United States: FTC Throws The Works at iWorks And Obtains Partial Summary Judgment On Online Advertising Issues

Last Updated: April 9 2015
Article by Mark S. Goodrich and Leonard L. Gordon

Last week, the United States District Court for the District of Nevada granted partial summary judgment for the Federal Trade Commission ("FTC") against Jeremy Johnson and a number of related corporate entities collectively referred to as "iWorks," offering a glimpse into how the FTC and the courts analyze certain online advertising issues. The FTC first brought suit in 2010, alleging, in part, that Jeremy Johnson's websites used misleading testimonials, failed to disclose that consumers would be entered into negative option plans, and failed to disclose that websites and positive articles about the products were created by the defendants. While some defendants in this case settled with the FTC in 2014, the battle between Jeremy Johnson and the FTC has raged on, with the court's most recent order constituting a significant victory for the FTC on some counts, but requiring the FTC to prove much of its case at trial. The court's opinion highlights the difference between alleging deception and proving it, as the court refused to imply that all of the thousands of websites that iWorks operated were deceptive based on the selected sample that the FTC provided the Court.

For our loyal readers, many of the advertising issues in the order may seem all too familiar, as negative options, testimonials, and forms of native advertising are frequent topics of the blog. However, the order is worth a read, as it provides an analytical roadmap for advertising interpretation and disclosure issues in online advertising cases. We summarize some of the highlights below.

  1. The court evaluates "the net impression" created by advertising. Even if statements are literally true, the ad as a whole can be misleading if consumers acting reasonably under the circumstances would interpret the statements made to include a particular message. The court looked at certain iWorks websites and considered the information delivered to the consumer and how it was delivered. The court held that, as a whole, the websites were likely to mislead consumers into believing they would receive government grants, and thus summary judgment on Count II of the amended complaint was warranted
  2. Testimonials must have substantiation and accurately depict the results likely to be achieved by the consumer. The court found that the numerous testimonials on the defendants' websites represented to consumers that they were likely to receive government grants, when, in reality, only 0.04% of consumers enrolled in the grant program actually received grants. Further, the defendants lacked substantiation in making claims that grants exceeded $5,000. As such, the court granted the FTC's motion for summary judgment on Count VI of the amended complaint.
  3. Negative option offers must be clearly and conspicuously disclosed before the consumer enters into the transaction and in close proximity to the request for consent to the offer. The FTC alleged that the defendants' websites use of the words "free" and "risk free" led consumers to believe they would pay only a small shipping and handling fee or download fee for the product, rather than be entered into a continuity/membership program. The court expressed concern over the websites not clearly informing consumers of a membership program and the inability of consumers to decline the negative option offer without aborting the entire order process altogether. In particular, the court noted that the membership program was never advertised before the order page, the membership fee was not included in the order page, and the disclosures (when made) were unclear as to what exactly was included in the membership program. The court granted the FTC's summary judgment on Counts IV and V for most of the websites brought to the court, while leaving two websites with a different order process to a factfinder at trial to decide.
  4. Marketers that create articles supporting products must disclose that the articles do not originate from unbiased consumers. The FTC alleged that iWorks' positive articles and blogs represented that they were independent reviews from unbiased customers, when they were actually written by iWorks employees. The court considered competing declarations submitted by the parties and concluded that a genuine dispute as to a material fact existed, preventing summary judgment on these counts.

The iWorks case provides further evidence of the FTC making online advertising a priority. Over the past few years, the FTC has issued its Dot Com Disclosure Guide and its Guides on Endorsements and Testimonials (offering some online examples), and has targeted marketers such as iWorks with enforcement actions. The iWorks case is not yet over, as the scope of the order was limited to the websites addressed by the court, and a number of issues remain headed to trial. However, last week's order certainly represents a victory for the FTC in its ongoing fight against Jeremy Johnson and certain deceptive online advertising practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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