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Legal Review: New Attackers Join the Fight Against Unauthorized Charges

15 Jan, 2010 By: Jeffrey D. Knowles, Venable LLP’s Advertising, Ellen T. Berge Response

Jeffery D. Knowles and Ellen T. BergsThe onslaught against unauthorized charges is gaining momentum on many fronts, with pressure exerted on everyone from major retailers and advertising networks to major credit card companies — and for charges posted not just to credit cards but also to bank accounts and telephone bills.

Six months ago (Response, July 2009), we reported on an investigation launched by Sen. John D. Rockefeller IV (D-WV), chairman of the U.S. Senate Committee of Commerce, Science and Transportation, into online upselling practices that generated thousands of “mystery charges” to consumer credit cards. The ongoing investigation is focused on the marketing practice of three ad networks — Affinion, Vertrue and Webloyalty — that present post-transaction online upsells for membership clubs and other continuity programs involving recurring monthly charges. Consumers can usually accept these offers with the click of a mouse, without having to re-enter credit card or other billing information — and not realize that their billing information will be transferred from one merchant to another to process future charges.

In early November 2009, the Commerce Committee sent information requests to 16 major retailers (including Pizza Hut, US Airways, Shutterfly and Vistaprint) that apparently used the ad networks to present membership club offers to their online customers and agreed to pass customer credit card and other billing information to the ad networks. In mid-November, the Committee held a hearing to examine these sales tactics.

The hearing, along with a Committee staff report released at the same time, revealed that consumers who accepted these offers were not aware that the credit card or other financial account information was passed to the third-party marketer, or that they would be charged as part of an ongoing continuity or membership program once the “free” trial ended. In early December, Sen. Rockefeller sent letters to Visa, MasterCard and American Express demanding that the credit card companies provide information on the safeguards they use regarding “hidden charges.”

Separately, at least two states are attacking the ad networks for these practices. Connecticut Attorney General Richard Blumenthal announced his support of the Commerce Committee’s warning on “bogus membership clubs” and that his office was also investigating Connecticut-based Vertrue and Webloyalty. In his statement, Blumenthal mentioned a 2006 multi-state lawsuit against Affinion (formerly Triligiant) that resulted in $14.5 million in consumer restitution and penalties. Affinion is now under fire for possible violations of its settlement order.

Iowa Attorney General Tom Miller’s office recently finished arguing its three-year-old case against Vertrue related to allegedly unauthorized charges for membership clubs pitched to consumers as “risk-free” trial offers on the tail end of routine customer service calls. The Iowa Attorney General is seeking injunctive relief to prevent certain marketing practices, consumer restitution, disgorgement of profits, and significant civil penalties.

Class-action attorneys have also joined in the hunt. Social network Facebook Inc. and social gaming company Zynga Inc. were named in November in a class-action lawsuit filed in a Northern California federal court. The suit seeks $5 million in damages for users of social network games who were incentivized to accept trial offers for membership clubs in exchange for virtual currency that could be used to play games. Users of the games complained about unauthorized charges that appeared on their cell phone bills after they provided their cell phone numbers to an advertiser making the offer. Both Zynga and Facebook say they did not profit from the ads and have pledged to vigorously fight the suit.

The efforts of Sen. Rockefeller, state and federal law enforcement agencies, and the plaintiff’s bar have already had sweeping effects. Businesses are starting to scrutinize marketing practices more closely or shun certain practices altogether. Facebook is taking action block deceptive advertising and has banned four ad networks within recent months.

Changes in the way that merchants present membership clubs and other such programs, particularly those offered as post-transaction upsells to consumers, are imminent. Pressure from Visa and MasterCard could have the most impact, as failure to comply with the credit card company standards could jeopardize a merchant’s ability to accept credit card payments.

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