FTC Settles Charges of Misleading Advertising by Three Companies Selling Low-Cost and "Free" PCs

The Federal Trade Commission has reached consent agreements with online retailers BUY.COM and Value America, and the Office Depot retail chain, over charges they engaged in deceptive practices in advertising so-called "free" and "low-cost" computer systems. According to the FTC, the companies' promotions, which included rebates conditioned on the purchase of three years of Internet service, failed to disclose the true costs and important restrictions on the offers. The retailers have agreed to disclose this information prominently in future advertising to enable consumers to determine the real, out-of-pocket costs of such deals.

"You shouldn't need a Ph.D. to figure out the cost of a P.C.," said Jodie Bernstein, director of the Federal Trade Commission's Bureau of Consumer Protection. "These advertisers should have done a better job of disclosing the details so consumers could figure out the deal. The fact is that consumers and businesses all benefit when disclosures are prominently placed and in plain English."

The Parties

BUY.COM, Inc., based in Aliso Viejo, California, is an Internet superstore, selling computers and related products, consumer electronics, books and movies, among other products. Its net revenues in 1999 were just under $600 million, making it one of the top five e-commerce sellers, according to industry surveys.

Value America, Inc. of Charlottesville, Virginia, is a large Internet retailer, specializing in electronics, office products, and technology products. The company had 1999 revenues of $182 million.

Office Depot, Inc., headquartered in Delray Beach, Florida, is the world's largest seller of office products. It operates 868 stores in the United States, Canada, France and Japan. The company's 1999 total sales were $10.3 billion.

Complaints

The FTC's complaints in these cases allege that all three retailers deceptively advertised the total costs of several different computer systems by failing to inform consumers adequately of the upfront cost of the systems (the before-rebate price), and that consumers had to sign a contract committing them to three years of Internet service from an Internet service provider (such as CompuServe, MSN, or Prodigy) to qualify for the rebate. The challenged advertisements appeared in major newspapers, magazines, television infomercials, radio, and online in banner ads and on the companies' Web sites.

The advertisements touted low-cost and, in some cases, "free" computer systems, but the true costs of these systems were far higher. For example, one advertisement featured a computer for $269. But the purchaser's actual expenses would exceed $1,000, nearly four times greater than the advertised price, when taking into account the cost of the Internet service contract.

In addition, purchasers faced other restrictions and charges that were not adequately disclosed, the FTC charged. Consumers who canceled their contracts before the term was up faced loss of their rebates and, in most cases, additional penalties. And consumers in some parts of the country had to pay long-distance telephone charges, or expensive hourly surcharges, to connect to the Internet, because the Internet service provider lacked local access numbers in their area. All of this information either was not disclosed at all in the advertising, or appeared in very small and inconspicuous disclaimers -- some appearing in type as small as four-point ((This is four-point type.)).

While all three companies ran similar advertising of "low cost" or "free" computer systems, the three complaints differ somewhat because of the specifics of each case.

All three complaints challenge the companies' failure to disclose, or failure to disclose adequately, the following material information: 1) the required three-year subscription to the Internet service and its cost; 2) the amount of the rebates and the total upfront cost of the computer without the rebates (this allegation is not included in the Office Depot complaint); 3) the penalty for early termination of the Internet service; 4) the possible long-distance telephone charges or hourly surcharges to use the Internet service; and 5) as to Value America, that it can take 12-17 weeks for consumers to receive their Internet service provider rebates.

Both the Office Depot and Value America complaints also allege that the companies falsely represented that their "free" computer system offers included a monitor at no additional cost. In fact, the monitor was not part of the offer and had to be purchased separately at a cost of $140-$200.

Finally, the Value America complaint alleges the company committed violations in many instances of the FTC's Trade Regulation Rule entitled "Mail or Telephone Order Merchandise" ("Mail Order Rule") by failing to ship products within the promised delivery time and failing to send late delivery notices giving consumers the option of canceling their orders and getting a refund.

Proposed Consent Agreements

All three proposed orders prohibit any misrepresentations of price or cost to consumers of any computer, computer-related product or Internet access service. The Office Depot and Value America orders also ban misrepresentations about what is or is not included in the advertised price or cost to address the alleged false advertising about monitors.

In addition, if the companies advertise a price or rebate that is conditioned on the purchase of any other product or service (including Internet service), the proposed orders require the companies to disclose both that requirement and the price of the other product and service. The disclosures must be clear and conspicuous, and in close proximity to the price claim. The BUY.COM and Value America orders also require clear and conspicuous disclosures, whenever an after-rebate price is advertised, of the amounts of the rebates and the before-rebate price. These disclosures are critical to consumers in understanding their obligations under the offer and what their out-of-pocket costs will be.

Finally, the orders require clear disclosure of all Internet service cancellation penalties, as well as information regarding the possible long-distance telephone charges. In the case of Internet advertising, these disclosures can be made through hyperlinks, if those hyperlinks are prominent and adequately labeled to identify the information to which they are linking. For example, a hyperlink to a disclosure about possible telephone charges must be labeled: "You May Have to Pay Significant Telephone Charges to Use the Internet Service. Click Here."

The Value America order addresses the Mail Order Rule violations. It requires the company to comply with the Rule in the future, and, once the agreement is made final, to cancel orders and provide refunds to all customers who ordered a product before the agreement is final and whose order is more than 10 days late.

The Commission vote to accept each proposed consent agreement was 5-0.

These orders draw on the principles set forth in the FTC's recently released working paper entitled "Dot Com Disclosures: Information about Online Advertising." That document explains how to adequately disclose restrictions and qualifications in Internet advertisements, including the appropriate use of hyperlinks.

For More Information

For more information on online advertising and "free" PCs, in addition to the Dot Com paper, the staff of the Commission's Division of Business and Consumer Education has published a consumer brochure on what shoppers should know about "free" PC offers entitled "'Free' and 'Low Cost' PC Offers. Go Figure," and a guide for businesses entitled "Big Print. Little Print. What's the Deal?" with advice on complying with the law in advertising these offers. These publications can be found online at www.ftc.gov or by calling the Consumer Response Center toll-free at 1-877-382-4357.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

A summary of the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 30 days, until July 31, 2000, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

Copies of the complaints and proposed consent agreements are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File Nos. 992-3282; 992-3313; 992-3206)