Online Advertiser Settles FTC Charges. "Free" Products Weren't Free; Settlement Calls for $200,000 Civil Penalty

An online advertiser that drove traffic to its Web sites using spam e-mails with misleading subject lines has agreed to settle Federal Trade Commission charges that it failed to disclose that consumers have to spend money to receive the so-called "free" items it touts. The settlement, filed by the Department of Justice on behalf of the FTC, requires the defendants to disclose the costs and obligations to qualify for the advertised products or services, and bars them from sending e-mail that violates the CAN-SPAM Act. The settlement also requires that the company pay $200,000 in civil penalties.

According to the FTC, Member Source Media LLC, doing business as ConsumerGain.com, PremiumPerks.com, FreeRetailRewards.com, and GeatAmericanGiveaways.com, and the company’s principal, Chris Sommer, used deceptive spam and online advertising to lure consumers to its Web sites. For example, Member Source Media used e-mail subject lines such as, "Congratulations. You've won an iPod Video Player"; "Here are 2 free iPod Nanos for You: confirm now"; "Nascar Tickets Package Winner"; "Confirmation required for your $500 Visa Gift Card"; or "Second Attempt: Target Gift Card Inside." The company’s Web-based ads contain similar representations: "CONGRATULATIONS! You Have Been Chosen To Receive a FREE GATEWAY LAPTOP."

When consumers arrive at Member Source Media's promotional Web pages, they are led through a series of ads for goods and services from third parties. To "qualify" for their "free products," consumers must first wade through pages of "optional" offers. If they clear this hurdle, they discover that they must "participate in" a series of third-party promotions that requiree them to do things such as purchase products, subscribe to satellite television service, or apply for multiple credit cards.

The FTC alleges that Member Source Media's failure to disclose material facts – such as the fact that consumers must pay money or provide some other consideration to obtain their "free product" – is deceptive in violation of the FTC Act. In addition, the agency charged that deceptive subject lines in Member Source Media's spam e-mails violate the federal CAN-SPAM Act.

The settlement requires that Member Source Media clearly and conspicuously disclose in its ads and on its promotional Web pages that consumers have to spend money or incur other obligations to qualify for a free product or service. The settlement also requires the company to provide a list of the obligations a consumer is likely to incur to qualify for their chosen item – such as applying for credit cards or purchasing products. In addition, the settlement bars future violations of the CAN-SPAM Act and requires Member Source Media and Sommer to pay a $200,000 civil penalty. Finally, the settlement contains bookkeeping and record-keeping provisions to allow the agency to monitor compliance.

The Commission vote to approve the stipulated final order was 5-0, with Commissioner Jon Leibowitz concurring in part and dissenting in part. In his dissenting statement, Commissioner Leibowitz said he had dissented from a similar case against Adteractive, Inc. "on the ground that the civil penalty the company had to pay represented a downward departure from our other CAN-SPAM Act cases and was not adequate to deter violations in the future. I respectfully dissent in part in this case because I believe that the civil penalty here, which was being negotiated at roughly the same time as that in Adteractive, is also inadequate. But I am concurring in part because I do not want a continuing difference on the amount of the civil penalty to suggest that I disagree with the Commission’s efforts in this area."

The complaint and stipulated final order for permanent injunction were filed in the U.S. District Court for the Northern District of California.

NOTE: This stipulated final order is for settlement purposes only and does not constitute an admission by the defendant of a law violation. A stipulated final order requires approval by the court and has the force of law when signed by the judge.