Major Online Advertiser Settles FTC Charges. "Free" Gifts Weren't Free; Settlement Calls for $650,000 Civil Penalty

A large 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" gifts it offers. The settlement, filed by the Department of Justice on behalf of the FTC, requires the defendant to disclose the costs and obligations to qualify for the advertised "gifts," and bars it from sending e-mail that violates the CAN-SPAM Act. The settlement also requires that the company pay $650,000 in civil penalties.

According to the FTC, Adteractive, Inc., doing business as FreeGiftWorld.com and SamplePromotionsGroup.com, used deceptive spam and online advertising to lure consumers to its Web sites. For example, Adteractive used e-mail subject lines such as, "Test and keep this Flat-Screen TV," "Test it – Keep it – Microsoft Xbox 360," and "Congratulations! Claim Your Choice of Sony, HP or Gateway Laptop." Similarly, Adteractive's banner ads and pop-up ads contained claims such as, "Participate Now and You'll Receive a FREE SONY PLAYSTATION."

When consumers arrive at Adteractive's promotional Web pages, they are led through a series of ads for goods and services from third parties. To "qualify" for their "free gifts," 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. Participation in these promotions requires consumers to do such things as purchase products, take out a car loan, subscribe to satellite television service, or apply for multiple credit cards.

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

The settlement requires that Adteractive 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 gift or prize. The settlement also requires the company to provide a list of the obligations a consumer is likely to incur to qualify for their chosen gift – such as applying for credit cards, purchasing products, or obtaining a car loan. In addition, the settlement bars future violations of the CAN-SPAM Act and requires Adteractive to pay a $650,000 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 4-1, with Commissioner Jon Leibowitz issuing a separate dissenting statement. In his statement he expressed concern that “the civil penalty that Adteractive must pay is a downward departure from our other CAN-SPAM Act cases and is not adequate to deter violations in the future.” The complaint and stipulated final order for permanent injunction were filed in the U.S. District Court for the Northern District of California.

The proposed stipulated order was filed on November 26, 2007 by the DOJ at the request of the FTC. It is subject to court approval.

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.