FTC Takes Tough Action Against ‘Scareware’ Tactics

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A great way to make money is to develop a product or service that responds to a consumer want or demand, and then to stay ahead of prospective competitors by offering better pricing or quality. A not-so-great way to make money is to convince consumers to buy a product or service that they don’t really want or need, at inflated rates. A highly dubious way to make money is to trick consumers into paying for something they didn’t want and didn’t mean to buy.

Businesses operating in this third category, which may include a scareware marketer or two, have to consider risk versus reward. Is the reward of temporary profits worth the risk of legal action; what is the likelihood of legal action; and what is the potential cost of such action?

Someone who operates on tricks over treats, or by pure scareware tactics, may expect business to dry up as consumers learn to avoid their traps. Such an operator must also face the looming threat of consumer legal action, government intervention, or run-ins with credit card companies alarmed by high chargeback rates.

For these types of businesses in the mobile marketing space, the cost of potential government intervention is going up. A recent settlement between the Federal Trade Commission and Jesta Digital LLC points to the severe penalties a business may face for operating on the sidelines of fair play. The consequences include a hefty fine, consumer refunds, restricted billing practices and stringent compliance measures for years to come.

Jesta (which also does business as Jamster) is known mostly for its marketplace of ringtones, photos, videos and apps. Starting in 2011, it ran a scareware campaign, purportedly for anti-virus software, that the FTC asserts crossed the line into deceptive advertising. The ads ran on the free version of the Angry Birds app for Android. Using a graphic that looks like the Android robot logo, the banner ad displayed a warning that viruses had been detected on the device – even though no virus scan was conducted. According to the FTC, when the consumers clicked on the “remove [virus]” button, or similar “warning” buttons, Jesta directed them through a number of pages about virus protection that left to very fine print a monthly service fee for ringtones and other content.

The FTC alleges that consumers were even charged at the instant of pressing a “Protect Your Android Today” button. Through the use of Wireless Access Protocol (WAP) billing, the company was able to charge consumers through their cell phone numbers without needing to obtain express authorization. (It may be that the use of the billing practice actually spurred the FTC into action as wireless carriers initiated their own penalties against Jesta for the large number of consumers demanding refunds.) The FTC also alleges that the anti-virus software often failed at download (apparently at one point, only 372 people out of 100,000 subscribers actually received some sort of anti-virus app download link).

The FTC describes numerous deceptive practices: mimicking the Android logo to confuse consumers into believing the virus warnings were credible, charging consumers without their knowledge or consent, failing to provide services charged for. The company apparently was aware that its scareware tactics crossed the line, as an email correspondence among company executives noted that the chief marketing officer was “anxious to move our business out of being a scam and more into a valued service.”

So now the company must pay the FTC a $1.2 million penalty and offer to refund consumers. The process of identifying and notifying consumers of their refund options and tracking all this to show to the FTC will be a costly undertaking. Another major cost will be the stringent and detailed billing practices that the company – and all participants, including principals and agents – must adhere to, disclosures it must make, and compliance monitoring and recordkeeping requirements it must adhere to, for 20 years. The settlement agreement is far more than a hand slap; its terms keep Jesta (and its principals!) beholden to the FTC for the foreseeable future.

Mobile marketers who may calculate risk versus reward and decide that a get-rich-quick scheme is worth the risk should think again. The FTC is making deceptive marketing tactics, like many scareware campaigns, a priority. We have seen strong action from the agency in the recent past, including hefty penalties for the company Innovative Marketing and its principal Marc D’Souza. Moreover, the newly-appointed head of consumer protection at the FTC, Jessica Rich, has noted that the FTC is expanding digital enforcement, increasing the risk of getting caught in the agency’s cross-hairs.

 

Topics:  FTC, Marketing, Penalties, Scams, Unfair or Deceptive Trade Practices

Published In: Antitrust & Trade Regulation Updates, Communications & Media Updates, Consumer Protection Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jeff Ifrah | Attorney Advertising

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