things, but a hearing like this I think brings it out to
the public. In a way, I'm reminded of my days as State Attorney
General, where we used to say when we worked on the consumer
protection context a good business wants bad business out of
business.
As Senator LeMieux just said, any legitimate business
that's teaming up with these kind of scam operators, I wouldn't
call them a good business any more. The good businesses should
be stepping forward, they should be distancing themselves from
this kind of behavior, and they should be working with
prosecutors, with State district attorneys, with attorneys
general to get this done and to get people prosecuted and to
say we're going to take this very seriously.
I have a case in New Mexico that I believe Professor Meyer
has highlighted. Here you have a Santa Fe woman who was bilked
out of $700 after multiple visits to Vista Print's website to
purchase materials for a real estate business. You describe it
in your written testimony, that the confusing charges appeared
on her credit card long after the original online purchases.
She didn't have a clue what was going on.
It goes to, Professor Cox, I think what you were saying, is
the sufficiency of these disclosures. I want to ask any of the
witnesses here. We ought to be putting people that do this in
jail. These are the same kinds of operators that we put in jail
in New Mexico for doing telemarketing fraud. I would ask the
witnesses that have the expertise here to tell me, should the
Federal Trade Commission update its existing rules for
telemarketing and mail order sales to address these new online
scams, or does the agency lack authority?
I mean, how do we get it so that State prosecutors,
attorneys general, others, can focus on this, focus on this
area and make sure that the bad guys are being brought to
justice?
You can all jump in, but just don't do it at once.
Mr. Cox. I'm a little embarrassed. I've been talking too
much. But I will add one little thing, which is at 18, I was
the youngest member of the Udall for President national
campaign staff.
Senator Udall. Well, thank you for that.
He was also a prosecutor in his old age.
Mr. Cox. And a nice gentleman.
Just real quickly, the problem with the FTC and the problem
with, the civil enforcement problem here, is that this thing
is, to use technical language, rotten at its core. It's not a
matter of separating out the good parties from the bad parties,
which it usually is in a civil enforcement context. This type
of practice just shouldn't be allowed. Inevitably--I've never
seen it ever, in any of its many modalities, ever do anything
but result in millions of charges, overwhelming, 98, 99 percent
of people being charged for things they don't know. So, I think
the problem is regulatory.
Real quickly on the Federal Trade Commission, many of
these, in fact--I'm not sure what the percentages are these
days. It used to be--it's primarily run through banks, and of
course, the Federal Trade Commission has limited jurisdiction
there. So, it's going to be a difficult problem to sort out
exactly where the regulatory authority needs to happen in order
to control fundamentally this problem of selling access to
consumer accounts by retailers and financial institutions.
Senator Udall. Do either of you?
Mr. Meyer. Yes. My view of it is that sort of the web
introduces sort of--basically opens the door to a wide array of
exploiting people's frailties and vulnerabilities in processing
information. I think a lot of existing legislation was designed
for a previous world and in some sense it significantly needs
to be updated.
I agree with Professor Cox that the structure of these
businesses is such that the only way these companies make money
is through open outright deception. The one thing I've noticed
is that they're incredibly good psychologists. You basically
get them to cut back on one area and they find incredibly
ingenious ways of luring people into these programs through
other means. They're constantly doing online experiments.
Essentially, if they find out that people catch on to existing
methods, then they use experiments to find new ones that work.
Senator Udall. Well, the folks ought to know that Chairman
Rockefeller and AGs and district attorneys are going to focus
on them and bring this out into the sunlight and bring these
people to justice.
Thank you, Mr. Chairman, for focusing the Commerce
Committee on this issue. This is a very important issue to
consumers and I think you've done the American people a big
favor in focusing on consumer protection in a new way that I
don't think has been done in the Commerce Committee in a long
time.
Thank you.
The Chairman. Thank you, Senator Udall, very much.
Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much.
Was it you, Professor Cox, that was on the Udall for
President Committee?
Mr. Cox. Yes, I'm ashamed to admit.
Senator Klobuchar. I was distracting Senator Udall because
I was trying to figure out if you then jumped ship on Humphrey
or Mondale during that time. But it appears that you did not.
Mr. Cox. Actually, I will say I ran ``get out the vote'' in
Illinois for Jimmy Carter that year.
Senator Klobuchar. OK, all right.
Mr. Cox. Very poorly, you might add. I actually got notices
of how bad the ``get out the vote'' was in Illinois that year.
Senator Klobuchar. Well, all right. I wanted to welcome
you, Professor Cox, and for the purpose of the record Professor
Cox has been very active in a number of very important consumer
issues and has helped me on some of the work we're doing with
cell phones, which has now emerged again this week with the
early termination fees charged by Verizon, and other things.
So, I want to thank you for that.
I know--were you working with Mike Hatch, the Attorney
General? Did you file suit on similar things like this before?
Mr. Cox. Senator Klobuchar, yes. I filed suit against
Memberworks, which was the predecessor to Vertrue, against U.S.
Bancorp, against--there was about five suits filed, including
Fleet Mortgage Company and several. We tried to do exactly what
you're saying, which is go up the chain and try to hold people
responsible at the financial institution level. We had some
success, but then this whole thing just sort of died away. This
is just--I'm giddy that you're taking a look at this huge
problem.
Senator Klobuchar. So do you think that there are things
that we can do? What would you suggest that we do, the easiest
thing to make the current laws and regulations sufficient to
curb the abuses online?
Mr. Cox. Thank you, Senator Klobuchar. This really again
has an actual easy solution, which rarely is the case when you
confront these problems. Financial institutions and retailers
shouldn't sell account numbers and access to accounts to third-
party sellers, period. There's just no reason, there's no
legitimate commercial reason to allow that.
I think in my testimony, as well as in a longer article, I
explain some of the attempted justifications and why they're
just almost pitiful. There's really not much of an argument
here.
Now, you get into a more tricky legislative problem when
you get the problem of sellers retaining account information
and then later re-using it.
Senator Klobuchar. For their own purposes, you're talking
about?
Mr. Cox. Right. For instance, you might let a website that
you order contact lenses from every quarter retain your
information and then just regularly bill you with that
information. But then that information also can be misused in
ways that mimic this problem. So I think you can attack that
problem, but that's a little trickier legislative drafting
issue. I really do think that there is an obvious and clear
solution to this and it's just to shut down selling access to
consumers' accounts.
Senator Klobuchar. Have there been any attempts by online
retailers to try to stop this, to try to exert pressure on
this? Or do you think it's just because they're giving access,
so why would they do anything?
Mr. Cox. The online retailers are actually the ones that
are profiting from selling this. I will say that if you look at
section 502 of the Gramm-Leach-Bliley Act and Title 5, the
privacy provisions that were enacted, section 502[d] has
something that pretty much on its face says you can't do--
financial institutions anyway, which is a big part of this
problem, can't do that, they can't make those sales.
But the OCC, along with other Federal banking regulators,
were authorized to enact regulations and they instituted
regulations that essentially completely circumvented what I
thought was the intent of that legislation and allowed access
to consumers' accounts as long as the actual sharing of the
information was just encrypted. But then the membership club
says, yes, they consented, and then they just decrypt the
numbers. So it didn't effectively do anything, even though on
its face it seems to really solve the problem.
Senator Klobuchar. So what do you think--evidence also
shows of these people--maybe you know this. The people that get
sucked into one of these, do most of them eventually cancel
them?
Mr. Cox. You can sort out into certain subgroups exactly--
great question, Senator Klobuchar. You can sort out into
subgroups who the people are. Some people will cancel during
the 30-day trial period. But what's interesting, in a very
large database sample, which is consistent with some of the
information your staff report pulls forth, shows that, in fact,
most people who wind up getting this, catch it after it's
initially billed, not during the 30-day period, which is
totally counterindicated if you thought that it really worked
the way they said it did.
So most people catch it in like the 60- and 90-day
timeframe. A lot of people--some people, some people, don't
catch it, particularly when it's billed annually. They will
sometimes be billed 3, 4, 5 years. So when I would talk to
consumers who had this problem, if it looked like an annual
bill I would say, go back and look at your bill, your credit
card or bank statement or mortgage account for the year before
and the year before and the year before and find out how long
this has happened to you.
These companies in part live on these consumers who pay
full revenue and then are automatically renewed.
Senator Klobuchar. Right. I've gotten into some of these
situations, those kind of customers. Then I go back and look at
the Visa bill and try to fix it.
But still then, eventually do most people cancel it?
Mr. Cox. Of course, because nobody--essentially nobody
really wants it.
Senator Klobuchar. Right, they don't want it.
Mr. Cox. When you boil it all down, at the end of the day I
don't think--it's not a partisan issue. I just can't imagine
why anyone--and I'm so glad to see that it's not that way--
anyone would say we want people to sell products where the
people being charged have no idea they're being charged for it
and don't want it. It's just absurd.
Senator Klobuchar. Professor Meyer, and then I'm out of
time here. Well, if you want to add.
Mr. Meyer. I just wanted to add that they also, in terms of
those multi-charges, that for people that don't cancel,
essentially every year they increase the charge by a couple
dollars. So essentially, they keep increasing the charge until
finally you do catch it. And like Professor Cox said, it could
be 3, 5 years before some people find out.
The Chairman. So there's an art form to seeing how far you
can raise it without getting people too suspicious.
Senator Nelson.
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you, Mr. Chairman.
Mr. France, I'm sorry you had to go through what you went
through just to get back your money, not even to speak of all
of the trauma and time and so forth that you had to go through.
Mr. France. Thank you, Senator.
Senator Nelson. But you are an example of what's happening
with this explosion of technology. We have people that are now,
instead of using a crowbar to steal, now use technological
improvements, and they're doing the same thing. And they're
doing it with a lot of deception, as the Chairman's hearing has
pointed out.
This Committee has been handling a lot of other things
called ``phishing'' with a p-h and ``pharming'' with a p-h, and
spoofing, which is another one. We just had it in Florida, a
spoofing case. That's when you look on your cell phone and you
see the number that's calling you. Well, if you alter that
number to make it appear like you're looking--what happened to
this lady, a single woman, and suddenly she's getting a call
from her own residence. Of course, somebody was doing this just
to play a prank on her. Well, the lady's absolutely petrified.
She thinks somebody's in her house.
Or one of the worst ones is that they call 911 masquerading
at a certain number, home, that there's a burglary going on.
911 dispatches the SWAT team, and you can imagine what mayhem
might happen on an unsuspecting household with the police
suddenly breaking in.
This is what technology has gotten us to and this is what
we've got to change. So thank you for sharing your story with
us, Mr. France.
Mr. France. You're welcome. Thank you for having me.
Senator Nelson. We're going to try to do something about
it, and thanks to you, Mr. Chairman.
The Chairman. Thank you, Senator Nelson, very much.
I would point out again that this is not just a few people
we're talking about. At any given point, I think the fact is
that there are about 4 million people who are being scammed.
And over--we have comments here from people in 2003, 2002. Over
the years, we're talking about tens and tens of millions of
people. So the amount may be small, but the amount is not small
to those who are struggling to get by. You made, Ms. Lindquist,
that point very, very well, as did you, Mr. France. Ten
dollars, $19.95, can put you in bankruptcy, can have people all
over you, can add to whatever other traumas are already taking
place in your life.
A question for our experts. There are thousands and
thousands of businesses out there on the Internet trying to
sell us their goods and services. They have to convince us that
their product is good if they want us to purchase from them and
stay with them and to be seen, from our point of view, as a
trustworthy company.
Then only after they've convinced us that their product is
trustworthy, they are trustworthy, and their product is worth
it, do we then pull out our credit cards and enter the 16
digits to complete the purchase. In fact, according to Visa's,
new to me, rules for merchants, to complete a valid online
purchase customers must type in their billing information,
their 16-digit full credit card number, and their digit
security code, called CVV-2.
So here's my question to any of the three of you. If
anybody else can charge credit cards only after consumers have
entered their full credit card information, how is it possible
that those companies--Affinion, Vertrue, Webloyalty, et
cetera--can charge millions of shoppers who have never given
them their credit card numbers?
Ms. Marotta-Wurgler. They can't and they shouldn't. Their
argument is that the selected vendors disclose or demand
authorization of this by the consumers by seeking authorization
of automatic transfers of payment information in their privacy
policies. If you go to the privacy policy--which nobody reads,
by the way--of Fandango or other businesses, they actually say
we're protecting all sorts of information, but you're also
authorizing us to transfer your payment or personally
identifiable information to some selected partners.
So the authorization stems from this type of contract,
which is, I should mention, unenforceable because the assent is
not unambiguous enough. It would thus seem to me that there is
no reasonable way in which this would be an enforceable--I'm
sorry--a legal way of transferring payment information, without
the consumer ever entering the numbers his or herself. Of
course, it has been, but theoretically I don't think it should
be.
Mr. Meyer. I think the other related part of that is the
question of how consumers suddenly find themselves having
agreed to the transfer of this information. I think the answer
is that in many circumstances consumers are making these
decisions very quickly using automated processes that they're
not really aware of, such that in many cases they think they're
still in the original site. They think in many cases what
they're being part of is the original purchase process of the
original site.
I should say that, for Mr. France, I actually was taken in
by the Intelius site as well. What happened there was is you go
to the site and you think you're getting some information and
there's a little part where you have to pay a dollar on a
credit card--to get the information. You then click a red
button that says ``Give me my information'' and when you click
it, you are not given the information, but suddenly you're at a
new page, and you're wondering, ``where's my information''?
Then you're looking around for a button to click to get the
information and there's a red button at the bottom that says
``Show my report.'' And you click on the report, and as soon as
you've done that, you've become a member of this program.
You would have no awareness whatsoever as to what you had
agreed to do.
The Chairman. You said, Professor Cox, in your testimony
that this membership club industry, quote, ``would cease to
exist almost overnight'' if it had to sell its products like
every other retailer. Can you explain that?
Mr. Cox. Thank you, Mr. Chairman. If nobody is aware that
they're actually, quote, ``buying'' their product, that rather
suggests that you're going to have a problem actually selling
your product, if you have to convince people to pay you the
money that you're demanding for the service.
After 10 years of observing this, I have no question that
if they had to sell this in a legitimate way that these
companies would not exist.
The Chairman. My time is out. Before I go to Senator
LeMieux, one of the things I regret about this hearing actually
is the lack of focus on the evilness and lethality of fine
print, of small print; that if you can put something in in
small print and you know--I mean, it's like you take a
prescription out of a brown paper bag and you take the little
bottle out and then there's this paper which you immediately
throw in because you can't read it, or you would have to set
aside an evening to read it. I mean, it's so phoney, and yet
it's a flat-out practice that we allow to continue.
Senator LeMieux.
Senator LeMieux. Again, Mr. Chairman, thank you for holding
this hearing.
I just have one final question for our experts. That is, is
there anything that we did not talk about today that you would
offer as suggestions to how to best combat this fraud? We can
start with Professor Meyer and go down, and then maybe we'll
finish up with our citizen consumers and see if there's
anything else they think of which would be a good way to
prevent this fraud from happening to other unsuspecting
Americans.
Mr. Meyer. Sure. Well, some of this had been mentioned
before, but one that, I think, is really important is that if
you have a handoff from one site to the next, the consumer
really needs to know that they are no longer dealing with the
original merchant that they have. As an example, I have this
figure over here on the right. This was a case where a customer
was at a Vista Print site buying online labels, and this is
sort of the site they're immediately taken to, and throughout
the site there is all these references to the fact that it's
Vista Print and it's Vista Print thanking you and Vista Print
everywhere.
And only if you look at the tiny fine print at the very
bottom, do you find out that this is actually a site maintained
by a firm that has nothing to do with Vista Print, and that
they have no connection with any other merchants that are named
on the site.
One of the reasons why this happens is that customers are
lured into not thinking very carefully and making decisions
very quickly. Whatever could be done to sharpen customers'
antennas to alert them that they are no longer in a safe zone--
that they are at a new site where they have to be wary and
attend to the fine print, then that would be one small step.
Senator LeMieux. They're trading off the credible brand.
Mr. Meyer. Yes, absolutely. And there's no reason when you
look at this to think that there'd be any reason for--that you
couldn't totally trust whatever offers they're providing.
Ms. Marotta-Wurgler. I guess what I'd like to highlight is
the importance of preserving online norms. The reason why
people don't have to delve into the fine print is because they
know that with certain steps there are expected consequences,
particularly for financial liability. If you enter your credit
card information, you expect to be liable for something. If you
enter e-mail information, you expect to get an e-mail. So
that's extremely important. Otherwise, these trusted online
markets will be seriously damaged and people might be reluctant
to enter online transactions.
The second point I'd like to make is that disclosures in
the form of fine print are terribly ineffective at alerting
consumers. Much of our current law focuses on the idea of
disclosure, that as long as you disclose things in fine print,
it's fine because consumers know what they're getting into and
so they're actually assenting to the transaction that's being
described in the fine print.
Research after research, studies after studies, have shown
that this is not the case. This is not the way consumers
behave. So, I'd like to highlight the importance that
disclosure is really not that effective into duping consumers
into these types of transactions.
Mr. Cox. Senator LeMieux, I'd just like to thank you
because I always try to teach my students the value of the
``Anything else'' question. But I think I've been heard today.
Senator LeMieux. Mr. France, anything else that you think
that we need to be aware of that might be helpful in preventing
this fraud from happening in the future?
Mr. France. I think one of the biggest steps that could be
done is, like had been mentioned earlier, is to actually hold
these reputable, or at one time reputable, companies
responsible for allowing these other sites to come in and do
that. Essentially, they're one and the same. They may not be
taking as much money, but by allowing these other companies to
come in they're just as guilty. If we can discourage them from
allowing these companies in, then I think that we'll see a lot
less of this problem in the future.
Senator LeMieux. Thank you.
Ms. Lindquist?
Ms. Lindquist. I agree with Mr. France that the companies,
the reputable websites, they need to be held more responsible
for who they're affiliated with.
Senator LeMieux. Thank you again, Mr. Chairman. I think
we've gotten some good direction from our witnesses today.
Thank you again for holding this hearing.
The Chairman. I agree with you, Senator LeMieux, and thank
you.
Before--we're going to have a vote on a very good judge who
turned out to be controversial, but isn't, in about 10 minutes,
so we need to close. I wanted to ask one question and put
something in the record. I ask and give unanimous consent to
place several items in the record of today's hearing. One is a
copy of the Commerce Committee staff report called ``Aggressive
Sales Tactics on the Internet,'' which was circulated to
members yesterday afternoon.
The prepared statement of Robert McKenna, the Attorney
General of Washington.
The prepared statement of Professor Benjamin Edelman of the
Harvard Business School.
A letter and other material sent to the Committee by
Richard Fernandes, the CEO of Webloyalty.
[The information referred to follows:]
Committee on Commerce, Science, and Transportation--Office of Oversight
and Investigations--Majority Staff
Staff Report for Chairman Rockefeller--November 16, 2009
Aggressive Sales Tactics on the Internet and Their Impact on American
Consumers
Executive Summary
In May 2009, Chairman Rockefeller launched an investigation into a
set of controversial e-commerce business practices that have generated
high volumes of consumer complaints. Since that time, Commerce
Committee staff has been investigating three Connecticut-based direct
marketing companies--Affinion, Vertrue, and Webloyalty--as well as the
hundreds of online websites and retailers that partner with these three
companies to sell club memberships to online shoppers. Although this
investigation is not yet complete, it is clear at this point that these
three companies use highly aggressive sales tactics to charge millions
of American consumers for services the consumers do not want and do not
understand they have purchased.
Controversial Sales Practices Migrate to the Internet
Over the past fifteen years, the Internet has grown into an
important commercial channel for American consumers and businesses.
More than half of all American adults have either made an online
purchase or an online travel reservation, and in the first half of
2009, e-commerce revenue accounted for more than $60 billion of U.S.
retail sales.
The rapid growth of e-commerce has promoted business innovation,
but it has also attracted direct marketing businesses that use
aggressive sales tactics against online shoppers. These tactics involve
selling unfamiliar membership programs to consumers who are in the
process of purchasing familiar products offered by trusted websites.
Many of these controversial practices are new to e-commerce, but are
well-known in other commercial channels, especially in direct mail and
telemarketing, and have been the subject of numerous legal actions. The
three direct marketing companies that are the subject of this
investigation--Affinion, Vertrue, and Webloyalty--are all operated by
management teams that have years of experience in employing these
aggressive sales tactics against consumers.
The three companies gain access to online consumers by entering
into financial agreements with reputable online websites and retailers.
In exchange for ``bounties'' and other payments, reputable on-line
retailers agree to let Affinion, Vertrue, and Webloyalty sell club
memberships to consumers as they are in the process of buying movie
tickets, plane tickets, or other online goods and services. The sales
tactics used by these three companies exploit consumers' expectations
about the online ``checkout'' process.
With the cooperation of their online ``partners,'' the three
companies insert their sales offers into the ``post-transaction'' phase
of an online purchase, after consumers have made a purchase but before
they have completed the sale confirmation process. These offers
generally promise cash back rewards and appear to be related to the
transaction the consumer is in the process of completing. Misleading
``Yes'' and ``Continue'' buttons cause consumers to reasonably think
they are completing the original transaction, rather than entering into
a new, ongoing financial relationship with a membership club operated
by Affinion, Vertrue, or Webloyalty.
Even more misleading and confusing is the ``data pass'' process
Affinion, Vertrue, Webloyalty, and their partners use to automatically
transfer consumers' credit or debit card information from the familiar
web seller to the third-party membership club. Passing consumers'
billing information directly to Affinion, Vertrue, or Webloyalty,
without requiring consumers to re-enter it, deprives consumers of
notice that they are entering a new, ongoing financial relationship
with an unfamiliar company. After a 30-day ``free trial'' period,
Affinion, Vertrue, or Webloyalty begin charging the consumer a monthly
fee of $10-$20 until the consumer cancels the membership.
The Senate Commerce Committee Investigation
The Committee opened this investigation because thousands of online
consumers have complained to state attorneys general, the Better
Business Bureau, and other consumer advocates that the enrollment
process described above is misleading and deceptive. These consumers
complain that they did not consent to sharing their billing information
with a third party membership club. They also say they only learned
they had been enrolled in one of these membership clubs after seeing a
``mystery charge'' on their monthly credit card or checking account
statement months after the purchase.
These complaints suggest that the aggressive sales tactics of
Affinion, Vertrue, Webloyalty, and their partners are harming large
numbers of American consumers. They also suggest that these companies'
tactics may be negatively affecting consumers' overall attitude toward
online commerce.
Since opening this investigation, Committee staff has collected and
reviewed thousands of pages of documents produced by Affinion, Vertrue,
and Webloyalty; interviewed dozens of Internet consumers who have
complained about unknowingly and inadvertently enrolling in the
programs offered by the three companies; interviewed employees of e-
retailers currently and formerly in partnerships with the three
companies; and met with numerous e-commerce experts.
Although it is not yet complete, the key findings of the Committee
staff's investigation thus far are the following:
Using aggressive sales tactics to enroll consumers in
unwanted membership clubs is a billion-dollar business.
Affinion, Vertrue, Webloyalty and their e-commerce partners
have earned over $1.4 billion in revenue by using aggressive
tactics to charge Internet shoppers for club membership
programs. Since 1999, Internet consumers have been enrolled
more than 35 million times in Affinion, Vertrue, and
Webloyalty's membership clubs. In June 2009, there were 4
million Internet consumers currently enrolled in these three
companies' membership programs.
Hundreds of well-known websites and online retailers have
earned hundreds of millions of dollars employing aggressive
online sales tactics. More than 450 e-commerce websites and
retailers have partnered with Affinion, Vertrue, and Webloyalty
to employ aggressive sales tactics against their online
customers. Of the $1.4 billion in total revenue earned through
using these tactics, $792 million of this total was earned by
Affinion, Vertrue, and Webloyalty's e-commerce partners.
Eighty-eight e-commerce companies have earned more than $1
million through using these tactics, including 19 that have
made more than $10 million. Classmates.com has made more than
$70 million using these controversial practices.
Affinion, Vertrue, and Webloyalty have knowingly charged
millions of consumers for services the consumers do not use and
are unaware they have purchased. Internal documents reviewed by
Committee staff show that Affinion, Vertrue, and Webloyalty
know that most of the ``members'' they acquire through their
aggressive online sales tactics do not understand they have
been enrolled in a program that charges their credit or debit
card on a recurring basis. Most consumers enrolled in the clubs
cancel their memberships when they discover the monthly charge
and never receive any benefit from their club membership. One
Webloyalty employee candidly commented in an e-mail that, ``at
least 90 percent of our members don't know anything about the
membership.''
Affinion, Vertrue, and Webloyalty's customer service centers
are almost entirely dedicated to handling the large volume of
calls from angry and confused consumers requesting
cancellations. Affinion, Vertrue, and Webloyalty receive
millions of calls every year from angry, frustrated consumers
canceling their membership or asking questions about the charge
on their credit or debit card. One Webloyalty employee
acknowledged in an e-mail that most of its calls were ``from
members who are questioning charges or want to cancel their
membership,'' while a Vertrue employee had estimated that
``cancellation calls represent approximately 98 percent of call
volume.'' The companies' internal manuals train their call
center representatives to answer questions such as, ``what is
this charge?'' or ``who are you?''
E-Commerce companies know that their customers are being
harmed by the aggressive sales tactics of Affinion, Vertrue,
and Webloyalty. The e-commerce companies partnered with
Affinion, Vertrue, and Webloyalty understand that more
aggressive sales tactics lead to higher revenue. In the words
of one company official, ``to generate more revenue through
Webloyalty, it seems we must be more aggressive (and deceptive)
in our marketing techniques.'' Thousands of customers have
contacted the companies using words like ``fraud,''
``tricked,'' ``deceptive,'' ``misleading,''
``scam,''``deceitful,'' ``dishonest,'' ``betrayed,'' and
``robbed'' to describe their experiences. This ``customer
noise'' has led a number of e-commerce partners to request a
more ``conservative'' approach or to end their relationships
with Affinion, Vertrue, or Webloyalty.
I. Background on Aggressive Online Sales Tactics
In the past fifteen years, the Internet has rapidly grown from an
entertaining diversion to an integral part of the daily life of
hundreds of millions of Americans. By 2008, more than seventy percent
of Americans were using the Internet on a regular basis for a variety
of purposes, including online banking and shopping, and over half of
all American adults had either made an online purchase or an online
travel reservation.\1\ For the first two quarters of 2009, e-commerce
revenue accounted for more than $60 billion of U.S. retail sales.\2\
---------------------------------------------------------------------------
\1\ Pew Internet & American Life Project, Online Shopping: Internet
Users Like the Convenience but Worry about the Security of Their
Financial Information (Feb. 2008). In a 2009 survey, 59 percent of
adult Americans said they had purchased products online and 52 percent
had used the Internet to book travel reservations. Pew Internet &
American Life Project, The Internet and the Recession (July 2009).
\2\ U.S. Census Bureau, Estimated Quarterly U.S. Retail Sales
(Adjusted): Total and E-Commerce (Aug. 17, 2009) (available at http://
www.census.gov/retail/mrts/www/data/pdf/09Q2.pdf).
---------------------------------------------------------------------------
While these figures show that American consumers are increasingly
taking advantage of the convenience and efficiency of Internet
shopping, they continue to express concerns about the security of their
personal information when they are shopping online. Large percentages
of online consumers also report that they sometimes feel frustrated,
overwhelmed, or confused by online shopping.\3\
---------------------------------------------------------------------------
\3\ Pew Internet & American Life Project, Online Shopping: Internet
Users Like the Convenience but Worry about the Security of Their
Financial Information (Feb. 2008).
---------------------------------------------------------------------------
One of the factors contributing to consumers' lingering unease
about online shopping is the aggressive sales tactics that many
companies are using against their customers. The tactics the Committee
has focused on involve offering consumers unfamiliar services from
unfamiliar third party companies as consumers are in the process of
purchasing familiar products offered by trusted websites. The
unfamiliar services offered are typically discount club memberships
which charge a monthly fee between $9 and $20. A prominent feature of
the post-transaction offers is up-front gifts, such as ``$10 Cash Back
on Your Next Purchase!'' which is presented to consumers as if it is
related to the websites where they have just made purchases.
While these club membership offers are presented to online
consumers in different ways, they all share the following elements:
Post-Transaction Marketing: The third party offer comes as
online consumers are completing their purchases on familiar
retailers' websites. After consumers have completed inputting
their billing information into a ``check out'' purchase page on
familiar e-retailers' sites, but before they have completed
confirmation of the transaction, unfamiliar third party
companies will attempt to enroll consumers in membership clubs
offering discounts or other services. Due to the positioning of
these offers in the purchase process, they are commonly
referred to as ``post-transaction'' offers.
Data Pass: Consumers do not have to enter their billing
information again to be enrolled in the clubs offered by the
third party. Internet consumers can usually accept the third
party post-transaction membership club offer without having to
type in their credit or debit card numbers again. As a result
of so-called ``data pass'' or ``card-on-file'' arrangements
between retailers and the third party companies, online
consumers' credit card or debit card account numbers can be
automatically transferred from the websites where the consumers
are shopping to the third party companies.
Free-to-Pay Conversions: Consumers enrolled in the clubs are
automatically charged a monthly fee after a free trial period.
The membership programs offered by the third parties are
generally free for the first 30 days. This practice is also
known as ``free-to-pay conversion.'' Online consumers will be
charged on a monthly basis after the 30-day period unless they
actively opt out of the program, commonly referred to as a
``negative option.''
The combination of these aggressive online sales practices has
caused thousands of consumers to complain to state attorneys general,
the Better Business Bureau, and other consumer advocates that
unfamiliar companies have charged them monthly fees for services they
did not want and were unaware they had purchased.
A. Post-Transaction Marketing
Online consumers shopping at websites that do not use the
controversial tactics described above typically progress through
several standard pages as they make a purchase. Once consumers select
their merchandise and click the ``Buy'' or ``Add to Shopping Cart''
button, they typically have four remaining steps: (1) proceeding to
checkout by clicking another link usually labeled ``Proceed to
Checkout''; (2) entering their shipping, billing, and credit card
information in data fields on the checkout page; (3) clicking a button
labeled, ``Accept'' or ``Confirm'' to finish the transaction; and (4)
obtaining a receipt or order number confirming the purchase on the
confirmation page.\4\
---------------------------------------------------------------------------
\4\ David Pogue and J.D. Biersdorfer, The Internet: The Missing
Manual (2006).
---------------------------------------------------------------------------
In a manual for Internet users, the confirmation process was
summarized for novice users in the following manner:
Once you submit your credit card billing and shipping
information, the site processes the transaction just like the
clerk at Macy's who swipes your MasterCard at the register. In
a few seconds, you should see a receipt, complete with order
number and purchase summary. You can print this out for your
records.\5\
---------------------------------------------------------------------------
\5\ Id.
E-commerce companies engaged in aggressive third party post-
transaction marketing add additional steps to this process, making it
much less like ``the clerk at Macy's'' referenced in the manual. They
make it less akin to a ``brick and mortar'' purchase by using:
``interstitial'' sales offer pages, which appear between the checkout
page and the confirmation page; ``pop up'' windows which appear on top
of the confirmation page; and hyperlinks or ``banners'' that are
included directly on the confirmation page itself.
On the ``interstitial'' page, third party e-commerce companies
offer ``$10 Cash Back on This Purchase'' or ``$10 Cash Back on Your
Next Purchase'' combined with an offer to purchase a club membership.
The offer to purchase a discount club membership is secondary in
placement to the ``$10 Cash Back on this Purchase'' and is typically
located in the page's fine print. This ``interstitial'' page presents
consumers with an offer they must accept or reject before they can
reach the page that provides confirmation and the order number for the
original purchase. (See Exhibits 1 and 2).
For customers to reach the confirmation page, they must either
accept the offer to join a membership club offered by the third party
sellers (by clicking a large, colorful ``Yes'' button) or click a much
less conspicuous ``No Thank You'' hyperlink. In general, the name of
the familiar website with which the consumer has just completed a
transaction is displayed on this page, making it more difficult for the
consumer to discern that this ``interstitial'' page is actually owned
and operated by the third party company, not the website on which the
consumer has been shopping.
E-commerce companies also use ``pop up'' windows that appear on top
of, but do not totally conceal, the consumer's confirmation page. These
pages look very similar to the enrollment offers presented via
``interstitial'' pages, but they do not require the customer to accept
or reject the offer in order to proceed to the confirmation page.
A less intrusive post-transaction marketing technique also used by
e-commerce companies is placing a hyperlink to an enrollment offer
(``banner'') on the confirmation page, which can be accessed via
clicking a button labeled, ``Continue.'' A ``Continue'' button is used
despite the fact that the customer has completed the transaction at
this point. An example of a ``Continue'' button displayed on a
confirmation page is provided here.
B. Data Pass and ``Preacquired Account'' Marketing
A central element of the aggressive online tactics the Committee
staff has been investigating is that a consumer can be signed up for a
third party membership program without entering his or her credit card
information. Instead of requiring the consumer to enter this billing
information a second time to confirm acceptance of the new offer, the
retailer will pass the consumer's credit card and billing information
to the third party once the consumer has provided information the third
party company regards as ``proof of enrollment,'' such as an e-mail
address.\6\
---------------------------------------------------------------------------
\6\ In August 2009, Webloyalty's attorney informed the Committee
that ``in response to its own analysis and testing over time, as well
as in connection with resolution of class action litigation and
concerns raised by the Committee's inquiry and state regulators, [that]
. . . as of August 1, 2009 . . . current Webloyalty enrollment pages
require that consumers re-enter the last four digits of their credit
card or debit card before they are enrolled.'' Letter from Jane
Sherburne to Senator John D. Rockefeller IV (Aug. 31, 2009). On
November 13, 2009, Affinion announced that, in ``responding to concerns
raised by the Senate Commerce Committee'', it would now be ``[r]equring
that the consumer gives--at a minimum--the last four digits of their
account or credit card number for every online transaction involving
pre-acquired account information and a free to pay conversion.''
Affinion Group, Affinion Unveils Enhanced Online Marketing Standards
(Nov. 13, 2009). On November 16, 2009, Vertrue also announced it ``will
obtain from the consumer the last four digits (at a minimum) of their
payment account as further acknowledgement of the offer'' to address
``concerns specifically identified by the U.S. Senate Committee on
Commerce, Science and Transportation with regard to certain post-
transaction marketing practices on the Internet.'' Adaptive Marketing
LLC, Adaptive Marketing LLC Calls for Industry-Wide Internet Marketing
Standards (Nov. 16, 2009).
---------------------------------------------------------------------------
This ``data pass'' or ``card on file'' process--where a third-party
company obtains a consumer's billing information not directly from the
consumer, but from a website where the consumer has just made a
purchase--is a well-known and controversial practice in the direct mail
and telemarketing industries. In these retail channels, it is generally
known as ``preacquired account'' marketing.
In the telemarketing setting, ``preacquired account information''
has been defined by the Federal Trade Commission (FTC) as ``any
information that enables a seller or telemarketer to cause a charge to
be placed against a customer's or donor's account without obtaining the
account number directly from the customer or donor during the
telemarketing transaction pursuant to which the account will be
charged.'' \7\
---------------------------------------------------------------------------
\7\ Federal Trade Commission, Telemarketing Sales Rule, 68 Fed.
Reg. 4580, 4595 (Jan. 29, 2003) (final amended rule).
---------------------------------------------------------------------------
Preacquired account marketing conducted over the telephone, like
``data pass'' on the Internet, has caused consumers to complain that
they unknowingly and inadvertently enrolled in membership programs. Due
to the problems inherent in preacquired account telemarketing, the FTC
chose to regulate the practice in 2003 after concluding that:
The record makes clear, in fact, that it is the very act of
pulling out a wallet and providing an account number that
consumers generally equate with consenting to make a purchase,
and that this is the most reliable means of ensuring that a
consumer has indeed consented to a transaction . . . [T]he
Commission still believes that whenever preacquired account
information enables a seller or telemarketer to cause charges
to be billed to a consumer's account without the necessity of
persuading the consumer to demonstrate his or her consent by
divulging his or her account number, the customary dynamic of
offer and acceptance is inverted.\8\
---------------------------------------------------------------------------
\8\ Id. at 4619.
---------------------------------------------------------------------------
In recommending regulations for preacquired account telemarketing
to the FTC in 2000, the National Association of Attorneys General told
the FTC that the use of preacquired account information presents
``inherent opportunities for abuse and deception.'' \9\ Requiring a
consumer to re-enter his or her account information ``is a readily
recognizable means for a consumer to signal assent to a deal'' and
gives a consumer final control over purchase decisions. The Attorneys
General noted:
---------------------------------------------------------------------------
\9\ Letter and Comments from the National Associations of Attorney
Generals (NAAG) to Donald Clark, Secretary Federal Trade Commission,
FTC File No. P994414 (May 30, 2000).
The telemarketer with a pre-acquired account turns this process
on its head. The pre-acquired account telemarketer not only
establishes the method by which the consumer will provide
consent, but also decides whether the consumer actually
consented.\10\
---------------------------------------------------------------------------
\10\ Id.
The online data pass process that is the subject of the Committee's
investigation presents exactly the same informational problems that
concerned state and Federal officials examining the telemarketing
industry. As Harvard Business School Professor Benjamin Edelman
---------------------------------------------------------------------------
recently told the Committee:
Consumers rely on the process of providing a credit card number
as a barrier to unexpected charges. Users rightly expect that
by clicking from site to site, button to button, they do not
incur financial obligations. This expectation is part of what
makes the web fun, flexible, and low-risk: Users believe they
cannot incur financial obligations except by typing their
credit card numbers, and users expect to be able to cancel an
unwanted transaction if a site requests a credit card number
that a user does not care to provide.\11\
---------------------------------------------------------------------------
\11\ Prepared Statement of Professor Benjamin Edelman to the U.S.
Senate Committee on Commerce, Science, and Transportation (Nov. 2009).
---------------------------------------------------------------------------
C. ``Free-to-Pay Conversions''
The e-commerce marketing practices being examined by the Committee
also employ a marketing technique known as ``free-to-pay'' conversion,
which enrolls consumers in a membership program for free for a period
of time (usually 30 days) before their credit card or checking account
is charged. In the course of proposing amendments to the Telemarketing
Sales Rule, the FTC explained that consumers are often ``confused about
their obligations when a product or services is offered to them for a
trial period at no cost.'' \12\
---------------------------------------------------------------------------
\12\ Federal Trade Commission, Telemarketing Sales Rule, 67 Fed.
Reg. 4494, 4501 (Jan. 30, 2002) (proposed amended rule).
---------------------------------------------------------------------------
Citing testimony submitted by state attorneys general, the FTC
explained that free trial offers are presented to consumers as ``low
involvement marketing decisions.'' Because consumers often do not
understand that the marketers already have their billing information,
consumers ``mistakenly believe they must take some action before they
will be charged.'' At the end of the free trial period, the marketer
starts billing the consumer, ``even when consumers have taken no
additional steps to assent to a purchase or authorize the charge, and
have never provided any billing information themselves.'' \13\
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
Based upon this evidence, the FTC concluded that, ``in any
transaction involving both preacquired account information and a ``free
to pay conversion,' the evidence of abuse is so clear and abundant that
comprehensive requirements for obtaining express informed consent in
such transactions are warranted.'' \14\
---------------------------------------------------------------------------
\14\ Federal Trade Commission, Telemarketing Sales Rule, 68 Fed.
Reg. 4580, 4621 (Jan. 29, 2003) (final amended rule).
---------------------------------------------------------------------------
D. Consumers' Experience of Aggressive Online Sales Tactics
Over the past few months, Committee staff has reviewed thousands of
complaints written by consumers who claim they were unknowingly
enrolled in membership clubs while they were shopping online. Committee
staff has spoken with many of these consumers about their experiences.
These consumers regularly cite the placement of the third party offers,
the data pass process, and delayed charges as the sources of their
confusion and dissatisfaction.
Committee staff believes that these consumer experiences are
typical. Most consumers, even very web savvy consumers, do not clearly
understand the third party companies' membership club offers and do not
understand that they can be enrolled without entering their credit card
numbers. The cases discussed below provide several representative
examples of how consumers experience this process.
Kari Glennon--In May 2009, Kari Glennon, a resident of Bellingham,
Washington, realized that she had been signed up for a membership club
called ``Shopping Essentials'' while buying a gift certificate on the
Restaurants.com website in October 2008. She wrote Vertrue, the
operator of the ``Shopping Essentials'' club, to ask for a refund and
to let them know that ``I am being charged a monthly fee of $14.95 for
a membership that I was unaware of.'' In her letter, she describes how
she called Vertrue and discovered she was a Shopping Essentials club
member.
When I called into your organization on 5/26/09 to inquire
about the charges to my credit card, I spoke with Sherry . . .
and her supervisor Jamie . . . I was told by Jamie during my
conversation that there was a banner on that site and that if I
clicked it and entered my e-mail address, I was automatically a
member. Becoming an on-line member to an organization seems
obvious when entering an e-mail address, but paying for it is
another matter. I did not give my credit information for the
purpose of signing up for a membership. I gave my credit card
information to Restaurants.com for a purchase of a gift
certificate only. If my credit card information was used for
more than that purpose, it was done so without my knowledge or
authorization.\15\
---------------------------------------------------------------------------
\15\ Letter from Kari Glennon to Shopping Essentials (May 26, 2009)
(Vertrue Doc. 18957).
---------------------------------------------------------------------------
Ms. Glennon concluded her letter with the following comment:
As someone who has been in the professional marketing field for
over 16 years, I find it unfortunate that situations like this
still arise. Whenever you have a product to market, intangible
or otherwise, it should be made clear to the consumer what the
process is and what they are purchasing. Anything else creates
confusion and situations like the one I am writing in
about.\16\
---------------------------------------------------------------------------
\16\ Id.
Chris Steffen--In April 2007, a frustrated consumer from Los
Angeles, California, named Chris Steffen wrote the following complaint
---------------------------------------------------------------------------
to Movietickets.com.
I'm not sure how or when this happened and I'm sure part of it
is oversight or my own fault. But somehow through the
purchasing of movie tickets through your site I was signed up
for Reservation Rewards and charged 10 dollars a month
membership for multiple months. This means that when I ordered
tickets through your service, the cost to me was not only the
price of the tickets, but the inadvertent cost of being
enrolled in a service plan I was not aware of.\17\
---------------------------------------------------------------------------
\17\ E-mail from Chris Steffen to Movietickets.com employee (Apr.
11, 2007) (Webloyalty Doc. 50825-26).
Mr. Steffen also wrote a complaint to Webloyalty, the operator of
the Reservation Rewards club. Addressing his complaint to ``Joni,'' the
Webloyalty representative he had communicated with, Mr. Steffen
---------------------------------------------------------------------------
expressed his frustration.
Imagine yourself, Joni, getting on a computer to book movie
tickets for the next big show and you're in a hurry because you
and your friends decided to go at the last minute. You want to
make sure you order your seats in time so you can go have
dinner before the show. Then, at first glance you get what
looks like a coupon for 10 bucks off your next purchase of
tickets. You don't read the fine print because you're in a
hurry and next thing you know you're signed up for some
worthless service.\18\
---------------------------------------------------------------------------
\18\ E-mail from Chris Steffen to Webloyalty employee (Apr. 12,
2007) (Webloyalty Doc. 50827).
David Murray--In February 2008, a Massachusetts hospital executive
named David Murray realized he had been enrolled in Affinion's
``LiveWell'' membership club while shopping at 1-800-Flowers.com
several months earlier. Mr. Murray wrote an e-mail to 1-800-Flowers.com
expressing his concerns about the LiveWell enrollment process and
asking the company, ``Do you really think what you did was morally
right?'' One of his criticisms focused on the confusion surrounding the
---------------------------------------------------------------------------
origin of the discount offer. He wrote:
The Order Confirmation states the following: ``Your purchase is
complete. Click here to claim $15.00 Cash Back on this
purchase!'' This is not true and is deceitful. You aren't
offering $15.00 back unless the client signs up to this company
called ``LiveWell.'' And even then, you're not offering it--
LiveWell is. Who in the hell is LiveWell? It doesn't say on the
e-mail. So there is no $15.00 to be had from 1800Flowers at
all.\19\
---------------------------------------------------------------------------
\19\ E-mail from David Murray to 1-800-Flowers employee (Feb. 4,
2008) (Affinion Doc. AFSE-4-5078-79).
Mr. Murray also complained that the data pass process made it
---------------------------------------------------------------------------
unclear that he was actually making a purchase.
At no time, during this process, is there an opportunity to
keep this from happening. There is no warning, no interim
message telling me what I'm actually about to do. Had there
been that opportunity, I readily concede that it was my fault
for clicking. But there wasn't that opportunity. As you can
see, the consumer (in this case, me) is automatically enrolled
and you have to call to cancel within a month of the ``free
membership'' to keep from getting charged $11.99 per month.\20\
---------------------------------------------------------------------------
\20\ Id.
Finally, Mr. Murray expressed his anger that 1-800-Flowers.com, a
company with which his earlier experiences were ``nothing but
---------------------------------------------------------------------------
positive,'' would allow him to be enrolled in the LiveWell club.
What I feel terrible about is that your Customer Service is
doing this to unsophisticated consumers who don't know what
steps they should take when a corporation does that to them,
and how many people are signed up to this company and are going
to get charged for something they didn't want? Worse, is this
really something 1800Flowers wanted to be associated with? It
was just a mean thing to do to someone. I have an old saying.
It may be legal, but is it moral? Well, I don't think it's
legal. And I know it wasn't moral. Don't be immoral.\21\
---------------------------------------------------------------------------
\21\ Id.
---------------------------------------------------------------------------
II. Background on Affinion, Vertrue, and Webloyalty
Affinion, Vertrue, and Webloyalty--the three leading companies
engaged in the aggressive online sales tactics described above--are all
located in or around Norwalk, Connecticut. All three companies are
managed by executives who started their careers at CompU-Card (CUC), a
Connecticut company that pioneered the marketing of discount membership
clubs.
All three companies have also been the targets of law enforcement
investigations and private lawsuits stemming from their use of
aggressive marketing practices. Affinion and Vertrue have used direct
mail, telemarketing, and e-commerce channels, while Webloyalty has used
only the e-commerce channel, to enroll members and charge their credit
cards or checking accounts. Committee staff has compiled a list of
nearly 100 different clubs and services these three companies sell or
have sold to consumers (See Exhibit 3).
A. Affinion/Trilegiant/Cendant/CUC
Affinion is a successor corporation to CUC which was started in
1973 and sold memberships to various auto, dining, shopping and travel
discount clubs. In 1997, CUC merged with HFS Incorporated and the new
company rebranded itself as Cendant.\22\
---------------------------------------------------------------------------
\22\ Affinion Group, Inc., Form 10-K Annual Report for Period
Ending Dec. 31, 2008 (Feb. 27, 2009).
---------------------------------------------------------------------------
Shortly after the merger, Cendant announced that CUC had falsely
inflated the number of club memberships it had sold, thereby
overstating its 1995-97 earnings by at least half-a-billion
dollars.\23\ A later investigation by the Securities and Exchange
Commission determined that CUC had been filing false financial
statements since 1985, and that the company's misstatement of its
income ``was of historic proportions.'' \24\ CUC's founder and former
chief executive, Walter A. Forbes, was criminally prosecuted and
sentenced to more than 12 years in Federal prison. CUC's former Vice
Chairman, E. Kirk Shelton, was also prosecuted and sentenced to 10
years in Federal prison. Both CUC executives were ordered to pay $3.2
billion in restitution.\25\
---------------------------------------------------------------------------
\23\ How Two Whistle-Blowers Sparked Fraud Probe That Crushed
Cendant, Wall Street Journal (Aug. 13, 1998).
\24\ Securities and Exchange Commission, Order Instituting Public
Administrative Proceedings Pursuant to Section 21C of the Securities
Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist
Order, In the Matter of Cendant Corporation, Respondent (File No. 3-
10225) (June 14, 2000).
\25\ U.S. Department of Justice, U.S. Attorney, District of New
Jersey, Former Cendant Chairman Walter Forbes Sentenced to 151 Months
in Federal Prison for Lead Role in Massive Accounting Fraud (Jan. 17,
2007).
---------------------------------------------------------------------------
In 2001, Cendant rebranded its membership club unit as
``Trilegiant'' and, in 2005, sold it to Apollo Management, a New York-
based private-equity group, which in turn renamed the company
Affinion.\26\ Trilegiant/Affinion has been the subject of numerous law
enforcement actions and private lawsuits in connection with its
aggressive marketing practices.
---------------------------------------------------------------------------
\26\ Cendant Scions Navigate Credit Crunch, Wall Street Journal
(Sept. 16, 2009).
---------------------------------------------------------------------------
On March 18, 2005, for example, Florida Attorney General Charlie
Crist announced that his office had reached a settlement with
Trilegiant under which Trilegiant ``agreed to provide compensation to
consumers wronged by the company's tactics in marketing various club
memberships.'' Trilegiant also agreed to pay the State of Florida an
additional $400,000.\27\
---------------------------------------------------------------------------
\27\ State of Florida, Office of the Attorney General, Attorney
General Reaches Settlement Over Club Memberships (Mar. 18, 2005).
---------------------------------------------------------------------------
A few months later, California Attorney General Bill Lockyer filed
suit against Trilegiant and Chase Bank charging that the companies
``mislead consumers into becoming members of various membership
programs without the consumers' knowledge or consent.'' \28\ According
to the Attorney General, Trilegiant and Chase sent ``reward'' checks to
consumers and did not adequately disclose that if consumers cashed the
checks the defendants would automatically and repeatedly charge the
consumers' bank accounts. In December 2006, California and 15 other
state attorneys general reached a $14.5 million settlement with the two
companies.\29\
---------------------------------------------------------------------------
\28\ State of California, Department of Justice, Office of the
Attorney General, Attorney General Lockyer Files Consumer Lawsuit
Against Chase, Trilegiant in Membership Club Scheme (July 12, 2005).
\29\ State of California, Department of Justice, Office of the
Attorney General, Attorney General Lockyer Announces $14.5 Million,
Multi-State Settlement with Chase Bank and Trilegiant to Resolve
Allegations of Deceptive Practices Related to Membership Plans (Dec.
11, 2006). The other states involved in this settlement were: Alaska,
Connecticut, Illinois, Iowa, Maine, Michigan, Missouri, New Jersey,
North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Vermont, and
Washington.
---------------------------------------------------------------------------
In July 2008, Trilegiant settled a number of class action lawsuits.
The suits alleged that Trilegiant enrolled consumers in membership
clubs through deceptive or unfair means. Trilegiant agreed to pay up to
$25 million in refunds to settle the lawsuits.\30\
---------------------------------------------------------------------------
\30\ Order of Final Approval and Judgment, (Jul. 18, 2008),
Pederson v. Trilegiant, IL 3rd Jud. Circuit Ct. (No. 01-L-1126). For
further information on these cases, see the information collected on
www.Trisettlement.com.
---------------------------------------------------------------------------
B. MemberWorks/Vertrue/Adaptive Marketing
In 1989, Gary Johnson, a former CUC vice president, founded
Cardmember Publishing Company. In 1996, the company's shares began to
be publicly traded under the name MemberWorks.\31\ In 2004, MemberWorks
changed its name to Vertrue. Three years later, in 2007, Vertrue was
de-listed and sold for approximately $800 million to a group of private
equity investors led by One Equity Partners, the private equity arm of
J.P. Morgan.\32\ Vertrue currently markets club memberships under the
auspices of its subsidiary Adaptive Marketing, LLC.
---------------------------------------------------------------------------
\31\ Fertile Sales Turf: Fee-Based Card Services; MemberWorks' Gary
Johnson Counts the Ways He Can Sell to Cardholders, The American Banker
(Apr. 10, 1997).
\32\ Vertrue, Inc., Vertrue Inc. Announces Agreement to Be Acquired
by an Investor Group Including Management for $48.50 Per Share or
Approximately $800 Million (Mar. 22, 2007) (available at http://
investors.vertrue.com/phoenix.zhtml?c=60678&p=irol-
newsArticle&ID=976542&
highlight).
---------------------------------------------------------------------------
The Attorneys General of Minnesota, New York, California, and Iowa
have all sued MemberWorks/Vertrue alleging that it engaged in deceptive
practices in connection with the aggressive sale of membership
programs. In 1999, the Attorney General of Minnesota, Mike Hatch, filed
suit against MemberWorks alleging that the company used deceptive and
misleading practices to sell club memberships to Minnesota
consumers.\33\ MemberWorks paid $75,000 to settle the Minnesota action
and agreed to make a number of changes to its business practices.
---------------------------------------------------------------------------
\33\ Second Amended Complaint, (Apr. 17, 2000), Hatch v.
MemberWorks, Inc., Minn. Dist. Ct. 4th Jud. District (No. MC99-010056).
---------------------------------------------------------------------------
In 2000, New York Attorney General Eliot Spitzer announced a
settlement with MemberWorks as part of a ``continuing investigation of
banks and credit card issuers that violated their cardholders' privacy
rights by selling their personal account information to telemarketers
in return for a substantial commission.'' \34\ According to the
Attorney General:
---------------------------------------------------------------------------
\34\ New York State Attorney General, National Telemarketing Firm
to Reform Practices. Bank Privacy Investigations Result in Settlement
on Unauthorized Credit Card Charges (Sept. 18, 2000).
MemberWorks made wide use of negative option plans with its
``risk free'' 30-day free trial membership offer. Although
these plans offer consumers a free period in which to consider
the advantages of the service, many who accepted the initial
free trial did not understand that MemberWorks had access to
their credit card numbers and would charge them if they failed
to cancel during the trial period.\35\
---------------------------------------------------------------------------
\35\ Id.
In order to settle the matter, MemberWorks agreed to, among other
stipulations, tape every consumer's consent to ensure it was knowingly
given. MemberWorks also paid $75,000 to cover the cost of the
investigation.
In 2001, MemberWorks and Sears, Roebuck and Co. agreed to pay $2
million to settle charges made by California Attorney General Bill
Lockyer that the companies misled and confused consumers about their
membership programs. The suit alleged that ``consumers were not
informed that defendants had the ability to charge their credit cards
without the consumers providing their credit card numbers or ever
signing anything.'' \36\
---------------------------------------------------------------------------
\36\ State of California, Department of Justice, Office of the
Attorney General, Attorney General, District Attorneys Settle Consumer
Protection Complaint Against MemberWorks, Sears Over Discount Club
Memberships (Apr. 27, 2001).
---------------------------------------------------------------------------
In 2004, MemberWorks paid $950,000 to settle a complaint brought by
Florida Attorney General Charlie Crist, alleging that the company had
placed unwanted charges on Floridians' credit cards. According to the
Attorney General:
The company typically marketed its products in conjunction with
infomercial products, and consumers calling to order products
were told they would receive a MemberWorks membership as a
bonus for their purchase. The bonus actually resulted in a
credit card charge for MemberWorks' membership programs if the
consumer did not actively seek to cancel the purchase.\37\
---------------------------------------------------------------------------
\37\ State of Florida, Office of the Attorney General, Attorney
General Announces Settlement with MemberWorks, (Jun. 29, 2004).
Most recently, in 2006, Iowa Attorney General Tom Miller sued
---------------------------------------------------------------------------
MemberWorks/Vertrue and explained that:
The suit concerns a marketing scheme in which consumers' credit
cards and bank accounts are charged for memberships in so-
called discount buying programs--even though many consumers
don't know they are members, are not aware that they are being
charged yearly or monthly membership fees, and make no use
whatsoever of the so-called membership benefits.\38\
---------------------------------------------------------------------------
\38\ State of Iowa, Depart of Justice, Office of the Attorney
General, Miller Sues MemberWorks, Inc., (May 15, 2006).
The Iowa Attorney General took the case against MemberWorks/Vertrue
to trial earlier this month, and an opinion is likely early next year.
Not every case against Vertrue has resulted in a negative outcome
for Vertrue. Vertrue and its subsidiary Adaptive Marketing recently won
a motion to dismiss a lawsuit alleging that Vertrue and the e-retailer
V istaPrint deceived consumers into joining a rewards programs by
offering them cash back if they completed an online survey. The Federal
judge dismissed the case, finding that the defendants' web pages were
not deceptive. The plaintiffs have appealed this decision to the 5th
Circuit Court of Appeals.\39\
---------------------------------------------------------------------------
\39\ In re VistaPrint Corp. Marketing and Sales Practices
Litigation, No. 4:08-md-1994 (S.D. Tex.) (Aug. 31, 2009).
---------------------------------------------------------------------------
C. Webloyalty
Webloyalty was founded in 1999 by another CUC/Cendant veteran,
Richard Fernandes. According to press reports, Mr. Fernandes ran CUC's
Auto Service division and then its Interactive Services division,
``where he launched many of the Company's major Internet programs.''
\40\ Webloyalty is owned by the Greenwich, Connecticut private-equity
group, General Atlantic, LLC.
---------------------------------------------------------------------------
\40\ eLOT Appoints New Board Member, Business Wire (Mar. 7, 2000).
---------------------------------------------------------------------------
Although Committee staff is unaware of any formal law enforcement
actions against Webloyalty, according to media reports, Webloyalty is
currently under investigation by Connecticut Attorney General Richard
Blumenthal because of the high number of consumer complaints about the
company.\41\
---------------------------------------------------------------------------
\41\ Never Heard of Reservation Rewards? Check Your Credit Card,
Wallet Pop Blog (Mar. 31, 2009) (available at http://www.walletpop.com/
blog/2009/03/31/never-heard-of-reservation-rewards-check-yourcredit-
card/).
---------------------------------------------------------------------------
Earlier this year, Webloyalty agreed to settle a class action
lawsuit, in which the plaintiffs alleged that they had been harmed by
Webloyalty's ``Coupon Click Fraud'' scheme. According to the lawsuit:
The scheme involved fraudulent and deceptive sale of its
``Reservation Rewards' discount products to unwitting consumers
who make legitimate online purchases from various web
retailers, including Fandango, and the unauthorized transfer of
private credit and debit card account information by the web
retailer to Webloyalty.\42\
---------------------------------------------------------------------------
\42\ Class Action Complaint, (Sept. 11, 2006), Kuefler v.
Webloyalty.com (D. Mass.) (No. 06-cv-11620-JLT) (later consolidated
with four similar cased by the Judicial Panel on Multidistrict
Litigation and restyled In re: Webloyalty.com, Inc. Marketing and Sales
Practices Litigation, MDL 07-01820).
In order to settle the case, Webloyalty agreed to make a number of
changes to its online offers and disclosures, and it also agreed to pay
out up to $10 million to consumers who had inadvertently signed up for
Webloyalty's membership clubs.\43\
---------------------------------------------------------------------------
\43\ Id.
---------------------------------------------------------------------------
III. The Committee's Investigation
In May 2009, the Committee opened an investigation into the use of
aggressive sales tactics on the Internet. On May 27, 2009, Chairman
Rockefeller sent letters to Webloyalty, Inc., and Vertrue, Inc.,
requesting information and documents related to their online business
practices.\44\ On July 10, 2009, Chairman Rockefeller expanded the
investigation by sending a similar information request letter to
Affinion Group, Inc.\45\ On July 28, 2009, Chairman Rockefeller issued
a subpoena to Vertrue to obtain documents responsive to the May 27,
2009, requests, which were being withheld by the company.\46\ Affinion
and Webloyalty have voluntarily cooperated with the Committee's
requests.
---------------------------------------------------------------------------
\44\ Letter from Sen. John D. Rockefeller IV to Mr. Gary A. Johnson
(May 27, 2009); Letter from Sen. John D. Rockefeller IV to Mr. Richard
J. Fernandes (May 27, 2009).
\45\ Letter from Sen. John D. Rockefeller IV to Mr. Nathaniel
Lipman (July 10, 2009).
\46\ Letter from Sen. John D. Rockefeller IV to Mr. Gary A. Johnson
(July 28, 2009).
---------------------------------------------------------------------------
On November 6, 2009, Chairman Rockefeller sent requests for
information to sixteen companies that are partnered with Affinion,
Vertrue, or Webloyalty and have apparently engaged in the controversial
online sales practices with the companies. The letters were sent to: 1-
800-Flowers.com, Inc.; AirTran Holdings, Inc.; Classmates.com, Inc.;
Continental Airlines, Inc.; FTD, Inc.; Fandango, Inc.; Hotwi re, Inc.;
Intelius, Inc.; MovieTickets.com, Inc.; Orbitz Worldwide, Inc.; Pizza
Hut, Inc.; Priceline.com, Inc.; Redcats USA, Inc.; Shutterfly, Inc.;
U.S. Airways Group, Inc.; and VistaPrint USA, Inc.\47\
---------------------------------------------------------------------------
\47\ Senate Committee on Commerce, Science, and Transportation,
Chairman Rockefeller Requests Information from Web Retailers in
``Mystery Charges'' Investigation (Nov. 6, 2009).
---------------------------------------------------------------------------
In the course of the investigation, the Committee has received over
300,000 pages of documents from the three companies: approximately
80,000 from Affinion, approximately 128,000 from Vertrue, and
approximately 104,000 from Webloyalty. The documents include over
100,000 pages of documents related to complaints from the companies'
former customers. The companies also produced screenshots of the
enrollment offers used by the companies on the Internet, employee
handbooks, contracts, correspondence between the companies and their
partners, and internal e-mails and correspondence.
Committee staff has interviewed dozens of former customers who have
complained to Affinion, Vertrue, and Webloyalty about their business
practices, executives for the e-commerce companies and e-retailers that
have partnered with the three companies, and experts in e-commerce
marketing.
IV. Overview of the Online Post-Transaction Sales Industry
Documents reviewed by Committee staff show that more than 450 e-
commerce companies and e-retailers have entered into ``partnership''
agreements with Affinion, Vertrue, and Webloyalty over the past 10
years. Under the terms of these contracts, the ``partners'' allow the
three companies to market membership programs to their customers, and
Affinion, Vertrue, and Webloyalty agree to share a portion of their
revenues with the partners.
Financial information provided to the Committee by the companies
shows that Affinion, Vertrue, and Webloyalty and their e-commerce
partners have generated over $1.4 billion in revenue from Internet
consumers who have been charged for membership programs. Of the $1.4
billion in total revenue, $792 million went to the e-commerce companies
that partnered with Affinion, Vertrue, and Webloyalty.
The websites and e-retailers that have partnered with Affinion,
Vertrue, and Webloyalty include some of the most well-known and high-
traffic e-commerce websites on the Internet. They include travel sites,
airline sites, electronics sites, movie ticket sites, and the websites
for popular ``brick and mortar'' companies. Eighty-eight e-retailers
have made more than $1 million through partnering with Affinion,
Vertrue, and Webloyalty and, of the 88, 19 companies have made more
than $10 million (See Exhibit 4). Classmates.com, which has been
partnered with each company at different times and has earned more than
any other partner, generated approximately $70 million in revenue.
Since 1999, Internet consumers have been enrolled more than 35
million times in Affinion, Vertrue, and Webloyalty's membership clubs.
In June 2009, there were 4 million Internet consumers currently
enrolled in the membership programs.
A. Partnership Terms
While the specific terms and conditions between Affinion, Vertrue,
and Webloyalty and their e-commerce partners differ from contract to
contract, their agreements typically give partners a financial
incentive to expose their shoppers to aggressive third-party offers.
Generally, the more aggressively an e-commerce company is willing to
market Affinion, Vertrue, or Webloyalty's membership clubs to its
customers, the more money it will earn.
Affinion, Vetrue, and Webloyalty's e-commerce partners are paid
based upon either the number of customers who sign up for the
membership clubs (``joins''), or the number of customers who see the
offer (``impressions''). In some partnerships, both payment methods are
used to calculate a retailer's profits.
Payments based on the number of consumers who join an Affinion,
Vertrue, or Webloyalty club are called ``bounties.'' This payment
system (also known as CPA, ``Cost Per Acquisition'') provides a very
straightforward incentive to the retailer to use more aggressive sales
tactics. Every consumer ``join'' means an additional bounty payment
usually ranging between $10 and $30. When Webloyalty pitched its
marketing program to Aloha Airlines in January 2006, it explained the
method of payment and the potential partnership by stating, ``Aloha
Airlines wins by getting . . . $$$ bounty from Webloyalty for every
customer who elects to accept offer.'' \48\
---------------------------------------------------------------------------
\48\ Webloyalty presentation to Aloha Airlines (Jan. 2006)
(Webloyalty Doc. 29325).
---------------------------------------------------------------------------
Payments based on impressions are calculated using a term known as
CPM (Cost Per Mil). Under this system, e-commerce partners receive a
payment for every 1,000 of their customers who view the enrollment
offer from Affinion, Vertrue, or Webloyalty. This method can be very
profitable for e-commerce companies with high-traffic websites because
the enrollment offer can be shown to millions of Internet consumers. If
the e-commerce partner is willing to show the offer to each one of its
customers who make a purchase on its website, this can result in
millions of ``impressions'' and millions of dollars in profit.
Payment terms in the contracts are routinely tied to a statistic
known as the ``conversion rate.'' This statistic measures the success
of the enrollment offers by comparing the total number of customers who
view the offer to the subset who actually enroll in the club. This
statistic is tracked very closely by Affinion, Vertrue, and Webloyalty
and each company uses it as a method to determine payments to its
partners.
Affinion, Vertrue, and Webloyalty typically pay higher CPMs as the
conversion rate increases. The table below provides an example of a
sliding scale used in a contract reviewed by Committee staff.
------------------------------------------------------------------------
CPM Net Conversion
------------------------------------------------------------------------
$2,650 9.50%
------------------------------------------------------------------------
$2,525 9.00%-9.49%
------------------------------------------------------------------------
$2,375 8.50%-8.99%
------------------------------------------------------------------------
$2,250 8.00%-8.49%
------------------------------------------------------------------------
$2,100 8.00%-8.49%
------------------------------------------------------------------------
$1,950 7.50%-7.99%
------------------------------------------------------------------------
$1,825 7.00%-7.49%
------------------------------------------------------------------------
$1,675 6.50%-6.99%
------------------------------------------------------------------------
$1,550 5.50%-5.99%
------------------------------------------------------------------------
$1,400 5.00%-5.49%
------------------------------------------------------------------------
$1,275 4.50%-4.99%
------------------------------------------------------------------------
$1,125 4.00%-4.49%
------------------------------------------------------------------------
$1,000 3.50%-3.99%
------------------------------------------------------------------------
$925 3.30%-3.49%
------------------------------------------------------------------------
$850 3.29%
------------------------------------------------------------------------
To illustrate how this system works, if a company displayed the
enrollment offer to one million visitors on its site every year, and 2
percent of its customers joined an Affinion, Vertrue, or Webloyalty
club, the company would receive a payment of $850,000, according to the
rates listed in the table. But if its conversion rate were a higher 5
percent, the company would receive $1.4 million. This sliding scale
payment system gives retailers a strong financial incentive to allow
Affinion, Vertrue, and Webloyalty to employ aggressive sales tactics
that mislead customers but increase conversion rates.
An important fact to keep in mind is that the revenue web retailers
earn from their partnerships with Affinion, Vertrue, and Webloyalty has
no associated costs for the web retailers and is therefore 100 percent
profit. Revenues from these partnerships, therefore, can become very
important to a company's overall profitability. For example, when the
CEO of 1800Petmeds, a Webloyalty partner, requested that the
``Continue'' button be removed from the company's offer page because it
was misleading customers, a Webloyalty employee responded:
We can do that, but with these changes your CEO is decimating a
program that delivered more than $516,000 in pure profit to you
in 2008. If you operate your website on a 10 percent net profit
margin, our payments to you represent over $5 million in sales
revenue.\49\
---------------------------------------------------------------------------
\49\ E-mail from Webloyalty employee to 1800Petmeds employee (Feb.
11, 2009) (Webloyalty Doc. 88550).
---------------------------------------------------------------------------
B. The Financial Advantages of Data Pass
As discussed in Section I above, most companies automatically
transfer their customers' billing information to Affinion, Vertrue, and
Webloyalty once consumers have presented what the companies call
``proof of enrollment,'' such as an e-mail address. Documents reviewed
by Committee staff show that Affinion, Vertrue, and Webloyalty are well
aware that this ``data pass'' process produces higher rates of
``joins'' than an enrollment process that requires consumers to re-
enter their credit card information to accept a membership club offer.
For example, a Webloyalty document tracking average conversion
rates in 2006 and 2007 presents the following conversion information
for consumers who join membership clubs through the data pass process
(referred to in this document as ``card on file'') versus those who
join by entering their credit card information (``non-card on
file''):\50\
---------------------------------------------------------------------------
\50\ Webloyalty document ``Average Conversion Rates Per Quarter--
All Flows'' (Jan. 10, 2008) (Webloyalty Doc. 19371).
----------------------------------------------------------------------------------------------------------------
``Card on File'' Net Conversion ``Non-Card on File'' Net
Rate Conversion Rate
----------------------------------------------------------------------------------------------------------------
Q3 2006 4.51% 1.26%
----------------------------------------------------------------------------------------------------------------
Q4 2006 4.54% 0.91%
----------------------------------------------------------------------------------------------------------------
Q1 2007 4.04% 0.68%
----------------------------------------------------------------------------------------------------------------
Q2 2007 3.84% 0.89%
----------------------------------------------------------------------------------------------------------------
Q3 2007 4.04% 0.94%
----------------------------------------------------------------------------------------------------------------
Q4 2007 3.91% 1.65%
----------------------------------------------------------------------------------------------------------------
According to these figures, consumers are about four times more
likely to join Webloyalty's membership clubs if their credit card data
is transferred automatically from the retailer.
Not surprisingly, based upon statistics such as these, Affinion,
Vertrue, and Webloyalty push their partners and potential partners to
display offer pages that allow their customers to enroll in the
membership programs without re-entering the credit card or debit card
number they used for the original purchase. In a presentation to a
potential partner, Webloyalty provided the following graphic to explain
its point that ``non-card on file'' enrollment offers would lead to
``Low $Revenue'', while ``card on file'' would lead to ``High
$Revenue'' for the e-commerce company.\51\
---------------------------------------------------------------------------
\51\ Webloyalty presentation ``Revenue Continuum'' (Webloyalty Doc.
27485).
In another presentation to a partner, Webloyalty bluntly stated
that requiring the consumer to re-enter credit card information would
hurt conversion. It noted, ``with data collection on the page [y]ou can
expect at least a 70 percent decrease in conversion.'' \52\ In an e-
mail to a potential partner, Affinion estimated that the conversion
rate would be four times higher if the partner used data pass than if
the partner required its customers to re-enter their credit card number
(``non-data pass'').\53\
---------------------------------------------------------------------------
\52\ Webloyalty presentation ``Non-card on file'' (Webloyalty Doc.
27691).
\53\ Affinion document ``Products Overview'' (Feb. 19, 2009)
(Affinion Doc. A FSE 04-736).
---------------------------------------------------------------------------
V. Evidence of Misleading Offers and Consumer Confusion
Affinion, Vertrue, and Webloyalty understand that ``data pass'' and
other aggressive online sales tactics drive up the rate of consumer
``joins'' to their programs. They also know that most of the consumers
who ``enroll'' in their membership clubs through these aggressive
tactics do so unknowingly and inadvertently.
Internal documents and information produced by Affinion,
Webloyalty, and Vertrue to the Committee indicate that the three
companies receive an overwhelming amount of negative feedback from
consumers once the consumers learn they are paying ``members'' of clubs
they have never heard of. The three companies' ``customer service''
operations are almost entirely dedicated to handling the large volume
of calls from confused and angry consumers requesting cancellations,
and asking how the company obtained their credit card information.
Given that most ``members'' are unaware they were enrolled in the
programs, information provided by Affinion, Vertrue, and Webloyalty not
surprisingly shows that most ``members'' cancel their membership once
they realize they are being charged on a monthly basis. It also shows
that a very large percentage of the members never utilize the benefits
of the programs or even take the simple step of logging into the
companies' websites to access the benefits they are paying for each
month.
A. Low Levels of Member Awareness
Internal data and member surveys commissioned by Affinion, Vertrue,
and Webloyalty clearly show that the three companies understand that
the majority of their paying ``members'' have little or no awareness of
their financial relationship with the companies.
One of the documents Vertrue produced to the Committee, for
example, is a summary of June 22, 2009, feedback from consumers who had
visited one of its membership websites. Of the ``members'' who
completed the survey, 43 percent indicated they were visiting ``to find
about the charge on my credit card that I did not recognize'' and 44
percent indicated they were visiting ``to cancel the program.'' Only
one member indicated he or she was there ``to find out more about my
membership benefits'' and none of the respondents were there ``to
obtain my member ID.'' \54\ In another question, 60 percent of the
respondents indicated they were ``extremely dissatisfied'' with the
site. In response to Vertrue's invitation to offer a comment or explain
why they were satisfied or dissatisfied with the website, members
provided more than 100 highly negative comments, including:
---------------------------------------------------------------------------
\54\ Internal Vertrue e-mail (Jun. 23, 2009) (Vertrue Doc. 118778-
84).
``Don't know how I got it, I don't use it, I don't want it .
. . you've heisted money from me for several months for
something that I have no idea what it is and will never use it,
---------------------------------------------------------------------------
so I'm cutting you off, both here and at my bank;''
``Because I didn't authorize this service or know how my
card # was gotten;''
``Stop tricking people into your phony service;''
``I never willingly joined, I want a reimbursement. I have
never even heard of you;'' and
``I have no idea why you charged me 19.95. Where did you get
my debit card information? I have no recollection of doing
business with valmax.'' \55\
---------------------------------------------------------------------------
\55\ Id.
Internal data tracked by Webloyalty shows that it has known for
years that the majority of its members were unknowingly enrolling in
the membership clubs it offered. A ``Disposition Report'' run in
September 1, 2003, appears to show that, of the 66,922 members who
canceled their Reservation Rewards membership in August 2003, 51,560,
or 77 percent, had indicated ``Did Not Authorize/Was Not Aware'' as
their reason for cancellation.\56\ ``Disposition Reports'' run in the
following years showed similar trends and, in 2008, a Webloyalty call
center employee, while participating in a discussion about proposed
call center script changes, acknowledged in an e-mail message that
``[a]t least 90 percent of our members don't know anything about the
membership.'' \57\
---------------------------------------------------------------------------
\56\ Webloyalty document ``Disposition Report by Product--Last Full
Month'' (Sept. 1, 2003) (Webloyalty Doc. 97613).
\57\ Internal Webloyalty e-mail (Oct. 21, 2008) (Webloyalty Doc.
89166).
---------------------------------------------------------------------------
Customer surveys commissioned by Webloyalty and its e-commerce
partners in 2004 and 2006 further confirm that most of Webloyalty's
members were unaware they had enrolled in the company's membership
clubs. A July 2004 telephone poll commissioned by Webloyalty and
conducted at the request of its partner Redcats USA, which owns brands
such as Brylane and Jessica London, showed that few of Redcats'
customers knew they were paying members of Reservation Rewards, a
Webloyalty membership program. As part of the survey, 308 past or
current members of Reservation Rewards--half of whom were described as
``active'' members--were asked a series of questions. Among the
findings of the survey were the following:
234 of these members (76 percent) either did not recall
being offered a Reservation Rewards membership or said they had
declined a membership offer;
Only 62 of the members (20 percent) remembered receiving an
e-mail notifying them of their Reservation Rewards membership;
Only 5 of the members (1.6 percent) said they had received a
$10 cash back offer; and
Only 4 of the members (1.3 percent) said they had used
Reservation Rewards discounts.\58\
---------------------------------------------------------------------------
\58\ Webloyalty document, ``Web Loyalty & Brylane Customer
Research. A Quantitative Assessment'' (Jul. 2004) (Webloyalty Doc.
84776 et seq).
In analyzing the results for Redcats USA, a marketing research firm
noted, ``It is quite concerninq that only half (51 percent) of the
Active segment clearly remembered signing up for the program.'' \59\
Customer surveys conducted for Choice Hotels International, Inc. and
Classmates.com, both Webloyalty partners, produced similar results. For
Choice Hotels, a marketing research firm found that ``[o]ne-half of
guests reached on the member list did not know for sure if they are
members of Reservation Rewards'' and, based upon the survey of members
who enrolled through Classmates.com, Webloyalty concluded that
``[a]wareness of WL services is low among respondents.'' \60\
---------------------------------------------------------------------------
\59\ Id., at 804785
\60\ Webloyalty presentation ``Choice Hotels International
Reservations Rewards Study'' (Jan. 14, 2004) (Webloyalty Doc. 80623);
Webloyalty document ``Webloyalty thoughts on Classmates Market Research
Member Survey'' (May 11, 2006) (Webloyalty Doc. 84884).
---------------------------------------------------------------------------
Although Affinion has not provided the Committee with member
surveys, it has, at different times, tracked members' reasons for
complaining to the Better Business Bureaus and state attorneys general.
From January 2007 through February 2009, 85 percent, of the 1,550
serious complaints forwarded by the Better Business Bureaus and state
attorneys general were related to online customers ``asserting that
they never agreed to join'' the membership programs.\61\
---------------------------------------------------------------------------
\61\ Affinion letter, ``Additional Information Provided by Affinion
to Senate Committee on Commerce, Science, and Transportation'' (Nov. 5,
2009) (Affinion Doc. ASFW 05-01).
---------------------------------------------------------------------------
From January through April 2009, Affinion also tracked ``customer
contacts with the Affinion Support Desk, which handles customer
requests that are not satisfied by the Customer Service Representative
(also referred to as the Front Line Agent) and are elevated to a
supervisor.'' \62\ The spreadsheet showed that thousands of ``customer
contacts'' could not be handled by ``Front Line Agents'' because the
customers were categorized as ``Unaware of Service'' or ``Disputing
Enrollment.'' While this data is limited to escalated contacts and does
not include the millions of consumers who likely canceled their
Affinion membership programs once they learned their credit card was
being charged, it further suggests that a substantial percentage of
Affinion's members are unaware they were enrolled in Affinion's
membership programs.
---------------------------------------------------------------------------
\62\ Affinion letter, ``Affinion Response to Committee Follow-up
Questions 1-3'' (Oct. 9, 2009) (Affinion Doc. ASFW 06-01).
---------------------------------------------------------------------------
For example, from January through April 2009, Affinion's Support
Desk received 7,649 elevated ``customer contacts'' related to
``billing'' or ``cancellation and suppression requests'' from customers
of 1-800-Flowers.com, AirTran Airways, Classmates.com, and Priceline
who had been enrolled in Great Fun, an Affinion discount program.\63\
Of the 7,649 customer contacts, Affinion categorized a large percentage
as ``Unaware of Service,'' ``Disputing Enrollment,'' or ``Bank
Representative Cancelled.'' Despite placing these ``contacts'' in
categories which suggest customer confusion and frustration, Affinion
did not categorize these customer ``contacts'' as complaints.\64\
---------------------------------------------------------------------------
\63\ Affinion spreadsheet, ``Reason by Service & Client'' (Aug. 21,
2009) (Affinion Doc. ASFE 04-59-82).
\64\ Id.
Escalated Customer Contacts with Affinion's ``Support Desk'' Regarding
Its ``Great Fun'' Discount Club: January-April 2009
------------------------------------------------------------------------
Affinion Escalated ``Customer Contacts'' Regarding ``Billing'' and
Partner ``Cancellations and Suppression Requests''
------------------------------------------------------------------------
1-800-Flowers 618
.com
------------------------------------------------------------------------
AirTran 838
Airways
------------------------------------------------------------------------
Classmates.co 872
m
------------------------------------------------------------------------
Priceline 5,221
------------------------------------------------------------------------
B. Employee Training on Cancellations and Member Questions
When consumers realize they are being charged for a club membership
they did not intend to enroll in and do not use, they contact Affinion,
Vertrue, and Webloyalty to stop the monthly charges to their credit
card or debit card. As a result, the three companies' customer service
centers are almost entirely dedicated to handling the large volume of
calls from angry and confused consumers requesting cancellations and an
explanation for the charge. As a Webloyalty employee recently
acknowledged in an internal e-mail, the call center representatives
spend most of their time answering calls ``from members who are
questioning charges or want to cancel their membership.'' \65\ Affinion
and Vertrue's internal documents show that most of their calls are also
related to cancellations or members questioning enrollment or the
charge on their credit card or bank statement.
---------------------------------------------------------------------------
\65\ Internal Webloyalty employee e-mail (Feb. 16, 2009)
(Webloyalty Doc. 88263).
---------------------------------------------------------------------------
In a training manual, Affinion has informed its newly hired call
center representatives that during an ``8-hour shift'' they will take
``between 75-100 calls'' and that ``approximately 80 percent of these
calls will be from members wishing to cancel their membership.'' \66\
In March 2008, Vertrue employees acknowledged a similar problem in an
e-mail regarding a ``Call Center Optimization'' meeting.\67\ In
discussing methods for reducing the cost associated with the call
centers, Vertrue employees estimated that it received ``7 million
customer calls per year'' and that ``cancellation calls represent
approximately 98 percent of call volume.'' \68\
---------------------------------------------------------------------------
\66\ Affinion training manual, Great Fun New Hire Training Manual
(Oct. 2, 2006) (Affinion Doc. AFSE 04-18772).
\67\ Internal Vertrue e-mail, ``Call Center optimization meeting''
(Mar. 20, 2008) (Vertrue Doc. 111093).
\68\ Vertrue, ``Adaptive Call Center Optimization'' (Mar. 18, 2008)
(Vertrue Doc. 111095).
---------------------------------------------------------------------------
In addition to cancellations, the employee manuals and scripts that
Affinion, Vertrue, and Webloyalty provide to their call center
representatives show that each company dedicates a significant amount
of time training their employees on how to respond when members call to
ask questions related to how they were enrolled, what the membership
program is, or why there is a charge on their credit card or bank
account statement.
A ``Quick Reference Guide'' distributed to Webloyalty employees
explained that it was important to ask members why they were canceling
their membership for Travel Values Plus, a membership program offered
by Webloyalty. It stated, ``[m]any times the reason is that they had no
idea what Travel Values Plus was and you will then have the opportunity
to explain.'' \69\ Another page in a Webloyalty manual offered a list
of the ``Top Ten Reasons a Member Calls'' and offered ``Cancel my
membership'' and ``What is this charge?'' as the top two reasons.\70\
Other Webloyalty manuals provided call center representatives with a
process for handling members asking the questions: ``what is this
charge?'' or ``who are you?'' \71\
---------------------------------------------------------------------------
\69\ Webloyalty document, Quick Reference Guide: October 2006
(Webloyalty Doc. 26561).
\70\ Webloyalty document, Manual/Introduction--February 2006
(Webloyalty Doc. 56370).
\71\ Webloyalty training manual, ``What is this Charge?/Who are
you?:'' (Webloyalty Doc. 26055).
---------------------------------------------------------------------------
The ``Great Fun Merged Product Script'' that Affinion has provided
to its call center representatives also shows they are trained on how
to handle members who are calling to question enrollment or the charge
on their bank statement. The second heading in the manual's table of
contents refers to a section entitled, ``If Questioning the Charge/
Enrollment,'' which instructs call center representatives to answer the
member's question by stating, ``The charge you see posted on your
account is the (Monthly/Annual) membership fee for (Product). We
received a positive response online that activated your membership.''
\72\
---------------------------------------------------------------------------
\72\ Affinion document, Great Fun Merged Product Script: (Sept. 18,
2006) (Affinion Doc. AFSE 03-1810, 1813).
---------------------------------------------------------------------------
A manual for Vertrue employees provides instructions remarkably
similar to those provided to Affinion and Webloyalty employees. It
provides a ``Scripted Response'' to answer the question, ``How Did I
Get Signed Up for this???'' \73\ The provided response states:
---------------------------------------------------------------------------
\73\ Vertrue document, Online/Internet Marketing Main Menu (May 31,
2007) (Vertrue Doc. 82269).
Our records indicate that you agreed to try [AM PROGRAM NAME]
while visiting the [Client/Partner name] website. For the order
to be processed, you were required to enter and confirm your e-
mail address. Additionally, by accepting the trial membership,
you agreed to be enrolled using the billing source that you
authorized and that after the 30 day trial membership, you
would be billed the program fee.\74\
---------------------------------------------------------------------------
\74\ Id.
---------------------------------------------------------------------------
C. High Rates of Cancellations and Low Rates of Usage
Affinion, Vertrue, and Webloyalty's internal data on their members'
rates of cancellations and their rates of usage of the programs'
benefits provide further evidence that online consumers are not aware
they have been enrolled in membership clubs offered by the companies.
Overwhelmingly, consumers cancel their memberships once they realize
they are being charged on a monthly basis and very few consumers use
the benefits offered by the membership programs.
Information provided by Affinion, Vertrue, and Webloyalty shows
that the majority of the consumers the companies charge for services
cancel their membership within 5 months of receiving the first charge
on their credit card or checking account statement. Exhibit 5 to this
report shows the number of members who have enrolled in Affinion,
Vertrue, or Webloyalty's membership programs and remained members for
at least 1 month, 6 months, 1 year, and 5 years. For the three
companies, about a quarter of their members (26.2 percent) cancel
during the free 30-day period, less than a third of their members (29.5
percent) are still members after 6 months and only 13.9 percent remain
members for more than 1 year.
The cancellation pattern observed for these online consumers is
similar to the one observed by the Minnesota Attorney General's office
during its investigation into a preacquired account marketing campaign.
In that case, where hundreds of thousands of bank customers were sold
membership clubs or insurance policies through preacquired account
marketing, investigators observed that most of these bank customers
canceled not in the 30-day free trial period, but in the following
months when they started seeing their credit card charges.\75\
According to Professor Prentiss Cox, who supervised the Minnesota
Attorney General's investigation, this pattern is ``consistent with a
large majority of the canceling customers not understanding the
solicitation and canceling only after the charge appears on their
accounts.'' \76\
---------------------------------------------------------------------------
\75\ Prentiss Cox, Invisible Hand of Preacquired Account Marketing,
forthcoming in Harvard Journal on Legislation, Vol. 47, No. 2 (2010).
(Available at SSRN: http://ssrn.com/abstract=1460963. He explains, ``If
all consumers understood the free trial offer . . . the temporal
pattern of cancellations should be heavily weighted toward
cancellations during the free trial period.'')
\76\ Id., at 24.
---------------------------------------------------------------------------
Information provided to the Committee by Affinion, Vertrue, and
Webloyalty also shows that the vast majority of consumers who enroll in
their programs never receive the ``cash back award'' or other incentive
promised them in the enrollment offer. As discussed in Section I above,
a prominent feature of the post-transaction offers Affinion, Vertrue,
and Webloyalty make to consumers is an up-front gift offer such as
``$10 Cash Back on Your Next Purchase!'', which appears to be related
to the website where the consumer has just made a purchase.
While the language and appearance of the offer suggests that
clicking the ``Yes'' button automatically gives consumers a discount on
their next purchase, the fine print informs consumers that they must
take additional steps to receive the benefit. According to information
provided by the three companies, of the 34,262,674 members who were
promised automatic cash gifts or other incentives, only 3 percent
actually received the promised enrollment benefit.
Another indication that online consumers are unaware of their
Affinion, Vertrue, or Webloyalty club memberships is their failure to
log on to the clubs' websites to view and use the purported benefits
offered by the clubs. Evidence currently available to Committee staff
suggests that the so-called member ``usage rates'' for Affinion,
Vertrue, and Webloyalty are very low.
For example, Vertrue provided the Committee with the number of
members who log in to their membership club websites. In 2006, 100,091
members logged in to the membership clubs' websites; in 2007, 215,191
members logged in to the membership clubs' websites; and in 2008,
377,428 members logged in to the membership clubs' websites. While
Vertrue has not yet explained to Committee staff whether these numbers
include consumers attempting to cancel their membership, how many are
multiple logins by the same consumer, or how many of these consumers
actually received a club service after logging in, these figures, at
best, represent only a small percentage (approximately 10-20 percent)
of the total number of Vertrue club ``members'' in these years.
Information Webloyalty provided to the Committee also suggests its
clubs have very low member usage rates. A February 28, 2005, Webloyalty
document titled, ``Product Usage Statistics,'' appears to show that the
rate of benefit usage for members enrolled through the data pass
process ranged between .2 percent and 11.4 percent for a 6-month period
between 2004 and 2005.\77\ A ``Site Usage'' table presented to the
Webloyalty Board of Directors in March 2006 reported that between 70
percent and 80 percent of Reservation Rewards club ``members'' enrolled
through data pass had either never visited the Reservation Rewards site
at all or viewed only the club's home page without ever accessing
additional pages.\78\
---------------------------------------------------------------------------
\77\ Webloyalty document, Product Usage Statistics (Feb. 28, 2005)
(Webloyalty Doc. 56115).
\78\ Webloyalty document, ``Reservation Rewards: Member Site
Usage'' (March 27, 2006) (Webloyalty Doc. 103997).
---------------------------------------------------------------------------
In his statement to the Commerce Committee, Professor Benjamin
Edelman cites publicly available web traffic data to reach a similar
conclusion. He notes that while Webloyalty claims to have more than two
million paying club members, none of the company's club web pages rank
among the Internet's top 100,000 sites for web traffic. Professor
Edelman concludes that, ``this gap between signups and users confirms
that Webloyalty's marketing failed to obtain meaningful consent from
the users who purportedly ``accepted' Webloyalty's offer.'' \79\
---------------------------------------------------------------------------
\79\ Prepared Statement of Professor Benjamin Edelman to the U.S.
Senate Committee on Commerce, Science, and Transportation (Nov. 2009).
---------------------------------------------------------------------------
At this point in the investigation, Affinion, Vertrue, and
Webloyalty have not provided the Committee with comprehensive data
related to their rates of usage. Committee staff has reason to believe
that this information is kept by the companies as a matter of course
and that it would not be difficult to provide the information to the
Committee. Consumer usage of these services is a key question because a
low usage rate ``is highly probative to show that a practice is likely
to mislead consumers acting reasonably under the circumstances.'' \80\
---------------------------------------------------------------------------
\80\ FTC v. Cyberspace.com, 453 F.3d 1196, 1201 (9th Cir. 2006).
---------------------------------------------------------------------------
VI. Partner Awareness of the Problem
Committee staff has spoken to more than a dozen e-commerce partners
of Affinion, Vertrue, and Webloyalty and has reviewed thousands of
pages of e-mail communications between Affinion, Vertrue, and
Webloyalty and their e-commerce partners. The interviews and the e-mail
communications provide abundant evidence that the e-commerce partners
are aware that their customers are being misled by the enrollment
offers from Affinion, Vertrue, and Webloyalty. This evidence also shows
that e-commerce partners have repeatedly raised concerns about customer
confusion over the data pass process and the enrollment offers. Many
partners terminated their relationship because they determined it was
not in the best interest of their customers.
A. ``Customer Noise''
When e-commerce partners enter into financial partnerships with
Affinion, Vertrue, and Webloyalty, the three companies promise to
handle cancellations, complaints, and other ``customer service''
issues. As a result of this arrangement, when consumers see a
membership club charge on their credit card or bank statements, they
are provided only a club name and a toll free number operated by
Affinion, Vertrue, and Webloyalty.
The purpose of routing customer service issues through the three
Connecticut companies is to prevent what Webloyalty promotional
materials call ``negative impact on partner brands.'' Affinion,
Webloyalty, and Vertrue handle dissatisfied customers in order to
insulate the partners from their own customers' criticism, which is
commonly described as ``customer noise'' by the companies.
For example, in November 2008, 1-800-Flowers.com's Director of
Third Party Marketing wrote an e-mail to her Affinion contact
complaining that ``we have had increasingly more frequent feedback from
our own teams that your agents are telling our customers to call us. .
. .'' She asked for Affinion's help ``to determine . . . how we can
reduce the negative comments from our customers back to our internal
agents.'' \81\ Affinion's Vice President of Relationship Management
quickly responded to this e-mail. She wrote:
---------------------------------------------------------------------------
\81\ E-mail from 1-800-Flowers.com Director of Third Party
Marketing to Affinion Vice President, Relationship Management (Nov. 20,
2009) (Affinion Doc. ASFE 04-31).
I am troubled by this report. This is a STRICT no-no in our
centers. We tell agents not to do it and don't give them our
client's phone numbers and so on. If we hear instances [of] it
in our monitoring/test calls, they will ``fail'' that call and
get dinged on their incentive payments.\82\
---------------------------------------------------------------------------
\82\ E-mail from Affinion Vice President of Relationship Management
to 1-800-Flowers Director of Third Party Marketing (Nov. 20, 2008)
(Affinion Doc. ASFE 04-30).
In spite of the elaborate precautions Affinion, Vertrue, and
Webloyalty take to prevent negative feedback about their membership
clubs from getting back to their partners, most, if not all, of the e-
retailers partnered with Affinion, Vertrue, and Webloyalty know that
the companies' aggressive sales tactics make many of their customers
dissatisfied and angry. Committee staff has reviewed thousands of pages
of communications from angry consumers sent directly to the partners.
Under standard procedures followed by all three companies, partners
forward the complaints to Affinion, Vertrue, and Webloyalty for
resolution.
For example, in April 2009, the Manager of the Customer Relations
Department (CRD) for AirTran Airways sent an e-mail to one of AirTran
Airways' marketing executives stating:
We continue to receive complaints in CRD from customers
regarding the Great Fun option. The complaints are mainly
focused around:
Customer received a charge on their credit card for the
membership, however the customer claims they never authorized
the charge or requested the membership.
Customers attempted to cancel the membership; but continue to
get charged for the monthly membership fee. They often call
Great Fun several times to cancel to no avail.
In CRD we explain the process for signing up for the
membership. However several customers on separate occasions
have been adamant that they have never signed up with Great
Fun.\83\
---------------------------------------------------------------------------
\83\ Internal AirTran Airways e-mail from Manager--Customer
Relations Department (Apr. 29, 2009) (Affinion Doc. AFSE 04-3803).
The AirTran marketing executive forwarded this e-mail to his
contact at Affinion, requesting help in addressing what he called ``a
growing concern about the raising [sic] complaints.'' \84\
---------------------------------------------------------------------------
\84\ E-mail from AirTran employee to Affinion employee (May 6,
2009) (Affinion Doc. AFSE 04-3904).
---------------------------------------------------------------------------
In June 2009, another Affinion partner, Priceline.com, forwarded
Affinion a ``tracker'' document detailing serious consumer complaints
the company had received in May and June of 2009.\85\ The comments
included in this document show that Priceline is aware that Affinion's
club membership offers are making Priceline users extremely unhappy. A
few examples are:
---------------------------------------------------------------------------
\85\ E-mail from Priceline call center employee to Affinion
employee (June 17, 2009) (Affinion Doc. AFSE 04-1653).
Hi, I just noticed a recurring monthly charge of $11.99 on
my VISA bill for TLG* GREATFN. . . . I called the 800 number
referenced and canceled . . . I have no idea how this charge
got on my VISA or what it is for. I certainly didn't get
anything from it. They said it was through something I did on
Priceline. Are you guys in on this? Is this part of a scam? Is
Priceline an accessory to this fraud? I feel like I've been
---------------------------------------------------------------------------
tricked and robbed.
A few months ago, I purchased the tickets through priceline.
I was not aware that in the process of purchasing tickets I was
somehow enrolled in an organization called Great Fun. I feel
that this happened very deceitfully. I just wanted you to know
that this will be a consideration in the future.
How do I send a message to you regarding your product of
Great Fun. This company has billed me for over a year without
my concent [sic] or knowledge. Priceline should be more
responsible than to subject their customers to this sort of
unsuspected, unwanted solicitation! I have written the company,
my credit card company & the office for Consumer Protection for
Connecticut.\86\
---------------------------------------------------------------------------
\86\ Id.
---------------------------------------------------------------------------
B. Concerns Raised by Partners
In response to these ``customer noise'' issues, Affinion, Vertrue,
and Webloyalty's partners regularly raise concerns about the companies'
aggressive sales tactics. In some cases, partners ask the companies to
take steps to reduce consumer complaints. In other cases, partners have
decided to end their relationship with Affinion, Vertrue, or Webloyalty
due to negative consumer experiences. The concerns expressed by
partners in these communications seem to have changed very little over
the past decade.
In 2002, the Director of Business Development for an e-commerce
company partnered with Webloyalty wrote directly to Rick Fernandes, the
Chief Executive Officer of Webloyalty, stating:
We have worked with webloyalty for about 5 weeks now and have
had enough time and data to make a solid assessment that the
execution of the program is not in our best interest. Even with
what we thought might be a suitable authorization process, has
turned out to have extremely negative consequences and we have
been unable to correct with the flexibility that we need to
address a problem of this magnitude. . . . We feel that if the
customer is interested in participate [sic] in this program,
your website should sell them without us passing their secure
info in the process.\87\
---------------------------------------------------------------------------
\87\ E-mail from Webloyalty partner Director of Business
Development to Richard Fernandes, Chief Executive Officer of Webloyalty
(Sep. 10, 2002) (Webloyalty Doc. 75740).
In January 2003, a Webloyalty employee described the customer
---------------------------------------------------------------------------
complaints that another Webloyalty partner had received:
Let me clarify that we ARE in jeopardy with this client and
these represent a small number of many more complaints their
staff insiders consider ``brutal and unprecedented''. . .\88\
---------------------------------------------------------------------------
\88\ Internal Webloyalty e-mail (Jan. 07, 2003) (Webloyalty Doc.
102451).
The company later terminated the partnership in 2005 and stated,
``This decision comes after detailed discussions with Senior
management. They understand what this program generates and that it has
the potential to generate even more. However, we are going through a
re-branding mobilization in 2005 and the Webloyalty banners do not fit
into that plan.'' \89\
---------------------------------------------------------------------------
\89\ E-mail from Webloyalty partner Operational Vice President of
Customer Marketing to Webloyalty employee (Nov. 5, 2004) (Webloyalty
Doc. 74077).
---------------------------------------------------------------------------
In August 2003, Webloyalty's Senior Vice President for Business
Development and Account Management sent an e-mail summarizing partners'
concerns to senior Webloyalty executives, including Rick Fernandes, the
Chief Executive Officer, that stated:
What clients tell us . . .
1. Pre-bill notification is buried in pre-bill e-mail. Make it
more upfront.
2. Special reward is perceived as misleading. It's not a reward
it's an obligation. Test special offer.
4. [sic] The segue ``Congratulations, Thank you for your
purchase'' is misleading. Sounds like it's a thank you from
client and it's not, it's an offer from WL [Webloyalty].
5. Continue button is misleading--customer does not have to
continue.
6. Yes button is misleading, should say enroll, sign up, etc.
7. Language about data pass is buried. Customers are unaware
their data is being passed.
8. Trial and price point is buried--it's clear you get 30 days
free, but not clear you'll be automatically renewed if you
don't cancel. And then the fee is buried too.\90\
---------------------------------------------------------------------------
\90\ Internal Webloyalty E-mail from Senior Vice President for
Business Development and Account Management to Richard Fernandes, Chief
Executive Officer of Webloyalty, and other Webloyalty employees (Aug.
25, 2003) (Webloyalty Doc. 14019).
In April 2004, the employee of a Webloyalty e-commerce partner,
which operated a virtual shopping cart for Internet merchants, sent an
---------------------------------------------------------------------------
e-mail to a Webloyalty employee stating the following:
. . . I do keep hearing the same thing from our merchants who
are calling up wanting the program removed. They are telling us
their shoppers are saying:
1. They have been tricked into buying and or signing up for
something.
2. They did not know there was a cost involved with the
program.
3. The cost was hidden at the bottom of the page, or not very
clear.
4. They do not know who to call to get more info, so they call
the merchant (who gets ticked off, calls us and wants out of
the program).
5. They do not know who is offering the program or who to
contact so again they call the merchant (who gets ticked off,
calls us and wants out of the program).\91\
---------------------------------------------------------------------------
\91\ E-mail from Webloyalty partner employee to Webloyalty employee
(Apr. 30, 2004) (Webloyalty Doc. 74483-84).
In January 2006, Webloyalty employees discussed concerns that an e-
---------------------------------------------------------------------------
retailer partner had raised. The e-mail stated:
He mentioned that they are getting a lot of noise with our
program and that people are writing blogs about . . . what a
scam WLI RR [Webloyalty Reservation Rewards] is . . . He's very
concerned . . . Bottom line is he wants to test more
conservative pages against the control to find a page that's
more clear and see what it does to his financials.\92\
---------------------------------------------------------------------------
\92\ Internal Webloyalty e-mail (Jan. 9, 2006) (Webloyalty Doc.
76770).
In May 2006, an employee for Avon informed Affinion that a customer
complaint had ``been escalated to our CEO and the customer . . . felt
it was completely misleading.'' \93\ The Avon employee went on to state
that ``[w]e need to discuss how we can modify the offer page to make it
more clear to the user that their credit card info will be passed upon
their approval, possibly by adding a check box.'' \94\ An information
technology specialist working with Avon.com to resolve a customer
complaint later advised:
---------------------------------------------------------------------------
\93\ E-mail from Avon eMarketing Manager to Affinion Associate
Client Manager (May 22, 2006) (Affinion Doc. 04-16516).
\94\ Id.
I think the big problem was that it was pretty misleading. It
wasn't clear that we were passing the customer details (cc
number etc) across when they clicked on the banner. I think
people often proceeded through out of curiosity, believing that
if they didn't provide they [sic] billing data that they
couldn't be charged, regardless of what they clicked on or
accepted. What they don't realise [sic] is that Great Fun did
have their billing details already.\95\
---------------------------------------------------------------------------
\95\ E-mail from Avon employee to Affinion employee (Oct. 26, 2007)
(Affinion Doc. AFSE 04-16527).
In January 2007, an e-retailer that had partnered with Webloyalty
sent an e-mail to Webloyalty stating that, ``. . . we have had regular
complaints from our customers . . . [w]e simply cannot have complaints
such as this.'' \96\ He went on to note that, ``The particularly
cheerless concern is that to generate more revenue through Webloyalty,
it seems we must be more aggressive (and deceptive) in our marketing
techniques.'' \97\
---------------------------------------------------------------------------
\96\ E-mail from Webloyalty partner employee to Webloyalty employee
(Jan. 15, 2007) (Webloyalty Doc. 95116).
\97\ Id.
---------------------------------------------------------------------------
In March 2007, an employee for another e-retailer partnered with
Webloyalty sent an e-mail expressing concerns about complaints. He
stated, ``We are getting an unbelievable number of complaints on our
current set-up. Customers (ours are older) are feeling tricked and many
state they are not coming back to our sites because of it. Don't know
if that is true, but I still want to talk about it.'' \98\
---------------------------------------------------------------------------
\98\ E-mail from Webloyalty partner employee to Webloyalty
employees (Mar. 02, 2007) (Webloyalty Doc. 81039).
---------------------------------------------------------------------------
In November 2007, a 1-800-Flowers.com employee raised ``a major red
flag'' about the company's partnership with Affinion. He cited a number
of recent consumer complaints about the company's partnership with
Affinion to sell the ``LiveWell'' membership club, and he noted that,
``for every one who complains vociferously, there are dozens, even
hundreds that do not.'' \99\ He continued:
---------------------------------------------------------------------------
\99\ Internal 1-800-Flowers.com e-mail (Nov. 7, 2007) (Affinion
Doc. AFSE 5-3452).
I know that our relationship with Affinion is a huge boost to
our revenue; on the other hand, I am gravely concerned that for
every dollar we get from Live Well, we may be trading off many
more dollars in angry and lost customers.\100\
---------------------------------------------------------------------------
\100\ Id.
In February 2008, another e-retailer expressed concerns to
---------------------------------------------------------------------------
Webloyalty in an e-mail by stating:
We're all still very concerned about the negative impact we are
experiencing to our reputation online. And, we continue to get
enough angry callers that our call center manager . . . has to
personally field about 3 of the angriest callers a week. (we
estimate that if [our call center manager] is getting 3 our
call center is getting 15 and your team is probably getting 75
or more per week) . . . Webloyalty has been unwilling to share
with us any data that would help us to understand how our
customers are using the program--or whether they are . . . To
be quite candid . . . we don't have a clue how our customers
feel about this program. Maybe 99 percent of them love it and 1
percent complain. Maybe 99 percent hate it but only 1 percent
complain.\101\
---------------------------------------------------------------------------
\101\ E-mail from Webloyalty partner employee to Webloyalty
employees (Feb. 6, 2008) (Webloyalty Doc. 95894).
Two months later, the e-retailer informed Webloyalty that ``we have
decided to part ways because as time went by it became clear to us that
our customers don't want this program.'' \102\
---------------------------------------------------------------------------
\102\ E-mail from Webloyalty partner employee to Webloyalty
employees (April 16, 2008) (Webloyalty Doc. 96060).
---------------------------------------------------------------------------
In May 2008, an Affinion employee discussed concerns raised by
Hotwire, an Affinion partner, in an e-mail to a colleague. She stated,
``Hotwire is claiming that they're receiving a high volume of CS
[customer service] noise--approx 1 out of every 6 members calls them to
complain.'' \103\
---------------------------------------------------------------------------
\103\ Internal Affinion e-mail (May 20, 2008) (Affinion Doc. AFSE
06-2506).
---------------------------------------------------------------------------
Also in May 2008, Vertrue supplied a ``New Product Questionnaire''
to one of its retailer partners, VistaPrint, in order to learn
VistaPrint's thoughts about the rewards program the two companies had
partnered on. One question asked, ``What are the top 3 likes and
dislikes with VistaPrint Rewards?'' For dislikes, VistaPrint replied,
``Customer Noise''; ``Ability/Difficulty to redeem benefits, including
$10 Cash Back''; ``Clarity of the offer''; and ``20 percent off not on
purchase of gift card but later.'' \104\
---------------------------------------------------------------------------
\104\ Vertrue questionnaire (May 7, 2008) (Vertrue Doc. 111917).
---------------------------------------------------------------------------
In June 2008, the Director of Client Services for Vertrue's
Adaptive Marketing acknowledged that Restaurant.com had raised concerns
by stating, ``we will create some mockups for ways the Restaurant.com
marketing flow can be changed for the purpose of making the marketing
less aggressive, in hopes of reducing customer noise and negative
impact to the Restaurant.com brand.'' \105\ This official also admitted
that while more ``conservative'' marketing would ``help to reduce
consumer noise,'' it would also likely have ``some negative impact on
conversion and revenue.'' \106\
---------------------------------------------------------------------------
\105\ E-mail from Vertrue Director, Client Services to
Restaurant.com employee (Jun. 9, 2008) (Vertrue Doc. 105186).
\106\ Id.
---------------------------------------------------------------------------
VII. Conclusion
Affinion, Vertrue and Webloyalty use aggressive sales tactics
intentionally designed to mislead online shoppers. These three
companies exploit shoppers' expectations about the online purchasing
process to charge millions of consumers each year for services the
consumers do not want and do not understand they have purchased.
Hundreds of e-commerce merchants--including many of the best-known,
respected websites and retailers on the Internet--allow these three
companies to use aggressive sales tactics against their customers, and
share in the revenues generated by these misleading tactics. While
Congress and the Federal Trade Commission have taken steps to curb
similar abusive practices in telemarketing, there has not yet been any
action to protect consumers while they are shopping online.
______
Prepared Statement of Robert M. McKenna,
Attorney General of the State of Washington
Thank you to Chairman Rockefeller, Ranking Member Hutchinson, and
the members of the Committee on Commerce, Science, and Transportation
for inviting me to provide my written statement to the Committee.
I am Robert M. McKenna, Attorney General of the State of
Washington. The subject matter of this hearing is of great importance
to the consumers of this country, and I therefore commend the Committee
for being responsive to the increasing number of consumer complaints
regarding the marketing and billing practices of the companies under
investigation by the Committee.
The Attorney General is the primary state official who responds to
consumer complaints and enforces state laws designed to protect
consumers from unfair and deceptive business practices. My office has
taken the lead in enforcing those laws in the Internet marketplace with
the creation of our High-Tech Unit over 10 years ago. As e-commerce has
flourished, so, too, unfortunately, have deceptive practices on the
Internet. One of the significant advantages for consumers to shopping
online has been the convenience and efficiency of the experience. What
might take hours in the brick and mortar world to accomplish may take
only a few minutes online. This has not been lost on some unscrupulous
marketers who are exploiting consumers' expectations of a quick and
efficient transaction process. Certain sellers and marketers have been
interrupting consumers' online transactions by making offers that
appear to relate to the consumers' transaction, but, in fact, do not.
The marketing offers instead involve a subscription to an unrelated
membership program that is billed on a recurring basis. As soon as my
office noticed a trend in complaints relating to this form of
marketing, we opened several investigations into companies conducting
such marketing. These investigations have been time-consuming,
resource-intensive, and complex, but they have provided us with
voluminous evidence of the harmful effects of these marketing practices
on consumers.
There are three general marketing methods that our office has
found, when combined, deceive a substantial portion of consumers and
result in their unknowing enrollment in membership programs. First,
sellers offer consumers free trials for services or products that
automatically convert to paid subscriptions unless the consumer
affirmatively cancels during the free trial period to induce consumers
to purchase services or products (known as ``free-to-pay conversion
offers''). Second, sellers obtain consumers' financial account
information from third parties so that they are able to bill consumers
for products or services without the consumer having to provide their
account information directly to the seller during the transaction
process (referred to as ``preacquired account marketing'' or a ``data
pass'' process). And third, sellers market their products and services
during the consumer's transaction process with a third party (sometimes
referred to as ``post-transaction marketing'' or ``interstitial
marketing''). Unscrupulous marketers and sellers have designed
marketing campaigns that combine each of these marketing methods in
such a way as to deceive consumers into enrolling in membership
programs for which consumers are billed on a recurring basis.
A typical example of this type of marketing as it appears on the
Internet is as follows:
After a consumer places an order for a product or service and
enters his or her payment information on an ecommerce site, an
offer for $10 cash back for filling out a survey appears on the
screen. The impression left on the consumer by the Web page is
that he or she should fill in the survey, enter his or her e-
mail address (sometimes twice) and click on the button to
complete his or her purchase and claim the $10 cash back. In
fact, by clicking on the button, the consumer is purportedly
agreeing to be enrolled in a free trial for a membership
program that will be charged automatically on a recurring
monthly (or, in some cases, annual) basis to the account the
consumer used to make the purchase of the product or service.
The fine print on the Web page discloses that by clicking on
the button associated with completing the purchase or
submitting the survey, the consumer is purportedly authorizing
the e-commerce site to transmit the consumer's financial
account information to an undisclosed third party. Despite the
disclosures, the offer misleads consumers into believing that
the offer is for $10 cash back for taking a survey, not an
offer for a trial in a membership program, which is the
``true'' offer and is disclosed only in the fine print. In
general, the offers appear to be coming from the e-commerce
site and do not disclose the third party that is actually
making the offer.
The Washington Attorney General's Office has been able to identify
several hundred consumer complaints filed with our office in the last 2
years alone that involve the consumer having been enrolled in a
membership program without his or her knowledge and having been
automatically billed for the program without his or her authorization.
Based upon these complaints and extensive investigations, we have
observed a number of significant problems with this form of marketing,
including:
1. Consumers do not expect that the financial account
information that they provide for one transaction will result
in ongoing charges placed by a third-party company;
2. Consumers have difficulty identifying and contacting the
seller of the membership program to cancel or otherwise
terminate any ongoing or recurring obligation because the
sellers frequently do not identify themselves in the offers;
3. Sellers use a variety of distractions to obscure the
``true'' offer, e.g., offering cash back on the consumer's
primary purchase and using ``consumer surveys''; and
4. The use of words ``free'' or ``trial offer'' to market free-
to-pay conversions leads consumers to believe that they do not
have to take further action in order to avoid ongoing charges.
More specifically, our investigations have shown that hundreds of
thousands of consumers in Washington State alone have found themselves
subscribed to membership programs as a result of shopping online and
that the vast majority of enrolled members have not used the benefits
associated with the membership programs.
I cannot overstate the consumer injury that is occurring because of
these marketing methods. Based upon our office's investigations, we
estimate that well over $50 million has been deceptively obtained from
Washington consumers over the course of the last 4 years by a
relatively small handful of businesses conducting the type of marketing
at issue in this Committee's investigation.
Our investigations have gathered an extraordinary amount of
evidence showing that companies engaging in this form of marketing are
aware that their marketing and billing practices are deceiving
consumers and that the vast majority of consumers enrolled in their
membership programs never authorized the enrollment. The companies
under investigation in Washington have received thousands of consumer
complaints both directly from consumers and through the Better Business
Bureaus and the offices of the state attorneys general. These companies
have done little to nothing to stop the deception despite knowing that
they are obtaining unauthorized enrollments. Some of these companies
make it very difficult for the consumer to cancel the membership if and
when the consumer discovers the charges. They add insult to injury by
refusing to provide complete refunds to consumers unless they complain
to an outside agency, such as an Attorney General's office.
Many of these companies believe that the disclosures that are made
in the marketing offers insulate them from liability, despite the
substantial evidence in front of them that consumers are inadvertently
enrolling in the membership programs. Our investigations have shown
that disclosures in this kind of marketing are not sufficient to
overcome the inherent potential for deception. Because there is such
overwhelming and compelling evidence that this form of marketing
deceives consumers, I have requested state legislation to regulate the
practices at the heart of the deception. My office proposes state law
that would require sellers using free-to-pay conversion offers to
obtain the consumer's financial account information directly from the
consumer during the transaction for the free-to-pay product or service.
The proposed legislation, which did not pass when originally introduced
in the Washington legislature last year, was opposed by some
businesses. We expected such opposition, because our investigations
have revealed that marketing using a free-to-pay conversion where the
seller has preacqui red account information or uses a data pass process
is extremely lucrative; however, these profits are the result of unfair
and deceptive practices and belong back in the pockets of consumers.
Of course, using preacquired account information or a data pass
process to market products and services by means of free-to-pay
conversion offers during the consumer's transaction with a third party
is not a new marketing technique. A $14.5 million multistate settlement
with Trilegiant, now known as Affinion, and Chase Bank in 2006
attempted to curtail deceptive marketing practices involving free-to-
pay conversion offers and preacquired account marketing by imposing
greater disclosure requirements in direct mail offers. Furthermore,
numerous states have entered into settlements with MemberWorks, now
known as Vertrue, to address that company's deceptive negative-option
marketing. In fact, both the Federal Trade Commission (``FTC'') and the
states have a decade-long history of enforcement and consumer education
efforts to tackle the deceptive marketing of services and products
through free trial offers and the improper transfer or misuse of
consumers' account information. However, we have found that truthful
disclosures are insufficient to cure the inherent potential for
deception in preacquired account marketing or the data pass process in
conjunction with free trial offers.
The FTC recognized the inherent potential for consumer deception in
sales situations in which the seller had preacquired consumer account
information when it created the requirement in the Telemarketing Sales
Rule (TSR), which implements the Telemarketing and Consumer Fraud and
Abuse Prevention Act, 15 U.S.C. 6101-6108, as amended, that sellers
must audiotape transactions involving free-to-pay conversions where the
seller has preacquired account information of the consumer. In
addition, the seller must obtain from the customer, at a minimum, the
last four digits of the account number to be charged.
The complaints we have received, along with our investigations,
point to one conclusion: preacquired account marketing (or use of a
data pass process) in conjunction with free-to-pay conversion offers
has the inherent potential to deceive, despite the presence of
disclosures. The stark fact of how many consumers have actually been
deceived by this form of marketing--in the telemarketing, direct mail,
and Internet channels--is overwhelmingly persuasive.
Thank you for the opportunity to provide this statement and to
inform the Committee of the experiences my office has had in
investigating and combating the deceptive business practices that are
at issue in the Committee's investigation. I would be happy to provide
further information at the Committee's request.
______
Prepared Statement of Benjamin Edelman,
Assistant Professor, Harvard Business School
Chairman Rockefeller, Ranking Member Hutchison, members of the
Committee:
My name is Benjamin Edelman. I am an Assistant Professor at the
Harvard Business School, where my research focuses on the design of
electronic marketplaces, including designing online marketplaces to
assure safety, reliability, and efficiency. My full biography and
publication list are at http://www.benedelman.org/bio and http://
www.benedelman.org/publications. Relevant disclosures appear on the
final page of my testimony.
Today the Committee considers important questions of consumer
protection in the context of certain online marketing offers with a
special tendency to deceive. I apologize for my absence (the result of
prior commitments), but I applaud the committee's efforts. My bottom
line:
Post-transaction marketing offers systematically reach
consumers in a time when consumers are particularly vulnerable.
Post-transaction offers feature deceptive designs that invite
consumers to conclude, mistakenly, that the offers comes from
the companies the consumers have chosen to frequent, and that
the offers are a required part of the checkout process.
The automatic transfer of consumers' payment information
from a merchant to a post-transaction marketer runs contrary to
consumer expectations, and creates a heightened risk that
consumers will ``accept'' financial obligations they did not
intend to incur.
Disclosures fail to cure the deception created by post-
transaction offers, their timing and formatting, and their
automatic transfer of consumers' payment information.
Straightforward remedies could protect consumers who have
suffered unwanted charges, and could prevent further consumers
from incurring similar charges.
Post-Transaction Marketing Generally
It is all too easy for a consumer to stumble into a post-
transaction marketing offer. Typically, a user requests a merchant site
to browse products and perform a purchase. Having added items to an
electronic shopping cart, the user presses a button to check out, then
completes a series of forms to provide a shipping address, billing
address, payment method, shipping speed, and more. At the conclusion of
that process, the user expects to receive a page confirming that the
order has been accepted and will be processed. Instead, the user
receives a ``post-transaction offer'' from an unrelated third party. If
the user responds to that offer, the user comes to be enrolled in the
third party's program. Typically, such programs entail recurring fees
of $10 or more per month--charges that continue unless and until the
user takes action to insist that the charges cease.
An ordinary web search for the names of top post-transaction
marketers reveals thousands of dissatisfied users. Post-transaction
marketers have earned unsatisfactory ratings from the Better Business
Bureau, and their practices have been subject to consumer class
actions. In the following sections, I analyze specific practices that
have led to consumers becoming enrolled in post-transaction recurring-
billing schemes without meaningful knowledge or consent.
The Timing, Placement, and Format of the Post-Transaction Offers
Deceptively Suggest that the Offers are Part of the Checkout
Process
Users in an online checkout process have a reasonable expectation,
well-grounded in standard practice at most websites, that checkout will
consist of a series of steps, each with a button (usually in the
bottom-right corner) required to proceed to the next step. Users
rightly expect that a checkout process will end in a page that
prominently reports that the transaction was successful. Post-
transaction marketing flies in the face of these expectations.
Checkout sequence. Post-transaction marketing challenges norms for
checkout sequencing. A post-transaction offer generally appears as a
screen that a reasonable consumer might mistake for an intermediary
step toward the completion of the requested purchase. The post-
transaction offer's color scheme, layout, and overall design are
typically consistent with the prior screens in the checkout sequence,
and there is usually no large and prominent report that the requested
transaction has been completed. Committed to finishing the desired
purchase, and burdened by a lengthy checkout process, a user is
especially likely to press a button with an affirmative label without
reading the details and without learning that the button actually
accepts an unrelated offer. Haste is reasonable in this context: The
many steps in an online checkout processes leave users unusually
vulnerable to unrelated offers that, through their timing, appear to be
a necessary part of the checkout sequence.
Size and shape. The unusual shape and size of post-transaction
offers further hinder consumers' efforts to recognize the offers as
advertisements. From experience around the web, consumers recognize
that most online ads conform to certain standard shapes and sizes. But
post-transaction offers appear in unusual sizes--making them less
readily recognizable as advertisements.
Format and design elements. The format of post-transaction offers
compounds deception. On many sites I have examined, post-transaction
offers mimic the color scheme, fonts, and other design characteristics
of the sites in which they appear. Post-transaction offers even present
design elements thematically linked to the surrounding merchant's site.
(For example, a post-transaction offer on a florist's website often
shows flowers as part of its pitch.) These design elements further blur
the boundary between the requested site and the post-transaction offer.
Buttons versus links. Post-transaction offers often use a button
for a positive option (e.g., to accept the offer), while a negative
option is a bare hyperlink. From experience around the web, users
naturally expect that buttons, not mere hyperlinks, advance from page
to page in an online checkout process. By presenting the affirmative
choice in a button but the negative option in a hyperlink, post-
transaction offers make the affirmative choice that much more
appealing--closer to what users expect to need in order to proceed
through checkout.
Automatic Transfer of Consumers' Payment Information Removes a Key
Warning that Users Are Incurring a Financial Obligation
A distinctive characteristic of post-transaction marketing is the
automatic transfer of users' payment information from a merchant
website to the post-transaction marketer. As a result, a user can end
up facing recurring credit card charges from a post-transaction
marketing program without the consumer ever typing a credit card number
into any site or form operated by the post-transaction marketer.
To most users, automatic transfer of payment information is quite
unexpected. For one, it violates widespread norms about how online
advertising works. Clicking an ad on a newspaper's website does not
give the advertiser the user's credit card number, even if the user is
a paying subscriber of the newspaper. But, remarkably, clicking a
similar post-transaction offer can indeed transfer a credit card
number--eliminating a key warning that would otherwise alert consumers
to the impending financial obligation.
Consumers rely on the process of providing a credit card number as
a barrier to unexpected charges. Users rightly expect that by clicking
from site to site, button to button, they do not incur financial
obligations. This expectation is part of what makes the web fun,
flexible, and low-risk: Users believe they cannot incur financial
obligations except by typing their credit card numbers, and users
expect to be able to cancel an unwanted transaction if a site requests
a credit card number that a user does not care to provide. Here too,
post-transaction marketing defies settled norms. By obtaining a user's
credit card number directly from an affiliated merchant, a post-
transaction marketer can charge a consumer who has not performed the
evaluation that consumer would naturally impose before knowingly
entering into a paid relationship.
Credit card network rules confirm the impropriety of automatic
transfer of users' payment information. Visa's Rules for Merchants \1\
say charges may occur after a ``cardholder provides the merchant with
the account number, expiration date, billing address, and CVV2'' (page
12). Visa's requirement is clear: the ``cardholder'' must provide the
information; Visa does not indicate that any designee (such an
independent website) may provide this information to a partner who will
later charge the consumer for separate and unrelated services.
---------------------------------------------------------------------------
\1\ http://usa.visa.com/download/merchants/
rulesXforXvisaXmerchants.pdf.
---------------------------------------------------------------------------
In a summer 2009 change, one post-transaction marketer began to
require that a user retype the last four digits of a credit card number
before becoming enrolled in that company's service. Although this
requirement may reduce some accidental enrollments, it does not address
the core deception that yields unrequested signups. In no other context
site can typing just four digits begin a recurring billing
relationship; consumers rightly and reasonably expect that entering a
paid relationship requires typing an entire card number. Indeed, Visa's
Rules for Merchants require that the consumer provide ``the account
number''--the entire account number, not a small portion thereof. To a
typical consumer, a request to reenter a portion of a card number looks
more like a verification process than authorization: Thanks to Verified
By Visa, nonretention of customers' CVV codes, and other efforts to
reauthenticate online purchases, consumers expect these extra requests
in their online purchases. But typing four digits does not indicate
that a consumer authorizes credit card charges from a company with
which the consumer otherwise has no relationship.
Disclosures Fail to Cure the Deception of Post-Transaction Marketing
Practices
Post-transaction marketers typically argue that their disclosures
tell consumers what they're signing up for--suggesting that any
consumer who signs up must in fact want the service. I disagree.
Although post-transaction marketers typically do mention pricing and
selected product details, the substance and format of these disclosures
fail to cure the deception created by the substance and context of the
offer.
For one, post-transaction disclosures are typically positioned
where they are easily overlooked. For example, consumers naturally
begin their inspection of a web page at the top-left corner (where key
information usually appears), and consumers naturally proceed
diagonally toward the bottom-right (which, especially in a checkout
page, typically contains the button to proceed to the next step).
Following this standard pattern, a disclosure in the bottom-left corner
is naturally overlooked. Yet the bottom-left corner is exactly where
many post-transaction offers present key details of their service.
Post-transaction offers also often bury mention of key terms--for
example, the monthly charge and the fact that charges recur each
month--within long paragraphs. In the example disclosure that post-
transaction marketer Webloyalty provided to CNET News.com in July
2009,\2\ the first mention of Webloyalty's ``$12 per month'' charge
appears six lines into the second paragraph of text- a location easily
overlooked by a consumer skimming the text. Furthermore, that mention
appears under headings labeled ``Thank you . . .'' and ``Sign up to
claim your rewards!''--headings giving no suggestion that the paragraph
actually discloses a charge.
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\2\ http://bto.cnet.com/i/bto/20090723/WEBLOYALTY.jpg.
---------------------------------------------------------------------------
In the context of unprecedented automatic transfer of credit card
numbers from one company to another, disclosures must be exceptionally
effective to overcome consumers' longstanding expectation that only
typing a credit card number can create a financial obligation. I
suspect consumers' confusion is so fundamental that no disclosure can
cure the problem. The confusion certainly is not cured by ordinary
plain-type text presented within extended boilerplate below an
irrelevant header.
Credit Card Network Rules Disallow Key Post-Transaction Marketing
Practices
Credit card networks rules specifically disallow important post-
transaction marketing practices. For one, as detailed above, Visa's
Rules for Merchants require that the ``cardholder''--not any
intermediary or merchant--provides the card number to the company
seeking to charge the consumer's card. To the extent that post-
transaction marketers obtain customers' card numbers in other ways,
e.g., from other merchants that already hold consumers' card numbers,
credit card networks should disallow such charges.
Post-transaction marketers also appear to violate credit card
network rules about recurring payments. Visa's Rules for Merchants
state that ``Cardholders should be routinely notified of regular
recurring payments . . . at least 10 days in advance'' of each such
charge (page 57). Most recurring billing merchants comply with this
rule; for example, I receive monthly notifications from my mobile phone
carrier and my broadband provider. However, I understand that post-
transaction marketers do not provide such notifications. Visa's rules
are clear, and post-transaction marketers should comply with Visa's
requirements.
Low Service Usage Rates Support an Inference of Deception
When consumers pay for a service but systematically fail to use
that service, there is ample basis to conclude that consumers did not
intend to buy the service and that the service's marketing is
deceptive. See FTC v. Cyberspace.com, LLC, 453 F.3d 1196, 1201 (9th
Cir. 2006), drawing an inference that solicitation was deceptive from
the fact that less than 1 percent of consumers ever used an Internet
service they allegedly accepted by cashing or depositing a solicitation
check.
The FTC's reasoning is directly on point in the context of post-
transaction marketing. A Webloyalty press release from August 2009
claims ``over 2 million memberships.'' \3\ Yet traffic analysis service
Alexa.com reports that neither Webloyalty
.com nor any of its product sites (Reservationrewards.com,
Shopperdiscounts
andrewards.com, Travelvaluesplus.com, Walletshield.com, and
Completesavings.com) appear within Alexa's top 100,000 sites. The
difference is readily explained: Blogs, new stories, litigation
allegations, and other sources all report systematic user complaints
that they did not know they were enrolled in a Webloyalty program and
that they certainly never used any Webloyalty services. As in
Cyberspace.com, this gap between signups and users confirms that
Webloyalty's marketing failed to obtain meaningful consent from the
users who purportedly ``accepted'' Webloyalty's offer.
---------------------------------------------------------------------------
\3\ `` Webloyalty Announces Relationship with Clipper Magazine.''
August 19, 2009.
---------------------------------------------------------------------------
Ordinary Market Mechanisms Do Not Hold Post-Transaction Marketers
Accountable
The structure of post-transaction marketing impedes users' efforts
to determine which merchants passed their payment information to a
post-transaction marketer--preventing users from complaining to those
merchants. As a result, the merchants that provide users' credit card
numbers to post-transaction marketers generally escape criticism for
supporting these practices.
Meanwhile, users sometimes blame companies that in fact had no role
in post-transaction marketing. For example, I have read complaints
blaming Amazon, AOL, eBay, and Paypal for subscribing users to
Webloyalty, when in fact not one of these companies has ever promoted
Webloyalty.
Competition between firms further hinders accountability. When a
sector includes some sites that promote post-transaction offers and
some sites that refuse to include such offers, the former group enjoys
a revenue advantage that the latter lacks. As a result, the former can
tout lower prices--knowing that some portion of users will see a post-
transaction offer, respond, and incur charges that make up for the
lower up-front price. Users appreciate the low posted prices but cannot
readily assess the costs of post-transaction marketing. As a result,
sites that participate in post-transaction offers appear to offer lower
prices and a better value, when in fact their revenue advantage is, for
many users, illusory and in any event, ill-gotten.
Suggested Remedies
I suggest seven specific remedies for deceptive post-transaction
marketing practices:
End automatic credit card transfer. Merchants should cease
providing, and post-transaction marketers should cease
receiving, consumers' credit card numbers. If a consumer is to
sign up for a post-transaction offer, the consumer should
retype her credit card number -just as is required for all
other online purchases. This additional step will help the
consumer understand that the post-transaction offer is separate
from, and additional to, the transaction the user had initially
requested.
Improved disclosures. Under a clear heading (``monthly
fee''), separate and apart from other text, a post-transaction
disclosure should present the essence of the consumer's
obligation. Language should be clear and direct--concise
declarative sentences, without unnecessary complication or
excess detail. Formatting should be designed to draw attention
to these key disclosures, separating this material from
marketing copy.
Monthly reminders of impending charges. Consistent with
credit card network rules, post-transaction marketers should
notify each consumer before each monthly charge.
Disclosure of consumer signup sources. In monthly e-mails to
consumers, in an online account management interface, in call
center scripts, and/or in credit card charge details, post-
transaction marketers should remind consumers how they signed
up.\4\ No consumer should be left wondering which website
presented a post-transaction offer.
---------------------------------------------------------------------------
\4\ At the suggestion of the Center for Democracy and Technology,
similar accountability was added to certain adware popups-telling
consumers what software caused them to receive the bundled adware that
later showed popups. Such accountability helped put an end to deceptive
adware bundles.
Easy reversal of unauthorized charges. Pursuant to a class
action settlement, Webloyalty currently agrees to refund
historic charges if a user completes and mails a four-page
affidavit. But Webloyalty was happy to enroll users with just a
few clicks, and cancellation of charges should be equally
easily--not requiring a lengthy form, signature, certification,
and more. Nothing in the settlement prohibits Webloyalty from
granting refunds more easily than the settlement requires. Nor
should these refunds become unavailable when the settlement
---------------------------------------------------------------------------
claims period comes to a close.
Notification and easy refunds for current non-users. For
current subscribers of post-transaction services who have not
used such services recently (or at all), there is good reason
to doubt the efficacy of prior ``consent'' for associated
charges. Such users should receive individual e-mail and postal
notification of the programs in which they have been enrolled,
the duration of enrollment, and the charges they have incurred.
Withdrawal and refund should be as easy as possible--a single
hyperlink or a return postcard. All charges should be refunded
to the consumer's original form of payment or by check, without
requiring an extended refund procedure or affidavit.
Ongoing cross-check of usage rate. If a paid service has an
unusually low usage rate, that is prima facie evidence that
users may be enrolling in the service without understanding
what they're getting. The FTC, state attorneys general, or this
committee could monitor usage rates at large post-transaction
marketers to confirm that large numbers of consumers are not
tricked into paying for services they are not using.
Last month FBI Director Robert Mueller admitted that he nearly
succumbed to a phishing scheme. In response, Mueller's wife banned him
from further online banking. That's a troubling outcome--in part for
the public's ongoing losses to phishing, but also for the costs and
inefficiencies that will result if others follow Mueller's lead and
abandon online banking.
Through its current work, this committee can protect the balance of
online commerce from the deterioration of trust currently tainting
online banking. I seek an Internet that is safe for commerce--safe not
just for the savvy shopper and tech expert, but also for regular users,
including users who are busy, hurried, distracted, or even naive.
Conversely, the Internet cannot achieve its full potential if
convoluted schemes trick consumers into incurring charges for services
they did not request and did not fairly accept. Trusted Internet
commerce has no place for credit card numbers copied from merchant to
merchant, for obfuscated disclosures, or for tricky charges disguised
as ``savings.'' Ongoing oversight by this committee can help put an end
to these important problems.
Disclosures
I appear on my own behalf, not on behalf of Harvard Business School
or anyone else.
I serve as a consultant to a variety of companies on subjects
unrelated to those issue here, though often generally on the subjects
of online advertising and fair treatment of consumers. My biography,
http://www.benedelman.org/bio, details those of my clients for which I
have had occasion to make public disclosure.
______
Webloyalty.com
Norwalk, CT, November 16, 2009
Hon. John D. Rockefeller IV,
Chairman,
Hon. Kay Bailey Hutchison,
Ranking Member,
U.S. Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Mr. Chairman and Ranking Member Hutchison:
I write in regard to the hearing that is scheduled for tomorrow,
Tuesday, November 17, 2009, on Internet marketing practices. As you are
aware, Webloyalty has been cooperating with the Committee's
investigation and we agree that this is an important inquiry.
Please know that I readily agreed to your staff's invitation to
testify this week, but that invitation was withdrawn. Even though I
have not been permitted the opportunity to testify today and I strongly
disagree with some of the characterizations that your staff has used in
promoting this week's hearing, I remain hopeful that you will afford
Webloyalty a fair hearing on the issues surrounding point-of-sale
marketing on the Internet.
Our company stands ready to testify at any time and I repeat the
offer we have made many times to your staff: we are fully prepared to
work with the Committee in crafting industry-wide rules that protect
consumers and allow them the benefits of what we believe are our
valuable membership programs that provide significant advantages.
Toward that goal, I thought it might be helpful to provide you with
some background, elaborated in the attached Webloyalty Fact Sheet, on
our company and how we do business. In particular, I want to address
the concerns raised regarding consumers' awareness that they are
joining a subscription program and the value they receive when they
join.
At the point of sale by one of our e-retailer partners, Webloyalty
offers subscription programs that can save consumers hundreds of
dollars each year on travel, entertainment, shopping and dining out.
This type of marketing has existed for many years in the off-line
world. We are all familiar with, for example, being offered an extended
warranty when purchasing an appliance or personal training sessions
when joining a gym. We have learned much about adapting this approach
to the Internet to ensure consumers know what they are buying and how
they are paying for it. We have made significant strides in listening
to consumers and working with our e-retailer partners to continually
improve the clarity of our offers and the quality of our services.
Effective August 1, 2009, we introduced several changes to the way
consumers join our programs and how we communicate with them once they
become members. Most significantly, in addition to enhanced written
disclosures, Webloyalty began requiring consumers to enter the last 4
digits of the credit or debit card they used to pay for the purchase
from our e-commerce partner to confirm they want to charge that card
for their membership after a 30-day trial period. The Company stands
ready to discuss with the Committee this and other possible solutions
that provide assurance that consumers are affirmatively choosing to
join our programs.
We do not want members in our programs who are unaware they have
joined. Our programs work best for consumers and our company when our
members are active users of the savings and discounts we provide.
Following enrollment we send new members at least five e-mails during
the 30-day trial period to encourage use of the service and remind them
about billing. We also make it easy to cancel a subscription, if a
member so chooses. Every communication includes our toll-free customer
service number that members can use to ask questions about program
benefits or to cancel their membership.
We believe the changes we have made over the years culminating in
our most recent changes in August demonstrate our commitment to
learning from our experience and continuously improving the way we
engage with consumers. We believe our current practices set a new
standard for the industry and we are gratified that others in the
industry are now adopting the measures we implemented last August.
We appreciate the efforts of the Committee to ensure that firms
that engage in point-of-sale marketing on the Internet use appropriate
consumer protection measures. Webloyalty is strongly of the view that
our membership programs bring great value to our customers and we hope
you will be mindful of the many changes that we have made in our
marketing approaches in an effort to bring greater transparency and
meaningful communication to consumers.
We are hopeful that the changes we have adopted address many of the
concerns raised by this Committee's inquiry. We look forward to working
with the Committee to help you understand and continue to improve our
industry.
Thank you for the courtesy of receiving this communication; I
respectfully request that this letter and the attached Webloyalty Fact
Sheet be made a part of tomorrow's hearing record.
Respectfully yours,
Richard Fernandes,
CEO.
Cc: Members of the Committee
______
Webloyalty Fact Sheet
November 2009
Company Description
As the leading provider of online membership subscription programs,
Webloyalty provides easy access to dining, shopping, travel discounts
and additional travel protection benefits. Through its ever growing
network of benefit providers, Webloyalty offers more than 60,000 dining
discounts, 25,000 shopping discounts and 10,000 attraction discounts
throughout the U.S. and Canada.
Webloyalty provides savings and offers through four membership
programs--Reservation Rewards, Shoppers Discounts & Rewards, Travel
Values Plus, and Complete Savings--to consumers who have already
established relationships with an online commerce site. Our members
typically join by responding to an offer made as they complete a
purchase with one of our e-commerce partners. They immediately gain
access to all the program's benefits on a 30-day trial basis at no cost
to the consumer and for a monthly subscription fee thereafter.
Webloyalty is dedicated to upholding the highest standards of fair
conduct and transparent practices, as described in our Principles,
which influence all that we do:
Value --Webloyalty is committed to providing value to all online
consumers who join our programs.
Webloyalty wants customers to take full advantage of our
products and services to save money and access benefits they
may not be able to find on their own.
Transparency--Webloyalty wants consumers to know what they are
buying and how they are paying for it.
The key terms of any membership offer, including cost,
methods of payment and opportunity for cancellation must be
easily identifiable and readily understood.
The key terms of any membership offer must be provided to
the consumer before the consumer consents to join a program.
Affirmative Consent--Webloyalty believes that the consumer should
authorize every billing-related transaction with information plainly
related to billing.
Privacy and Security--Webloyalty meets, and seeks to exceed, the
most stringent industry standards for protecting consumers' personal
information.
Customer Service--We are committed to providing the highest level
of customer service to all consumers and addressing their concerns
promptly and satisfactorily.
Services/Programs
Webloyalty offers are a form of point of sale marketing, similar to
a magazine at a supermarket checkout or receiving an offer for a car
rental following the purchase of an airline ticket. After completing a
sale with one of our e-commerce partners, we offer benefits that, if
accepted, provide consumers the ability to save on their next purchase
from the partner's site as well as access to savings on other products
and services.
Webloyalty offers subscription membership programs that can save
consumers hundreds of dollars each year on entertainment, shopping and
dining out. Some examples of our combined program benefits include but
are not limited to:
Discounted gift cards (typically 20 percent off) for popular
stores, sites and restaurants
$5 movie tickets for national chains, including AMC
Entertainment; Cinemark Theatres (Cinemark, Century Theatres,
Cinearts and Tinseltown); Mann Theatres; National Amusements
Theatres and Pacific Theatres
Coupons and values from national distributors including
Clipper Magazine, MoneyMailer and ValPak
Enrollment Process
Webloyalty's practices have evolved over the years and, since
August, the company has made a number of changes to the enrollment
process including requiring consumers to take the additional step of
entering the last four digits of the credit or debit card they used to
pay for the purchase from our e-commerce partner to confirm they want
to charge that same card for their membership following a 30-day free
trial period. The process is as follows:
Consumers are shown a full-page solicitation offering one of
Webloyalty's programs for $12 per month after a 30-day free
trial period and $25 cash back for trying the service. If
consumers wish to accept the offer to join the program, they
must enter an e-mail address twice and, as of August, 2009,
must enter the last 4 digits of their credit or debit card to
indicate consent to have that card billed for the membership
following the free trial period. The consumer then clicks the
``YES! Click Here to Sign Up'' button.
To the left of the ``YES!'' button are the ``Offer and Billing
Details'' which explain that consumers will be billed on the credit or
debit card used for the transaction with our e-commerce partner. The
following information appears above the ``YES!'' button, with the
following language:
``Enter the last 4 digits of your credit or debit card and
your e-mail address as your electronic signature to confirm
that you have read and agree to the Offer and Billing Details
and authorize to securely transfer your name,
address and credit or debit card information to for billing after your 30-day free trial.''
After the consumer has consented, the consumer's billing
information is passed from the e-commerce partner to Webloyalty
in an encrypted format to help ensure security and protect
privacy.
In sum, Webloyalty cannot and will not enroll a consumer in
one of our programs without that individual's express and
informed consent. The data transfer process works only if the
consumer:
Enters the last 4 digits of his or her credit or debit
card and it matches the data on the card used in the
transaction with our e-commerce partner;
Enters his or her e-mail address twice; and
Clicks on the ``YES! Click Here Now to Sign Up''
button.
Member Communication
Webloyalty regularly communicates with its members by sending at
least five e-mails in the initial 30-day trial membership period, all
prior to consumers incurring any costs.
All of the e-mails encourage members to use the service and
provide a 1-800 number for customer service;
Two of the e-mails provide reminders that the member's
credit card will be charged $12 per month at the conclusion of
the 30-day trial period. The e-mails also provide information
about how to cancel the membership before billing begins. If
either of the two billing reminder e-mails is returned
undeliverable, Webloyalty sends an offline letter with the same
information. If that letter is returned, the membership is
canceled.
Thereafter, members continue to receive regular
communications highlighting specific or new benefits.
We also make it easy for members to reach out to us by
phone, Internet or e-mail. In addition to a voice response
system that is available 24 hours 7 days a week, operators are
available 15 hours a day, Monday through Friday, and 8 hours a
day on Saturday and Sunday.
Statement from Webloyalty CEO Rick Fernandes
Webloyalty offers subscription programs that can save consumers
hundreds of dollars each year on entertainment, shopping and dining
out. We want consumers to know what they are buying and how they are
paying for it, and we will listen to consumers and work with our e-
retailer partners to continually improve the clarity of our offers and
the quality of our services. Effective August 1, 2009, we introduced a
significant change to our enrollment process: Webloyalty now requires
consumers to enter the last 4 digits of their credit or debit card to
confirm they want to charge that same card for their membership.
We believe the changes we have made over the years and continue to
make show that we are committed to learning from our experience and
continuously improving the way we engage with consumers. We believe our
current practices set a new standard for the industry and address many
of the concerns raised by the Senate Commerce Committee inquiry. We are
glad to see that others in our industry are following our lead.
The Chairman. And statements by members of the Committee
who wanted to be here but were unable to be here because, as
usual, there are many, many hearings going on.
A final question from our experts. I guess to you,
Professor Marotta-Wurgler. Affinion and Vertrue and Webloyalty
have recently announced their reincarnation and they've decided
to pull back a little bit. It's interesting, it's interesting.
I mean, it's just like, you know, I get a letter from the CEO
of US Airways Group, Inc., saying they're not going to do this
any more. We haven't even had the hearing and I got it
yesterday. Then Continental Airlines is going to check in and
probably pull out of the whole thing. It just shows how fragile
this whole situation is and how devastating it is and how easy
it is to make it devastating.
So Affinion, Vertrue, and Webloyalty have sort of pulled
back a little bit, and what they're now going to require their
customers, consumers, is to enter the last four digits of their
credit card for proof of acceptance of their offer. Now,
Vertrue announced this move just yesterday and Affinion
announced their move on Friday of last week.
Professor Marotta-Wurgler, I understand you recently
enrolled in one of these programs after you purchased movie
tickets from Fandango. Did they ask for your last four digits
of your credit card as proof of enrollment?
Ms. Marotta-Wurgler. Yes, Mr. Chairman, I did, on Friday
night. I thought it would be a good experience before the
hearing to actually enroll in this service. I was actually
concerned about whether the confirmation e-mails disclosed
anything.
And yes, I did purchase a movie ticket to see ``Where the
Wild Things Are,'' which I didn't go to. And I received a pop-
up telling me of a ``$10 reward'' everywhere, asking me to
please claim my reward, and requested that I enter my e-mail
address and the last four digits of my credit card number.
I was too lazy to pick up my credit card from my wallet,
which was far away from the chair where I was sitting. So what
I did, given that I was at the Fandango website, I went to my
account, where I saw my billing information, and of course
there were little stars crossed off on my credit card number,
except for the last four digits, which I just copied and pasted
onto the box that requested it, and I clicked ``I Agree.''
I don't think this is enough notice. It's clearly a little
bit better than it used to be, but it is clearly not enough
notice, for two main reasons. One is that these offers appeared
to come from the original vendor. So, it seems that when one's
dealing with the original vendor and given current business
practices, not only online but also offline, one associate
giving the last four digits of a credit card number as a way of
verifying one's identity, not as a way of paying. So when you
call your credit card company, they want to know who you are,
and they ask for the last four digits of your credit card
number or the last four digits of your social security number
as a way of identifying you.
So inserting the last four digits of my credit card number
didn't require any extra effort. It didn't really require that
much more attention, because I thought that Fandango was the
one offering me $10 for being a loyal customer and that they
were just trying to see that I was the person who I was
claiming to be, because now they have a little legend that says
``Limit One Per Person,'' just in case people are flooding to
be part of these types of services.
So yes, they give you on one side, but they take away on
the other. So I don't believe these are enough. They're clearly
better than the default, but they're certainly not enough.
The Chairman. I agree, and I thank you for that.
The great news is that Senator McCaskill is on her way over
here at about 127 miles per hour and she wants to get in one
round of questions before the vote. So I'll defer to her the
moment she steps in.
From my point, just a few closing thoughts. This
investigation, I think, starts and ends with the American
consumer. Everybody's taking advantage of everything they can.
The buck is always a temptation, and when it comes up, like in
telemarketing, we stop it. When it comes up here, we've got to
stop it. You can argue whether it should be the FTC or
legislation, whatever. But the point is, we have to stop it. We
have to stop it from happening ever again and expose it for
those who continue to do it.
My message to consumers I guess would be, be very careful.
Make sure your glasses are good so you can read fine print, but
you probably will never get there on that. That's a subject
that really makes me very, very angry, the use of fine print to
deceive Americans at all levels on many subjects which we have
not even covered at this hearing, the use of small print to
hide pharmaceutical secrets--you know, does this mix with that,
et cetera? Well, it's in the fine print. Well, you should have
read the fine print.
That infuriates me. So I think this is a huge problem. It's
a Main Street problem, it's an American problem. It's sort of
classic greed. The sad part is that, you know, these big
companies, they're getting 10 bucks a month or $19.95 a month,
and actually Webloyalty, et cetera, they can raise it to
whatever they want. There's nothing stopping them, right? So
they can raise it to whatever they want.
As I indicated, they get to try to figure out what the very
point is where Ms. Lindquist goes bananas because she suddenly
realizes she's really being had, and then she closes down. So
that fine art. Beware if you're a consumer.
I worry about this, frankly, because the holiday shopping
season is just beginning, and all over this country, people who
are in economic distress will be spending what few dollars they
have on holiday shopping because they have children and
grandchildren and that's what parents and grandparents tend to
do.
That brings me to my second thought, and that is my message
for the companies that profit from tricking consumers into
joining their clubs, yet say over and over again that what they
do is legal and they operate within the law. I'm not a lawyer,
but this is what I think. Just because you say what you do is
legal, it doesn't make it right.
Professor Cox, I'd like you to finish my sentence.
Mr. Cox. Amen.
The Chairman. All right.
We're waiting now on Senator McCaskill. Believe me, it's
worth the wait.
If we did this to telemarketers and stopped them cold,
what's the big problem?
Mr. Cox. Mr. Chairman, I don't actually agree that we've
stopped telemarketers cold. One of the things we did--and I was
intimately involved in the telemarketing sales rule
promulgation. But the original rule was exactly what we're
talking about: You just can't sell billing information and
can't give it to a third party.
Then somewhere in the process between the proposed rule and
the final rule, we wound up with this very complex process that
involved this concept of free-to-pay conversions. So actually
companies started to circumvent all of that by just charging a
dollar. Instead of saying it's free, they say it's a dollar to
get your $10 coupon or whatever. So there actually are still
problems, particularly with inbound telemarketing, where you
just call your customer service representative at the bank and
then when they're done talking to you they say: Oh, by the way,
would you like to do this?
An example of that would be Ticketmaster. You call
Ticketmaster and when they're done, depending on the kind of
ticket you called in for, they'll say: Are you interested in a
free trial offer in this?
I'm not sure that the telemarketing sales rule completely
solved that problem. In fact, I'm almost sure it didn't. I
think it raised the stakes just a little bit and that made it
enough so that companies shifted most of their resources over
the direct mail and the Internet. But the problem is if you
push those down, maybe this becomes more attractive. I don't
think we've completely solved that problem.
The Chairman. You know, granted I'm waiting for Senator
McCaskill, but the Internet is very interesting to me, because
it was discovered by DARPA and is the source of almost
everything that everybody does. I don't go on AOL.com; I go on
Amazon.com for books.
Then yet, under President George Bush and under President
Barack Obama, there are two Directors of National Intelligence,
who are the most powerful people in their two administrations'
respective intelligence worlds, have both said that the number
one national security threat is not North Korea, is not China,
is not Iran; it is cybersecurity. That is the use of the
Internet from any place in the world, undetectable for the most
part, to shut down already portions of Brazilian cities.
They've already done a lot of damage to the Pentagon, to a
variety of--downloading endless amounts of information from
secret U.S. Government sources.
So the Internet is our friend and the Internet is our enemy
and the most dangerous thing that confronts us in terms of
surviving. They can shut down a grid, they can shut down
hospital systems. I mean, it's a very tricky business to me,
the Internet.
If somebody can't tell me that Senator McCaskill is about
here, I'm going to close the hearing.
I'm sorry, I can't wait. If you want to, she'll pop in here
and she'll be worth it, because she's terrific. And she's a
prosecutor, attorney general, all this kind of stuff, and she's
just wonderful, and aggrieved on this subject.
I want to thank you all very, very much for taking the
time. I think I agree with you, Professor Cox, that this will
have, this hearing will have an effect. It already has. It may
be $10 or $20 a month, but its a wrongful $10 or $20 and it's
not fair to do that to the American people under any
circumstances, and we have to stop it.
Having said that, this hearing is adjourned.
[Whereupon, at 4:34 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Mark Pryor, U.S. Senator from Arkansas
I'd like to thank Chairman Rockefeller for holding this hearing
today. I welcome our expert witnesses and I thank them for being here.
Their testimony and feedback are important to inform our discussion.
I thank the Committee and staff for their hard work as they
continue to investigate in this area.
Today we examine certain Internet sales tactics and their impact on
the American consumer.
As the Subcommittee Chairman of jurisdiction over the Federal Trade
Commission, I am very interested in this subject. Protecting consumers
from unfair or deceptive acts or practices is one of the FTC's core
missions in its base statute.
For me, it's essential to determine whether and the extent to which
consumers are being misled or taken advantage of in this domain. If
consumers are being abused, this Committee will work together to
protect them.
I know many state Attorneys General have filed suit against the
players under investigation by the Committee. As a former state
Attorney General, their actions indicate to me that more scrutiny and
light must be shed on this subject.
If third parties are manipulating Arkansans and Americans' online
purchasing power, this causes a decline in the integrity of e-commerce.
Less consumers will be willing to make online purchases if they are
being charged for membership clubs they did not know they had enrolled
in.
Consumers must be empowered to control their purchase decisions--
whether the exchange occurs face to face or over the Internet. The
insertion or typing of credit card information online appears to signal
a consumer's consent to a purchase. Without this consent or requisite
action, I am skeptical of third parties that claim the rights to
consumers' hard earned dollars.
I look forward to learning more about the complex dynamics of this
debate.
Response to Written Questions Submitted by Hon. Claire McCaskill to
Robert J. Meyer
Question 1. These companies have a long history in the
telemarketing business and I'm sure have utilized research to figure
out who they want to go after. Do you know if these companies target
certain groups with their Internet practices? Do they deliberately
target seniors or vulnerable groups?
Answer. The number of customers taken in by these schemes is quite
large and cuts across age, education, and income classes. Within this
large pool, however, some segments are inherently more vulnerable than
others to the schemes, and the firms display evidence of exploiting
these selective vulnerabilities. Vulnerable sub-populations include
consumers of limited income for which the sign-up premiums would hold
particular appeal, older consumers who have had limited experience in
making purchases on line and may have not fully comprehend the complex
web layouts that typically accompany the solicitations, and younger (or
older ) consumers who are overly trusting of on-line solicitations.
Elderly consumers are also vulnerable in cases where their monthly
large statements are handled by third parties (e.g., a son or daughter)
who are less likely to noticed errant charges.
While I am not aware that these companies have an a priori goal to
target certain consumer groups, disclosures made to the Iowa Attorney
General's office by Vertrue, Inc. suggest they actively engage in
experimentation with different web designs, premiums, and program
content to discover those that maximize consumer take-up while
minimizing pay-outs of initial premiums and the filing of benefit
claims within the programs themselves. These experiments have yielded a
de facto targeting strategy that maximizes revenue from the groups
identified above. To illustrate, the schemes make use of sign-up
premiums that are likely to hold particular appeal among budget-
conscious consumers, such as free credit reports, small discounts on
purchases and gift cards that could be used at economy-focused
retailers such as Walmart. Likewise, the content of many of the benefit
programs themselves are also implicitly designed to hold special appeal
to either lower-come and/or older consumers, such as those that are
designed to look like health plans and financial privacy -protection
programs.
Question 2. Once people find out they have signed up for the
memberships, how difficult is it to cancel? Do the companies have
tactics they utilize to try to retain customers? How truthful or not
are they about what programs the customer has unwittingly entered into?
Answer. There are three parts to this question, and it is best
answered by describing the overall business objective of these firms
and the steps they take to achieve this objective. In essence, the
business model of these firms is rooted in an attempt to arbitrage
consumer ignorance; they seek to secure one or more months of un-
refunded membership payments from customers for a discount membership
program for which consumers are unaware that they are members, or for
which they are unable to secure any benefits.
While the programs vary quite a bit in specific content, in almost
all cases they are dead-loss propositions as viewed by the firm, in the
sense that the monetary value of the advertised benefits typically
exceeds the cost of providing those benefits. For example, a primary
feature of several of the shopping programs offered by Vertrue, Inc. is
the ability to secure gift cards to a variety of merchants at less than
face value--e.g., $25 Target Gift cards for $20. Because the programs
offer consumers no benefits other than the ability to obtain such
discounts, a consumer would rationally agree to pay for membership only
if the realized savings exceeds the monthly membership charge.
Disclosures made to the Iowa Attorney General's office, however,
indicated that in most cases the cost to the firms of securing the gift
cards is close to (and in some cases fully) face value. Hence, the
firms have a financial incentive to insure that consumer make little or
no use of the programs that they are unrolled it---that is, that
consumers pay more each month for membership than they get back in
discounts.
Because few consumers would likely voluntarily enter into such an
exchange, the firms are economically viable only if they are successful
in deception. Specifically, the firms seek to maximize the difference
between monthly membership payments from consumers and benefits paid
out by:
1. Making consumers unaware that that they are members of the
program to begin with and;
2. Constructing transaction costs that are not revealed at the
time of enrollment that make it unlikely that consumers who are
aware of their memberships will file claims.
The firms involved are fully aware that as soon as consumers
discover that they are members and/or discover the transaction costs
involved in securing benefits they will cancel. Hence, the goal is
``keep them on the line'' as long as possible, securing at least 2-3
months of payments from each before cancelation. While the firms have
become increasingly compliant in allowing consumers to cancel when they
discover that they are members, disclosures made to the Iowa Attorney
General's office by Vertrue suggest that the firms have written
policies designed to make it difficult for consumers to recoup
unintended past monthly payments. Such restitution is typically only
made if the consumer takes such actions as file formal claims with a
Better Business Bureau, or threatens to contact a lawyer or law
enforcement.
Once hooked, the firms use a number of means to insure that they
secure from consumers at least a few months' membership payments. These
include:
1. Monthly billing amounts that maximize the chance that the
charge will fall `'under the radar'' of consumers'';
2. Lengthy procedures for recurring sign-up premiums that, in
essence, require that the consumer makes 1-2 months of payments
before they can realize the sign-up benefit (which will be less
than the monthly payments); and
3. Initial descriptions of the programs that conceal the
transaction costs required to secure benefits.
To illustrate point (2), some programs offered by Vertrue lure
consumers with a promise of a ``free'' $25 gift card for use at certain
retailers (such as Walmart), in exchange for agreeing to a 30-day
``risk-free'' trial membership in a discount program. Not revealed at
the time of the solicitation, however, is the fact that to receive this
premium consumers must fill out two waves for forms which are sent back
to the company, with the total time between the initial sign-up and the
receipt of the premium being up to 3 months. Because of an ``active
membership'' requirement, the firm thus insures that it has received
$30-$45 from the customer (based on a $15/month fee) before the $25
premium is awarded.
To illustrate point (3), similar transaction costs are also imposed
on consumers who attempt to claim benefits within the programs. For
example, the initial solicitation does not inform consumers that while
indeed they can get $25 gift cards for $20, they are required to first
pay the firm (e.g., Vertrue) full price for the card, file for a
rebate, and finally receive the $5 benefit several month later. In
addition, each claim requires the consumer to submit a separate round
of paperwork. It is not surprising that the imposition of such costs
has had the effect of reducing usage rates of the programs to near
zero.
Question 3. The disclosure and full details of the offer is buried
in small print on the example page that I have here. Most people won't
see this because they will want get to the purchase fast and think they
are getting a discount. Moreover, seniors will often miss details like
this when purchasing items. In your view, what level or type of
disclosure is needed to make these practices fair for consumers?
Answer. The most fundamental fix is to prohibit the agreement that
is contained within the fine print---current provisions that allow one
seller to pass credit-card information obtained from a consumer to
another seller. If consumers--of any age--had to fully re-enter their
credit and address information when exposed to the new solicitation
they would: (1) realize that this a new transaction, not a continuation
of the previous one; and (2) have a greater motivation to carefully
examine the details of the offer they were agreeing to. Other--and
perhaps legally more viable--options include:
1. Prohibiting automatic re-enrollment in ``trial membership''
programs. If a firm offers a consumer the chance to examine a
program for 30 days so they can see the benefits, the default
action has to be non-enrollment, not enrollment. This would
bring on-line practices in congruence with norms in most other
areas in commerce where ``free trial'' does not come with an
implicit agreement to purchase.
2. Prohibiting masking the identity of the seller promoting a
given web page. One of the reasons consumers are often
unwittingly drawn in to these schemes--and overlook fine
print--is that they are led to believe that the solicitation is
being made by the company with whom they made their primary
purchase, and for whom they hold trust.
______
Response to Written Questions Submitted by Hon. Claire McCaskill to
Florencia Marotta-Wurgler
Question 1. These companies have a long history in the
telemarketing business and I'm sure have utilized research to figure
out who they want to go after. Do you know if these companies target
certain groups with their Internet practices? Do they deliberately
target seniors or vulnerable groups?
Answer. It's quite apparent that post-transaction marketers employ
tactics to deceive consumers by highlighting the reward part of their
offers while effectively concealing in fine print the financial
obligations that are attached to them. In my view, their approach is to
deceive as many people as possible, without really focusing on a
particular group. Given that consumers are not required to enter their
credit card information to sign up, even the savviest consumers can be
easily tricked into these memberships. But there are indeed groups of
individuals who are especially vulnerable. Seniors who are less
acquainted with online commerce and who might be less inclined to
peruse the fine print are especially vulnerable. The same applies to
individuals whose first language is not English and who might be unable
to understand the terms of the offer.
Question 2. Once people find out they have signed up for the
memberships, how difficult is it to cancel? Do the companies have
tactics they utilize to try to retain customers? How truthful or not
are they about what programs the customer has unwittingly entered into?
Answer. Even though the terms of these offers often list a number
where consumers can call to cancel their memberships, most consumers
only find out about their subscription after having spotted the post-
transaction marketers' charges in their credit card statements months
(or years) later. As a result, many simply don't know whom to call to
cancel. Some companies list an 800 number as a reference where
consumers can call in and cancel their services, but this number is
often obscured in the fine print. Consumers' success in canceling has
been mixed.\1\ Some call many times and are unable to cancel. I've had
limited personal experience with this issue when I purposely signed up
for Reservation Rewards after purchasing movie tickets at Fandango.com
and soon after tried to cancel. Unlike most consumers who want to
cancel, I had obviously read the terms of the offer and was thus aware
of the company providing the service as well as the number I was
supposed to call. Once I called the number I was asked if I wanted to
cancel. After indicated that I did, I was asked again where I indeed
wanted to cancel and was prompted to press the number 1 if I wanted to
stay and the number 2 if I wanted to cancel. These additional steps are
likely set up to confuse consumers into not canceling. That being said,
after pressing the right number, I received an e-mail notifying me of
the effective cancellation.
---------------------------------------------------------------------------
\1\ See, e.g., ``Aggressive Sales Tactics on the Internet and Their
Impact on American Consumers, Staff Report for Chairman Rockefeller''
[hereinafter Staff Report] (November 16, 2009) at pg. 26, outlining
some customer experiences in attempting to cancel.
---------------------------------------------------------------------------
Not only do these companies deceive consumers into registering for
(and subsequently canceling) their services, they are also deceitful in
their description of the proffered benefits offered to consumers. For
instance, most companies offer consumers rewards that would appear to
become effective immediately after the consumer signs up to the
service. This is almost never the case. Soon after registering, text in
fine print reveals that consumers must take many additional steps to
claim their rewards. It thus shouldn't be surprising that few consumers
do. Moreover, in order to enjoy the benefits of the membership,
consumers must be aware of the service and log on to their page to
become informed about the benefits. Given that most consumers are
unaware that they are enrolled, they are unlikely to participate. Data
confirms that usage rates of these services are extremely low.\2\
---------------------------------------------------------------------------
\2\ See Staff Report, id., at page 23.
Question 3. The disclosure and full details of the offer is buried
in small print on the example page that I have here. Most people won't
see this because they will want get to the purchase fast and think they
are getting a discount. Moreover, seniors will often miss details like
this when purchasing items. In your view, what level or type of
disclosure is needed to make these practices fair for consumers?
Answer. In my view, the existing fine print disclosures do not
effectively communicate the terms the relevant terms of the offer. My
first suggestion would be to require these companies to ask consumers
to enter their payment information before registering. Even if
consumers don't read the terms, regardless of how prominent they are,
the act of entering payment information should provide them sufficient
notice about the nature of the transaction. Second, these companies
should identify themselves prominently as distinct from the selected
vendor. This also will reduce consumer confusion. Third, these
companies should improve the quality of their disclosures by framing
their offers in a manner that is not deceptive, e.g., by clearly and
prominently explaining fees and services, following disclosure norms of
the typical online transactions. These disclosures should be followed
up with regular e-mail updates informing consumers of the monthly
charges, their usage rates, and cancellation procedures. All
disclosures should be written in clear, short, and plain language with
no distracting features.
______
Response to Written Question Submitted by Hon. John D. Rockefeller IV
to
Professor Prentiss Cox
Question. In response to the Senate Commerce Committee's
investigation into their business practices, Affinion, Vertrue, and
Webloyalty recently announced that they have changed their policies for
establishing whether a consumer has consented to their post-transaction
offers. Under their old policies, the companies assumed they had
obtained a consumer's consent to their offers when the consumer typed
in an e-mail address or other personalized ``proof of enrollment.''
Under the new announced policies, the companies will assume they have
obtained consent when the consumer types in the last four digits of his
or her 16-digit credit or debit card number. In your opinion, does this
policy change sufficiently protect consumers against accidentally or
inadvertently signing up for the companies' offers?
Answer. No. This change almost surely will not prevent the problem
of unknown and unwanted account charges. The answer to this question
requires a focus on the core problem at issue here.
1. A Focus on the Real Problem Shows This Is an Inadequate Solution
Preacquired account marketing is an unfair business practice
because it sorts out consumers for account charges of which they are
unaware for services they do not want to purchase. The evidence
available indicates that very close to 100 percent of the millions of
consumers charged each year for membership clubs \1\ through
preacquired account marketing do not know of the charge or want the
service. It achieves this remarkably unfair result by a combination of
two techniques: (1) the sale of account number or account access by the
referring retailer so that the consumer can be charged without
providing his or her account number; and (2) the layering of a series
of sales practices with deceptive potential (free trials, negative
options and automatic renewal).
---------------------------------------------------------------------------
\1\ I use ``membership clubs'' in this response because that has
been the focus of the Committee's inquiry, but it is worth noting that
these same companies, and other companies, also sell insurance and
other programs through preacquired account marketing.
---------------------------------------------------------------------------
The collection of four digits of a 16 digit account number does
nothing to change either of these practices, and thus is highly
unlikely to eliminate the problems with preacquired account marketing.
Collecting four digits likely will ameliorate some of the concerns
created by the first problem identified above. Some consumers, perhaps
even many, will no doubt refuse to enter even the first four digit of
their account number because it will trigger some concern for them that
their account may be charged. This probably will result in a decrease
in the number of consumers confused by the practice. While that is a
good result, it is not a solution to the problem because it helps some
of the consumers who have money taken from their account and leaves
others in the same undesirable situation.
There are reasons to believe that many consumers will continue to
be deceived about the terms of the offer, including the fact that four
digit collection is used as a short-hand to confirm consumer identity
in commerce rather than as confirmation of an account charge. If
nothing else, this proposed solution leaves wholly unaffected the
problem of the layering of problematic sales techniques. The ultimate
question, however, is not whether it increases consumer awareness
during the moment of the post-transaction solicitation, but whether it
radically alters the percentage of consumers who are charged for a
service they do not want to purchase. The very limited public data on
the impact of the use of four digit collection is not supportive of the
argument that the collection of four digits resolves this fundamental
problem with preacquired account marketing.\2\ Some membership club
sellers have previously used this method with some retailer partners or
other account access sellers, and there is no indication that the
result meaningfully improves the percentage of consumers who are aware
of or desire the account charge.
---------------------------------------------------------------------------
\2\ See, e.g., section 3D below discussing Iowa Attorney General
Tom Miller's consumer protection lawsuit against Vertrue.
---------------------------------------------------------------------------
2. A Focus on the Real Solution Shows This Is an Inadequate Solution
Another way to look at this problem is to ask why the membership
club sellers don't take the obvious step to avoid the first part of the
preacquired marketing problem entirely. In other words, why don't the
membership club sellers have the consumer enter his or her account
number just like the retailer that obtained the account number from the
consumer and sold it to the membership club seller (and just like every
other legitimate retailer in the market)? Obtaining the whole account
number would not stop the layering of problematic sales practices, but
it would be a simple and virtually cost-free solution to the practice
of membership clubs buying, or preacquiring, the consumer's account
number.
As with the devilishly clever preacquired marketing system itself,
this proposed four digit ``solution'' is shrewd because it has
superficial appeal. Collecting four digits mimics the appearance of
legitimate consumer protection regulation. Smart regulation for most
consumer protection problems requires carefully separating legitimate
commerce from deceptive or abusive transaction. The solution often
results in an approach that leaves sellers with as much flexibility as
possible while prescribing limits that protect as many consumers as
possible from transactions that mislead or take unfair advantage.
The difference here is that there is almost no legitimate commerce
to protect. We don't need to permit a half-way measure because there is
no evidence that any substantial number of consumers charged for these
purported services wants to buy them. Even if there are a few such
consumers, they will want to enter their full account number to obtain
the service.
Requiring the entry of the consumer's entire account number solves
the first core problem of preacquired marketing while protecting the
right of all consumers and sellers to enter legitimately desired
transactions. The proposal to collect four digits, on the other hand,
perpetuates abusive transactions while no better protecting the
possibility of legitimate commerce. Limiting pickpockets to operating
on weekdays only is better than 7 days a week of pickpocketing. But it
is not a solution to the problem of such theft.
The promise by membership club sellers to police themselves by
collecting four digits of the account number also is illusory for two
other reasons. First, it is a voluntary measure adopted in response to
attention focused on this problem by this Senate Committee. As quickly
as it appeared, it can disappear. Second, these companies are expert at
manipulating consumer impressions. The four digit collection system can
be ensconced in distracting details or circumvented entirely. For an
example of the latter, consider the third and final section of my
response to your question.
3. The Meaning of the 2003 Telemarketing Sales Rule Amendments
There appears to be some perception that the four digit collection
requirement in the 2003 Amedments to the Telemarketing Sales Rule
solved the problem of preacquired account marketing in the
telemarketing context. This is a gross misreading of the 2003 TSR
Amendments and its aftermath.
A. The 2003 TSR Amendment.
The amendments to the TSR published for comment by the FTC on
January 30, 2002, expressly prohibited the use of preacquired marketing
in telemarketing and declared it an abusive practice. The final rule
adopted a year later required that telemarketers using preacquired
account information in combination with a ``free-to-pay conversion''
must obtain from the consumer the last four digits of the consumer's
account number to be charged.\3\ The free-to-pay conversion concept was
intended to capture the use of free trial offers.\4\ The FTC Statement
on the rule summarized the intended effect as forcing the consumer ``to
reach into his or her wallet, and provide at least a portion of the
account number to be charged.'' \5\
---------------------------------------------------------------------------
\3\ 16 C.F.R. 310.4(a)(6). 68 Fed. Reg. at 4621-22.
\4\ 16 C.F.R. 310.2(o). The FTC also added a definition for
negative option as part of its implementation of this requirement. 16
C.F.R. 310.2(t).
\5\ TSR Statement, 68 Fed. Reg. at 4622.
---------------------------------------------------------------------------
Despite retreating from the broader prohibition in its final rule,
the FTC Statement on the Final Rule roundly criticized the practice and
found almost no benefit from allowing it to continue.\6\ The FTC seems
to have found one industry argument persuasive--that there are some
situations where ``the consumer makes the decision to supply the
billing information to the seller, and understands and expects that the
information will be retained and reused for an additional purchase,
should the consumer consent to that purchase.'' \7\ The FTC provided
examples of this situation like the use of previously provided account
numbers with a standing order for merchandise at a regular interval,
such as quarterly orders for contact lenses. This appears to have been
the basis for the FTC promulgating the four digit requirement rather
than retaining the proposed prohibition on selling account access.
---------------------------------------------------------------------------
\6\ See, e.g., 68 Fed. Reg. at 4617.
\7\ TSR Statement, 68 Fed. Reg. at 4621.
---------------------------------------------------------------------------
The FTC was the first and remains the only Federal agency that has
attempted to tackle the problem of preacquired account marketing.\8\ In
revising the Rule from the original proposal, however, the FTC made two
analytical mistakes or omissions. First, and most importantly, it
failed to distinguish between a retailer or financial institution
selling access to consumer accounts to a third party and the retailer
or financial institution re-using an account number it earlier obtained
from the consumer. This latter problem of seller-retained account
numbers presents a different, if related, concern from the clear abuse
of retailers or financial institutions selling account numbers to third
party membership club sellers. Second, the FTC provided no
justification or explanation as to why requiring only four digits was a
sufficient solution to the problem.
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\8\ The FTC's recognition of the problem with preacquired account
marketing and attempt to control it stands in contrast to the approach
of the Office of the Comptroller of the Currency. The OCC facilitated
national bank involvement in preacquired account marketing by issuing
rulings defining agreements with membership club sellers as an
ancillary banking activity; specifically, as a finder's fee. When
Congress passed the Gramm Leach Bliley Act in 1999, it included a
provision that appeared to prohibit financial institutions from selling
access to their customers' accounts in this manner. 15 U.S.C.
6802(d). The OCC and other Federal banking regulators, with FTC
approval, then issued regulations completely neutering the effect of
the law. See, e.g., 12 C.F.R. 40.12. When Minnesota Attorney General
Mike Hatch later sued the mortgage subsidiary of Fleet National Bank
for preacquired marketing, he presented evidence that Fleet's own
customer service agents overwhelmingly objected to these charges,
calling them ``unethical,'' ``a scam,'' and ``a fraud.'' The OCC's
response was to file an amicus brief on behalf of Fleet.
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B. Preacquired Marketing Industry Response to the 2003 TSR Amendments
Preacquired account marketing through telemarketing nonetheless
plummeted after the adoption of the 2003 TSR amendments. It is
difficult to separate the effect of the preacquired account marketing
restrictions, including the four digit collection requirement, from the
other major change to the TSR in the 2003 amendments, which was the
adoption of the national do-not-call list. The do-not-call list proved
highly popular and resulted in a tremendous contraction of the
telemarketing industry. It is clear that the preacquired marketing
companies developed at least two strategies to cope with the new TSR
requirements: (1) it substituted other forms of direct marketing; and
(2) it developed new methods of solicitation that circumvented the TSR
requirements.
The preacquired marketing companies substituted other forms of
direct marketing for telemarketing. They shifted resources into direct
mail solicitations as well as the Internet marketing techniques that
are the primary focus of this inquiry.
The nature of this shift can be tracked in the public securities
filings of the companies. In its 2001 annual 10-K filing with the SEC
just before the TSR amendment process began, Memberworks (Vertrue's
predecessor entity) reported that, ``An important factor in the
Company's ability to develop innovative programs is its emphasis on
telemarketing.'' By its late 2003 10-K filing, the company reported
that telemarketing new member acquisitions through telemarketing had
decreased to 20 percent of new enrollments. In its 2004 10-K filing,
Memberworks reported the following: ``The Company has been able to
effectively diversify its distribution channels since its initial
public offering in 1996, at which time the Company's primary method of
solicitation was outbound telemarketing. For the year ended June 30,
2004, outbound telemarketing was the source for approximately 10
percent of the Company's new member enrollments.''
Another of the largest preacquired account marketing companies,
Affinion, the largest membership club seller, stated the following in
its 2009 10-K filing: ``We have developed considerable expertise in
direct mail marketing, which remains our largest marketing medium in
terms of new member acquisition, accounting for 45 percent of new joins
globally in 2008. Our direct mail operations incorporate a variety of
mailing types, including solo direct mail, detachable inserts, credit
card inserts, statement inserts, promotion inserts, and other printed
media. Additionally, we continually test variations of direct mail
solicitations to drive higher customer response rates.''
A change in the pattern of public enforcement actions against
preacquired marketing suggests it may have worked to reduce preacquired
telemarketing. Prior to the promulgation of the rule, public actions
focused on telemarketing, while later cases focused more on direct mail
and other forms of preacquired solicitation.
The second industry response to the TSR was to develop or increase
use of techniques that fell outside the scope of the TSR. One clear
effort to circumvent the TSR was to change the solicitation from a
``free trial offer'' to charging $1 for the trial period. Because of
the narrow definition of ``free-to-pay conversions,'' this change
allowed evasion of the new requirements for preacquired account
marketing. The companies also relied on ``wholesale'' programs for
telemarketing. Under this arrangement, the retailers or financial
institution is responsible for the marketing and billing and the
preacquired marketing company obtains fees for establishing the program
and operating some or most aspects of the program. Because the biling
for the membership club service is made by the retailer or financial
institution, this process evades the TSR preacquired account marketing
requirements.
C. The Lack of Record Supporting The Effectiveness of Four Digit
Collection
The net result of the TSR preacquired account marketing rule,
therefore, is unclear. We know that telemarketing declined in general
and the companies adapted to the TSR by shifting to other forms of
direct marketing and solicitation. We do not know if the 2003 TSR
requirements, when complied with by the preacquired marketing
companies, actually resulted in consumers becoming of aware of charges
to their accounts for membership clubs to which they want to belong.
Some anecdotal evidence on the matter should be available soon.
Iowa Attorney General Tom Miller's consumer protection lawsuit against
Vertrue included data and other allegations that Vertrue members were
almost universally unaware that they were members or did not authorize
the charge, and one of the methods of solicitation for these members
was telemarketing. To the extent that the telemarketing was subject to
and conducted in accord with the Telemarketing Sales Rule, these
members would have had to supply the last four digits of the account
number. Although the Iowa case was tried recently, Vertrue argued that
certain evidence presented at trial constituted trade secret and should
be sealed. The court has yet to issue an order which identifies the
trial exhibits to be sealed.
______
Response to Written Question Submitted by Hon. Claire McCaskill to
Professor Prentiss Cox
Question. You stated in your testimony that seniors could be
especially vulnerable to these tactics. Can you elaborate more on your
reasoning as to why seniors would be adversely affected? I realize that
some of this may be anecdotal but do you have evidence or data that
shows whether and how many seniors are buying into these memberships?
Answer. The elderly are more vulnerable to deception with this type
of marketing. It is well-established that the elderly generally are
more susceptible to unfair or deceptive sales practices. Yet in a
typical solicitation, the seller still has to overcome the burden of
having the elderly consumer take the affirmative act of providing
account access information. The preacquired seller skips this step.
Getting an elderly consumer to pull out and read her financial account
number is a very different proposition from getting an Alzheimer's
patient to give you her birth date as purported evidence of
understanding and consenting to the mechanics of a complicated,
attenuated free trial offer with negative option.
The evidence that is publicly available right now on this point is
anecdotal. For example, the above-mentioned suit by Iowa Attorney
General Tom Miller contains surveys of various Iowa citizens victimized
by preacquired account marketing. Appendix A to this response is an
excerpt fromt hat lawsuit describing a survey conducted of supposedly
active members of a Vertrue club whose accounts were being charged.
Attached to this response is a file with three of those completed
surveys by elderly consumers. Further release of public data from this
lawsuit also may provide data about the impact of preacquired account
marketing on the elderly. As noted above, Vertrue is resisting the
release of such data, and the judge in the lawsuit is considering
whether to seal this information from the public.
Other examples of elderly consumers who have had their accounts
drained through abusive preacquired account marketing practices are
contained in Appendix B to this response, which is an excerpt from a
Complaint filed against Memberworks by Minnesota Attorney General Mike
Hatch against Memberworks. It describes numerous elderly consumer
victimized by this type of marketing. Attached to this response is a
file showing the transcripts from the purported ``verification'' tapes
with each such consumer. One of those a transcripts, for instance, is
the taped portion of a telemarketing call to Robert Steele, an 85-year-
old man with advanced Alzheimer's disease charged for a membership
club. In order to ``verify'' the sale, the telemarketer has to ask for
his birth date five times. The telemarketer mentions that his age, 85
years, ``is not a very long time.'' Mr. Steele replies, ``It is if you
stand on your head.''
Finally, your question raises the importance of looking at the
problem of preacquired account marketing beyond the internet. Because
the elderly are less likely to make purchases through the internet,
attacking only the manifestations of preacquired account marketing on
the web would ignore the channels more likely to victimize the elderly.
As noted in response to Senator Rockefeller's question, one of the
largest preacquired marketing companies reports that direct mail
solicitation are its most important marketing channel for obtaining new
members, accounting for nearly half of new members. Direct mail and
telemarketing are more likely to ensnare elderly consumers and thus
should be included in any response of the U.S. Senate Commerce
Committee to the abuses disclosed with preacquired account marketing.
______
Appendix A
Iowa Attorney General Survey Description (excerpt from Complaint in
Iowa ex rel. Miller v. Vertrue, Inc., No. EQ53486 (IA Dist. Ct.
for Polk Co. May 15, 2006))
``26. In order to determine how rare or common it was for consumers
to find themselves making payments for memberships they were not aware
they were paying for, the Consumer Protection Division contacted a
sampling of Iowa customers of Defendant who had not complained, and who
might therefore be expected to be satisfied members, contentedly taking
advantage of the membership services for which they were being charged.
27. In December of 2004 the Consumer Protection Division sent
written surveys to Iowans who were listed in company records as having
become members of one of four Vertrue programs after April 1, 2003. The
programs in question were HomeWorks Plus, Simple Escapes, Connections,
and Essentials. For each program, the survey was sent to each of about
100 randomly-selected consumers who had become members after April 1,
2003. A copy of the cover letter that accompanied the survey appears as
Attachment 9, and Attachments 10 through 12 are the survey responses of
a 71 year old Dubuque resident, a 76 year old Coggon resident, and a 69
year old Panora resident, respectively, each of whom repeatedly paid
membership fees that appeared on their credit card bills before
discovering the irregularity and obtaining at least a partial refund.
______
Appendix B
Description of Charges to Elderly Consumer through Preacquried Account
Telemarketing (excerpt from Complaint in Minnesota ex rel.
Hatch v. Fleet Mortgage Corp., No. 01-48 (D.Minn. 2001).
Sigurd Anderson Transcript
T. With your permission, I would like to tape record the
confirmation of your trial 1membership and your mailing address so
there is no chance of any clerical mistakes on my part, OK? Now, I show
the spelling of your last name as A-N-D-E-R-S-O-N.
C. That's right.
T. Your first name is S-I-G-U-R-D?
C. Yes.
T. And middle initial's A. I have your address as Rural Route 1,
Box 171A. That's Lake City, Minnesota?
C. Yes.
T. 55041. Is that correct, sir?
C. That's correct.
T. OK. Now, again, and again, Mr. Anderson, your membership
materials will arrive shortly. After 30 days, unless we hear from you,
the low introductory annual fee of $59.95, which works out to less than
$5.00 per month, would be automatically billed to your [credit card
name redacted] card account. For annual renewals we'll bill your
account at the then annual fee. However, if you decide not to continue
you just give our toll-free number a call. And finally, Mr. Anderson,
just a quick survey question. Which one of these benefits sounds the
best to you? Discounts on your music CDs and cassettes, discounts on
videos, discounts on movie tickets, discounts on name brand items for
your home? If you have no preference, I'll just put down that you . . .
C. It doesn't appeal too much anyway.
T. Yes. What I'll do is just say that you had no preference and
when you get your materials, just look over all of it and see which one
you can use and best benefit from and, again, my name is Patricia
Hunley and I'd like to thank you for uh--for trying Connections and if
you have any questions, call one of our Connections service
representatives and that number is 1-800, let me see what that number
is. Hold on, I've got that number right here. OK, it's 1-800-568-2386.
And this number is also included in your membership kit. And you have a
very nice day. Thank you. Goodbye.
Joseph R. Gwin Transcript
T. . . . your trial membership and your mailing address so there is
no chance of any clerical mistakes on my part, OK? OK?
C. What?
T. OK, sir, now with your permis--permission I would like to tape
record the confirmation of your trial membership and your mailing
address so there is no chance of any clerical mistakes on my part, OK?
C. Yup.
T. OK. Sir, I show the spelling of your last name as Gwin, that's
G-W-I-N, first name is Joseph. That's J-O-S-E-P-H. Is that correct?
C. (inaudible)
T. OK, sir. And I have your address as 3455 173rd Lane Northwest.
And that's in Andover, Minnesota 55304. Is that correct?
C. Yes.
T. OK, sir. And again, Mr. Gwin, your membership materials will
arrive shortly and after 30 days, unless we hear from you, the low
introductory annual fee of $59.95 which works out to less than $5.00
per month would be automatically billed to your [credit card name
redacted] card account. For annual renewals we'll bill your account at
the then current annual fee. However, sir, if you decide not to
continue just give our toll-free number a call. Now finally, Mr. Gwin,
just a quick survey question. Which one of these benefits sounds the
best to you? A discount on music CDs and cassettes, a discount on
videos, a discount on movie tickets, or a discount on name brand items
for the home? Or if you just like all the benefits. Do you have a
preference, sir?
C. Not really.
T. OK. Well, we'll note that. Sir, I really think you'll get a lot
of use from your Connections membership. And sir, to help you get
started when you receive your membership kit just go ahead and look
through all of it to see how you can use all these great benefits. And
again, sir, my name is Chris Sharborough. I'd like to thank you for
trying Connections. And if you have any questions, sir, please give one
of our Connections service reps a call at 1-800-568-2386. And sir, this
number is also included in your membership kit. I thank you so much
again, Mr. Gwin, and you have a great day. Thank you, sir, goodbye.
Robert E. Steele Transcript
T. . . . tape scrambled . . . I need to verify a little bit of
information to make sure we're sending it to the right place. With your
permission, sir, I would like to tape record the confirmation of your
trial membership and your mailing address so there is no chance of any
clerical mistakes on my part. Is that OK Mr. Steele?
C. That sounds alright.
T. OK. I show the spelling of your last name as S-T-E-E-L-E and
first name as Robert. R-O-B-E-R-T. Middle initial E. Is that correct?
C. Yes.
T. OK. You live at 1309 River Wood Drive, Little Falls, Minnesota
56345. Is that correct?
C. Yea.
T. OK. Now, just so we are clear Mr. Steele, your membership
materials will arrive shortly in a white envelope. After 30 days,
unless we hear from you, the low introductory annual fee of $59.95,
which works out to less than $5.00 per month, will be billed
automatically to your [bank name redacted] Bank account. Now, for
annual renewals we'll bill your account at the then current annual fee.
However, as I said Mr. Steele, if you decide not to continue with the
program, then just give our toll-free number a call. And just to verify
that I have your approval to process your trial membership and that you
understand how it will be charged, I need the month, day and year of
your birth. And what would that be Mr. Steele?
C. What?
T. The month, day and year of your birth?
C. That's (inaudible)
T. Unh? Mr. Steele?
C. Yea.
T. Could I have the month, day and year of your birth sir?
C. The month and day of my birth?
T. Yea. Your birthday?
C. Well, my birthday is July 21. 7-21.
T. OK. And the year?
C. 13.
T. OK. 1913. Alright. Mr. Smith . . .
C. Long time ago.
T. That's not so long ago, Mr. Steele. (Laughing).
C. I'm 85.
T. Yea but (inaudible). That's not very long ago.
C. No. No. I'm still running.
T. That's good. That's good.
T. Well, I study Biology and to me 85 years Mr. Steele is not a
very long time.
C. It is if you stand on your head.
T. (Laughing) Well, I am sure Mr. Steele when I'm 85 I'll probably
think it's a long time, but you still have time.
C. If you go the right road.
T. That's--That's right. That's exactly right. Mr. Steele, I'd
first of all I just want to ask you which one of the benefits of our
package sounds best to you? I'm going to read you a list of four. And
this is just a survey question. First of all, 20 percent cash rebates
for all your purchases at any of your favorite retailers. Or 20 percent
cash rebates for the best selling video game system and video games. Or
20 percent cash rebates on photographic and communications equipment.
Or 40 percent savings off local (inaudible) prices on items for your
home. Which one of those appeals to you the most Mr. Steele?
C. Probably the first one.
T. The first one. OK. I'll make a note of . . .
C. ah . . . no . . . and the
[Tape Ends]
Gustav Rakowsky Transcript
T. OK. With your permission, Mr. Rakowsky, I would just like to
tape record the confirmation of your trial membership and your mailing
address so there is no chance of any clerical mistakes on my part, OK?
C. OK.
T. Great. With your per, now with your permission, I have begun
taping, all right?
C. OK.
T. OK. I have, today's date is August the 17th, 1998, and I show
the spelling of your last name as Rakowsky, R-A-K-O-W-S-K-Y?
C. Right.
T. And your first name is Gustav.
C. Right.
T. G-U-S-T-A-V.
C. Right.
T. Middle initial A.
C. Right.
T. And I have your address as 222 East Second Street, Apartment
406?
C. Right.
T. That's in Duluth, 55805.
C. Right.
T. OK, Mr. Rakowsky, just so that we're clear, your membership
materials will arrive shortly in a green and white envelope. Now,
there's three very important points that I just need to get your verbal
acknowledgment on, OK?
C. OK.
T. Well, first you will have a full 30 days to try Health Trends
without a charge. After that, $8.25 a month will be drafted from your
[bank name redacted] Bank checking account, OK?
Well, I can pay my own bills. I don't need nobody to pay my check
for me.
T I understand that, Mr. Rakowsky. That's just how they charge for
this. If you would decide to continue with it, that's how they would do
the billing, OK?
C. OK.
T. Now, second, with your tape recorded verbal authorization, you
give [bank name redacted] Bank the permission to process the monthly
membership fees through your checking account. There's no signature is
required, OK?
C. Right.
T. And third . . .
C. And the banks'll soon own us anyhow, I guess.
T. I sometimes I get the feeling of that, yes.
C. We get our numbers on the back of our hands.
T. That's, or across our forehead.
C. Yes.
T. Sir, it's important to note that if you have any questions about
the program or would like to cancel your membership, you should contact
the customer service number provided in your membership kit, OK?
C. OK.
T. And just to verify that I have your approval to process your
trial membership and you know how it would be billed, I need the month,
day and year of your birth. What would that be, please?
C. Well, well, I'm not giving out all my history! (emphatically)
T. Just your birth date?
C. Yes, my birthday.
T. OK. Well, I can understand, Mr. Rakowsky. You know, we only ask
for your date of birth for your protection and to verify that we have
your permission.
C. Well, I don't . . .
T. That's fine, Mr. Rakowsky. I can take your mother's maiden name,
OK. This is just for our purposes to know that you are aware of
everything that I said to you. That's all. This just proves to us that
I did speak with you and you, and not, like a neighbor or if a neighbor
answered the phone or whatever. That's all.
C. Oh, I ain't worrying about that because, they're sticking their
nose in everything we got.
T. Pardon me?
C. I say that the business houses and the government is sticking
their hands right in the, into your pocket.
T. I understand that, Mr. Rakowsky.
C. Yes, and I'm too old to fall for these little catchy tricks that
they got. `Cause I've seen them work and I've seen them go right down
the drain.
T. What little catchy tricks?
C. Well, next there'll become a credit card with my number on it.
T. Oh, no, no, no, no, no, no.
C. and all kinds of stuff like that.
T. Oh, no. No, no. Nothing that drastic. Nothing like that. No.
This is just, you know, it proves that I did talk to you. It verifies
that I have your approval to process your trial membership and, you
know, you do understand how it would be billed if you decided to
continue with it after the 30 days, that's all. Could I have your
mother's maiden name?
C. Anna.
T. A-N-N-A?
C. Right.
T. OK. Very good. Mr.--Gustav, one real quick survey question.
Which of these benefits sounds the best to you? The savings on the
medication, the savings on eyewear, the savings on chiropractic
services or on the doctor hotline?
C. The one be on the medicines a little bit.
T. The medicines. OK, great. I'll note down . . .
C. `Cause the drugstores are robbing us blind anyhow because they
make about 300 percent on everything you buy.
T. I know. Just like the hospitals.
C. Yes.
T. OK. Well, I really think you'll get a lot of use from your
Health Trends membership. And to help you get started, be sure to turn
to page 5 when you receive your membership kit to see exactly how you
can use and benefit from the prescription medication. And again, my
name is Fran Megly. I'd like to thank you for agreeing to try Health
Trends. If you have any questions, Mr. Rakowsky, please give one of our
Health Trends service representatives a call . . .
C. Yes, OK.
T. . . . at 1-800-544-3291. Now, that number will be included in
your membership kit, but would you like to write that down?
C. No.
T. OK.
C. No, I'm not in that much of a hurry.
T. Oh, OK. Well, Mr. Rakowsky, again, my name is Fran Megly and I
thank you so very much. You have a great day.
C. Yes, you too.
T. Thank you.
C. All right.
T. Bye-bye.
C. Yes, bye.
Dorothy Christensen Transcript
T. And now with your permission I would just like to tape record
the, confirmation of your trial membership and your mailing address so
there is no chance of any clerical mistakes on my part, OK?
C. OK.
T. OK. I show the spelling of your last name C-H-R-I-S-T-E-N-S-E-N?
C. Right.
T. And your first name is Dorothy?
C. Right.
T. And I have your address as 4400 36th Avenue North, Apartment 201
. . .
C. Right.
T. Minneapolis, Minnesota 55422?
C. Yes. Are you calling from [bank name redacted] you said?
T. We're calling [bank name redacted] cardholders on behalf of
Smart Source.
C. OK.
T. Anyhow, just so we're clear, Mrs. Christensen, your annual
membership materials will arrive shortly in a white envelope after 30
days unless we hear from you, for the introductory annual fee of $59.95
which works out to less than $5.00 per month will be billed
automatically to your [bank name redacted] Bank VISA MasterCard
account. For annual renewals we will bill your account at the then
current annual fee. However, if you decide not to continue then just
give our toll-free number a call. And remember, Mrs. Christensen, you
can receive this gift of two free roundtrip tickets by simply
completing and returning the business reply card in your membership
kit. And just to verify that I have your approval to process your trial
membership, and that you understand how you will be charged, can I get
your birthday, what would that be, please?
C. And what else?
T. I need your birthdate.
C. 10-9-8
T. Pardon me?
C. 10-9-8.
T. 10-9-8. OK, that's just to verify that I have your approval to
process your trial membership. And you understand how you will be
charged. And Mrs. Christensen, just a quick survey question. Which one
of these benefits sounds the best to you at this time? A 20 percent
cash rebates for all your purchases at any of your favorite retailers,
a 20 percent cash rebates for the best selling video games and video
game systems, a 20 percent cash rebates on photographic and communic--
communications equipment, or up to 40 percent savings on local prices
on items for the home.
C. I, I can't remember all that, you'd have to show it to me, or I
can't--I think we just better quit this.
T. Well ma'am, if after reviewing the membership materials if you
found our program to be cost-effective and beneficial for you, would
you decide to keep it?
C. Keep what?
T. If after reviewing this program, if you found our program to be
cost-effective and beneficial for you, would you decide to keep it?
C. Well, I'll see, I don't know yet.
T. Alright, I'll note that. I really think you'll get a lot out of
your membership. Also remember to return the business reply card in
your membership kit to receive your two free airline tickets. Please
note travelers are required to spend a minimum number of nights in one
of the hotels in the program at the hotel's regular published rate.
C. This sounds like a scam to me.
T. Pardon me?
C. This sounds like some kind of a scam.
T. (incomprehensible) trial membership for the SmartSource program,
ma'am?
C. (incomprehensible) You want to send me this and then I don't
have to pay anything until I read it over.
T. If you should find that this is (incomprehensible) there's
absolutely no cost during the 30-day trial membership . . .
C. OK.
T. . . . you receive a month to review and use it and if you should
find that it's not for you during the month, all we ask is that you
give us a call at our toll-free number during the month and let us know
and you're not even billed.
C. OK.
T. Again, my name is Sherry, and I'd like to thank you for agreeing
to try the program. If you have any questions, please give one of our
service representatives a call at 1-800-211-9746. And this number is
also included in your membership kit.
C. OK.
T. Thank you and have a good day.
C. You too.
T. Bye bye.
C. Bye.