In September 2022, the Federal Trade Commission announced that it had taken action against credit services company Credit Karma for allegedly deploying dark patterns to misrepresent that consumers were “pre-approved” for credit card offers. The FTC alleged that the company used claims that consumers were “pre-approved” and had “90% odds” to entice them to apply for offers that, in many instances, they ultimately did not qualify for.

The agency’s order requires the company to pay $3 million that will be sent to consumers who purportedly wasted time applying for these credit cards and to stop making these types of deceptive claims.

“Credit Karma’s false claims of ‘pre-approval’ cost consumers time and subjected them to unnecessary credit checks,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “The FTC will continue its crackdown on digital dark patterns that harm consumers and pollute online commerce.”

Credit Karma provides tools that allow consumers to monitor their credit scores and credit reports. According to the FTC, in order to use Credit Karma’s services, consumers must provide the company with a variety of personal information, allowing Credit Karma to amass over 2,500 data points on each consumer, including credit and income information. Credit Karma uses that information to send targeted advertisements and recommendations for financial products, like credit cards, according to the agency.

The FTC’s proposed complaint alleges that, from February 2018 to April 2021, Credit Karma falsely told many consumers that they had been “pre-approved” for credit offers, leading consumers to apply, incur a hard inquiry on their credit reports, and, if they are denied, potentially damage their credit scores unnecessarily.

According to the FTC’s complaint, Credit Karma knew that its purported “pre-approvals” conveyed false “certainty” to consumers, based on the results of experiments, also known as A/B testing, showing that consumers were more likely to click on offers saying “preapproved” than those saying they had “excellent” odds of being approved.

When user interfaces are designed, including with the aid of A/B testing, to trick consumers into taking actions in a company’s interest and that lead to consumer harm, such design tricks have been described as “dark patterns.” Dark patterns were the focus of a public workshop held by FTC attorneys last year.

According to the FTC’s complaint, Credit Karma violated Section 5 of the Federal Trade Commission Act by falsely representing that consumers were pre-approved for credit offers or had 90% odds of approval. The complaint alleges that Credit Karma’s conduct harmed consumers by:

• Deceiving them about whether they were approved: Despite Credit Karma’s claims that consumers were “pre-approved,” for many offers, almost a third of consumers who applied were in fact denied. Credit Karma often only revealed the possibility of denial in buried disclaimers or false claims that consumers had “90% odds” of approval. Credit Karma was aware that its consumers were misled: for example, its own customer service training materials cited “I was declined for a pre-approved credit card offer .... How is that possible?!?!?!” as a common issue representatives would encounter.

• Costing consumers time and harming their credit score: The complaint alleges that, in response to Credit Karma’s false claims, numerous consumers wasted significant time applying for credit card offers. Additionally, when consumers applied for these offers, third party financial companies made a “hard inquiry” on their credit reports, which in many instances lowered consumers’ credit scores and harmed their ability to secure other financial products in the future.

Under the FTC Act, the FTC has the authority to take action against companies for engaging in unfair and deceptive acts or practices. The FTC’s proposed order against Credit Karma required the company to:

• Stop deceiving consumers: The FTC’s order prohibits Credit Karma from deceiving consumers about whether they are approved or pre-approved for a credit offer, as well as about the odds or likelihood that a consumer will be approved for a credit offer.

• Pay $3 million in consumer redress: The order requires Credit Karma to pay $3 million to the FTC, which will be sent to consumers who were harmed by the company’s actions.

• Preserve records: To help prevent further use of deceptive dark patterns, the order requires Credit Karma to preserve records of any market, behavioral, or psychological research, or user, customer, or usability testing, including any A/B or multivariate testing, copy testing, surveys, focus groups, interviews, clickstream analysis, eye or mouse tracking studies, heat maps, or session replays or recordings.

On January 23, 2023, the FTC announced that, following a public comment period, the agency finalized a consent order settling charges that Credit Karma deployed dark patterns to misrepresent that consumers were “pre-approved” for credit card offers.

The FTC’s consent order requires the company to pay $3 million that will be sent to consumers who allegedly wasted time applying for these credit cards and to stop making these types of deceptive claims.

Digital advertisers should consult with an experienced FTC defense lawyer to ensure that they are marketing safely and effectively. For example, the Commission is ramping-up FTC CID investigations utilized to trick or trap consumers into subscription services, deceptive sign-up tactics, unauthorized charges and ongoing billing that is impossible cancel.

Marketers will face legal action if their sign-up process fails to provide clear, up-front information, obtain consumers’ informed consent, and make cancellation easy. The FTC has brought numerous cases challenging a variety of illegal subscription practices. It has sued companies that hid important payment information, or even the fact that consumers would be charged at all, behind hyperlinks, hover-overs or in inconspicuous places or buried on pages beyond the initial offer page. It has sued companies that made consumers wait on hold or listen to lengthy ads before they could cancel. It has sued companies that converted free trials to paid subscriptions before the free trial ended. And, the FTC sued a company that failed to disclose that widely advertised, material benefits of the subscription were no longer available.

Marketers must follow applicable FTC legal regulatory requirements or be subject to law enforcement action, including potential civil penalties. They must disclose clearly and conspicuously all material terms of the product or service, including how much it costs, deadlines by which the consumer must act to stop further charges, the amount and frequency of such charges, how to cancel, and information about the product or service itself that is needed to stop consumers from being deceived about the characteristics of the product or service. Consult with an FTC compliance attorney for more detail on what “clear and conspicuous” means.

Marketers must also obtain the consumer’s express informed consent before charging them for a product or services. This includes obtaining the consumer’s acceptance of the negative option feature separately from other portions of the entire transaction, not including information that interferes with, detracts from, contradicts, or otherwise undermines the consumer’s ability to provide their express informed consent.

And, marketers must provide easy and simple cancellation to the consumer. Marketers should provide cancellation mechanisms that are at least as easy to use as the method the consumer used to buy the product or service in the first place.