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How Does The FTC Affect Online Business?

How does the FTC affect online business?

Internet law is a relatively new field of legal practice: state and federal courts and agencies are creating it on an ad hoc basis, attempting to fit the highly specialized disputes that arise from website development, service provider liability, copyright/trademarks, and the professional scope of online businesses and affiliate marketers into preexisting legal frameworks.

Of these jurisdictions, the ones that perhaps have the most effect on the daily life of the culture are those internet law questions that arise in conjunction with Internet businesses. In a very brief period of time, less than 20 years in fact, the Internet has utterly transformed not only the way that goods are bought and sold but also how they're advertised, promoted and marketed, not just in the United States but throughout the world. If you have an online business or are thinking of setting up an online analog to your existing business, competent internet attorneys are your best guide to this brave new world.

Within the United States, agencies like the Federal Trade Commission (FTC) - a federal agency first founded in 1915 to protect consumers from unfair business practices that include false advertising - have begun attempting to regulate online marketing. In 2009, the FTC issued a set of formal guidelines that had and continue to have a profound affect on the way Internet marketers and advertisers do business. In a 55-page report entitled "Self-Regulatory Principles for Online Behavioral Advertising," the FTC investigated the consumer privacy issues that arise from tracking an online user's netsurfing activities in order to customize advertising to his or her interests, and set forth four principles to regulate this practice:

  • Transparency and consumer control: Companies are expected to inform consumers when they are participating in behavioral advertising and to provide them with an opt-out mechanism if they do not choose to have their information collected for this purpose.
  • Reasonable security and limited data retention: Companies that engage in collecting personal data will only retain that data for as long as necessary for the business transaction it pertains to, and will provide reasonable security measures so that the data they collect is not compromised.
  • Material changes to privacy policies: Companies cannot use the behavioral data they collect in a manner that is substantially different from assurances made to consumers when they collected it without obtaining the express consent of those consumers.
  • Sensitive data: Companies cannot use information about children, consumers' health or financial statuses or other sensitive data for behavioral advertising.

The Implications of the FTC Guidelines

Consumer Privacy Controls

Online advertisers have the ability to track consumers' behavior across time in a way that traditional advertisers can only dream about through the use of a specialized HTTP protocol called cookies which allow vendors, advertisers and other parties interested in usage statistics to embed a piece of text in an end user's web browser that identifies the end user every time he or she accesses a website.

When an end user logs on to a website for the very first time, he or she may be prompted to provide personal information such as name, email address and interests, all of which is packaged into the cookie and sent to the end user's browser which stores it for later use. Cookies can also be customized to track end users' browsing activities.

The main thrust of the FTC's 2009 guidelines in the cyber-arena has to do with enhancing privacy controls that pertain to the information contained in cookies, particularly as they regard sensitive data such as an individual's health status or financial data and the activities of children online. The FTC made the distinction between data that is not personally identifiable and data that could be associated with a particular consumer or a consumer's computer or portable device. The FTC notes that fewer privacy concerns may apply to situations in which a company collects personal information for behavioral advertising purposes but does not share it with a third party as well as situations involving so-called contextual advertising targeting consumers as they access specific content websites.

Industry response to the FTC's enhanced privacy guidelines was positive: Almost immediately following the announcement of the new guidelines, both Google and Yahoo! created new tools to allow their users to opt out of receiving behavioral advertising pitches, and the newest version of Microsoft's Internet Explorer and the open source Foxfire browser both allow users to clear browsing and searching history, cookies, form data, and passwords from the browser's cache at the end of every Internet session.

In hearings that took place in the summer of 2010, the FTC announced it was considering strengthening its privacy guidelines even further by facilitating a process that will allow consumers to opt out of all behavioral advertising. The mechanism would be a browser plug-in that would store consumers targeting preferences. Oversight for the plug-in development would either be through the FTC or one of the many nonprofits such as the World Privacy Forum, the Center for Digital Democracy or the Center for Democracy & Technology that have been advocating for years for a do-not-track registry similar to the do-not-call registry.

Products and Services

The FTC's mission since its founding has been protect consumers from deceptive and unfair acts or practices. This tenet applies to Internet advertising as well. Website designers and administrators are responsible for validating informational claims for any information they package for Internet consumption. In a way, Internet advertisers are held to a higher standard since often they may have to apply to a product manufacturer for specific information that will substantiate the manufacturer's claims, and make that information available to end users who request it. Disclaimers are not enough to counteract a false or misleading claim, any product demonstration must showcase the product under conditions of ordinary use and if refunds are promised, they must be delivered in full.

Free Products

The most popular keyword on the Internet? "Free." Although the revised 2009 FTC guidelines did not specifically address the plethora of free samples, free games and free ring tones offered as fish bait by many websites across the net, they do have relevance for those individuals who create online editorial content about the freebies they receive for the blogs they write. Bloggers, Twitterers and anyone else who writes product endorsements or reviews must now disclose in a prominent location on their websites if they received the product or service without paying for it. Bloggers associated with mainstream media sources such TV, newspapers or magazines are exempt from this restriction.

The FTC's real target here is companies that utilize alleged word of-mouth promotions on bulletin boards and social networks like Facebook that are really pitches from paid employees engaged in guerilla marketing campaigns. But there is no denying that in the age of the Internet the age-old media distinction between church and state - editorial content versus advertising content - is blurring. Remember the old New Yorker cartoon? "On the Internet nobody knows you're a dog." But thanks to the FTC guidelines at least they'll know if 50 pounds of Alpo is delivered to your doorstep every week - if you're writing about it.

Jewelry

Not so very long ago it seemed that every other piece of jewelry being offered for sale on EBay was alleged to be a Tiffany original. The 2009 FTC guidelines specifically prohibit this sort of misrepresentation. Sellers must now disclose in their online descriptions and other online promotional materials exactly what is being sold using the criteria set for in the FTC's 2008 Guides for the Jewelry, Precious Metals, and Pewter Industries. The seller must have a reasonable expectation that he or she can ship within 30 days.

Multi-Level Marketing (MLM)

The Internet has provided a business platform for affiliate marketing, a practice whereby networks of websites feed visitors and customers to more established businesses. Amazon.com, whose affiliate program is still the most successful one on the web, pioneered the method in the 1990s. In 2007, the FTC ruled that consumers should have the right to opt out if a business attempts to use personalized information obtained from an affiliate to market its products and services.

Although affiliate marketing is not addressed per se by the 2009 guidelines, the FTC has come out against a very similar practice known as multi-level or matrix marketing schemes in which goods and services are sold through distributor networks. The FTC likens these to illegal pyramid schemes.

Why Internet Businesses Need Internet Attorneys

Compliance with the Federal Trade Commission's 2009 Guidelines will raise a lot of questions for online businesses. The best people to answer these questions are experienced internet lawyers familiar with the rapidly changing case law surrounding the commercial use of the Internet. Although the Federal Trade Commission's guidelines only carry the weight of administrative law which means no specified penalties are imposed for violation in most cases, it is still wisest to adhere to them since they represent a consensual ethical norm for behavior towards which the Internet is evolving quickly. Practiced internet lawyers can help you customize your website and online advertising to meet the 2009 guidelines without sacrificing any of its effectiveness in attracting new customers and retaining the old ones.

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