FTC Scores Big Court Win Against DRTV Veterans8 May, 2012 By: William I. Rothbard
In a much-awaited decision, a federal judge has granted summary judgment in favor of the Federal Trade Commission (FTC) against DRTV veterans Gary Hewitt and Doug Gravink and their company, Family Products LLC, in the case FTC v. John Beck Amazing Profits et al. Hewitt and Gravink sold “John Beck’s Free & Clear Real Estate System,” “John Alexander’s Real Estate Riches in 14 Days,” and “Jeff Paul’s Shortcuts to Internet Millions” through national infomercials. The FTC obtained a preliminary injunction in 2009 but failed to get an asset freeze, which allowed the defendants to keep advertising under the strictures of the preliminary injunction and, equally importantly, to continue to pay for a defense – all the way to trial if necessary. The court did not need a trial, however, summarily ruling that all challenged ad claims and marketing practices were deceptive and a violation of either the FTC Act or the FTC Telemarketing Sales Rule (TSR).
The gist of the accusations was that the business falsely advertised the income potential of its products and failed adequately to disclose the negative option terms for its continuity program. The FTC claimed the infomercials created the false impression that it would be “quick and easy” for anyone using the products to make money. The John Beck show, for example, said consumers could purchase homes at government tax sales “free and clear” for just “pennies on the dollar,” and would be able to profit by renting or selling them, and the John Alexander show claimed fancy earnings awaited users of its real estate system. “Jeff Paul’s Shortcuts to Internet Millions,” in the name itself and in endorsers’ earnings claims, suggested similar riches for users of that program.
On every score, the court held these claims were false – that, in fact, only a few people made money and the vast majority lost, including on expensive coaching programs. Further, the court said that disclaimers, such as ones stating that results would vary, and that time, effort and “common sense” would be necessary to be successful, were ineffective to dispel the misleading “net overall impression” that handsome profits could be made, quickly and easily, from the programs.
In perhaps its most legally significant finding, the court also ruled that defendants violated the TSR by failing to disclose the terms of their continuity programs not just before the customer agreed to the sale, but even before the customer divulged credit card information. The text of the TSR states only that terms must be disclosed before a consumer “consents to pay,” but the court, citing FTC compliance guidance on the TSR, construed the text to require that disclosure be made even earlier, before the seller or telemarketer requests account information.
Since the start of 2011, Internet sellers of negative options have been required by the Restore Online Shoppers’ Confidence Act (“Rockefeller Law”) to disclose terms before billing information is provided. Now, with the decision in John Beck Amazing Profits, there is case law to back up the FTC view that this requirement should extend to telemarketing sales as well. DR marketers of continuity programs should take heed and review their scripts (and websites) to make sure all material disclosures are made not just before the consumer says, “OK,” but even before he pulls out his card.
As for the case itself, it’s not quite over. The parties have been asked to tell the court how much it should order in consumer redress and whether it should ban Hewitt and Gravink from infomercials – for life. The FTC is seeking more than $450 million, and it goes without saying that it is pushing for a ban.
William I. Rothbard is a former FTC attorney and practices in Los Angeles, specializing in advertising and marketing law. He can be reached at (310) 453-8713, Rothbard@FTCAdLaw.com, and www.ftcadlaw.com.