Shock to the "system"
There are lots of good reasons for infomercial marketers and other retailers to abide by truth-in-advertising principles. But for people who insist on a dollars-and-cents rationale, the Court-ordered $478 million price tag for violations related to national ads for money-making systems makes legal compliance look like a bargain.
Watch a little late night TV and you were bound to see infomercials for John Beck’s Free and Clear Real Estate System, John Alexander’s Real Estate Riches in 14 Days System, and Jeff Paul’s Shortcuts to Internet Millions System. For an upfront cost of about $40, people got a kit of materials and a purportedly free 30-day membership in a value-added “club.” But in response to an FTC lawsuit, the Court ruled that the defendants’ money-making claims were misleading, that they failed to tell people that those “free” club memberships would wind up costing them, that their sale of expensive coaching services was riddled with deception, that their business methods violated the Telemarketing Sales Rule, and that they flouted the TSR’s Do Not Call provisions. You’ll want to read the Court’s summary judgment ruling, the order regarding relief, and the final order for the details, but the case offers compliance pointers regardless of what your company sells.
Framing your claims. Ads for the products made extravagant money-making promises — for example, that people could buy houses and other real estate for “pennies on the dollar” and with “little financial investment required,” or that they would quickly and easily make big money online. But the Judge cited evidence that “less than one percent (0.7%) of all consumers who purchased the Jeff Paul kit materials made any revenues. Less than one-half of one percent (0.4%) of all Jeff Paul customers have made any profit (revenues less expenses) using the Jeff Paul System." The message for marketers? Money-making claims, like any other objective representations, have to be backed up in advance with solid evidence.
“Trial” and error. People who bought the advertised programs were told they included free 30-day memberships to the John Beck Property Vault, John’s Club, or Jeff Paul’s Big League. But as the Court concluded, what the defendants didn’t say — or failed to disclose adequately — was that after the trial period ended, people would be billed $39.95 each month for their membership. The opinion underscores that marketers need people’s express permission before enrolling them in programs like this and billing their credit cards. The order puts protections in place for future consumers, including required disclosures and specific steps to get people’s express informed consent before billing them.
The download on upsells. The defendants used telemarketers to pitch pricey coaching services with the promise that people quickly would earn back their costs and much, much more. According to the Court, telemarketers often made express earnings claims and told people that “personal coaches will ensure consumers’ success by holding their hands and walking them ‘step by step’ through the systems.” Some telemarketers even warned people that “absent coaching, failure is guaranteed.” But what did the evidence show? As the Court found, “Almost all who purchased coaching programs lost money, and more than 17 percent lost at least $10,000. Only 1.7% of consumers who purchased coaching services made any profit whatsoever." What can marketers take from the case? A reminder that the same proof requirements apply to upsells, add-ons, and service promises.
Leaders of the ban. The Court’s order bans defendants Douglas Gravink, Gary Hewitt, and Family Products, LLC, for life from “engaging or participating in the production or dissemination of any infomercial” or from “engaging or participating in telemarketing.” (The telemarketing ban also applies to Mentoring of America, LLC.) OK, but what about playing a behind-the-scenes role? Nope. The Court also imposed a lifetime ban on “assisting others" engaged in the production or dissemination of infomercials or in telemarketing. Suffice it to say, this wasn’t the first time around the law enforcement block for Mr. Gravink or Mr. Hewitt. The order includes a recap of their history — Gravink and Hewitt were involved in an FTC infomercial case in 1990 and have settled other cases since then — and a detailed legal rationale for the remedy. It’s a sobering message for marketers on the importance of learning from earlier law enforcement lessons.
Addressing redress. The Court’s ruling includes a step-by-step analysis of the reasoning that led to the $478 million order, which represents “the total net revenue figure for kit sales, coaching sales, and two years of continuity sales.” The Court gave the defendants 30 days to pay the amount in full. The message for marketers? No need for one. An order totaling close to a half billion dollars says it all.