Gateway Settles FTC Charges over Free Internet Service Claims

Gateway, Inc., one of the largest domestic marketers of personal computers ("PCs"), has agreed to settle Federal Trade Commission allegations that the company misrepresented the cost of its "Gateway.net" Internet access service. According to the FTC, so-called "free" or flat-fee services offered by Gateway actually resulted in significant additional charges to many consumers - a fact inadequately disclosed by the company.

In announcing the settlement, Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection, said, "Free Internet access often turned out too good to be true for many consumers, a fact made clear by a significant volume of complaints by consumers to the FTC. Hidden fees often lurked in minuscule fine print tucked away at the end of ads or service agreements. Today's agreement will help make sure more consumers don't get taken for a ride on the Internet highway when it comes to the true cost of Internet access."

The settlement with Gateway would prohibit the company from misrepresenting the price or cost of any service to access the Internet or other electronic network, and requires Gateway to make clear and conspicuous disclosures of fees a consumer may incur to access such a service. Moreover, the order requires Gateway to pay redress to refund all charges for the so-called "toll free" numbers paid by customers who registered on the local access plan between January and April 1999, before consumers were adequately warned of the fee for "toll-free" calling.

According to the FTC's complaint against Gateway, the company advertised its Gateway.net Internet access plan as being provided for free for one year with the purchase of the Gateway Essential Line of PCs-- "An unbelievable computer that actually comes with a year of Internet access." However, at the bottom of the advertisement in approximately two point type, the following disclosure appeared: "Rural access $3.95/hour. Local access $1.50/hour over 150 hours per month." Similarly, one of the challenged ads offered "1-Year Gateway.net Internet

Access," with the relevant disclosure of additional possible fees appearing in a footnote, four pages later, at the bottom of the page, in the eighth line of eleven lines of fine print disclosures, in approximately four point type. Other ads promoted Gateway.net for a flat-fee of $14.95 per month, with no disclosures of any possible additional fees.

According to the complaint, Gateway made several claims that were false or misleading, in violation of Section 5(a) of the FTC Act.

• For many consumers, the one year of promised Gateway.net Internet access was not free. Consumers who were located in areas where there was no local telephone number to access Gateway.net were charged $3.95 per hour to use Gateway's "toll-free" number to connect to the service. Other customers incurred long distance charges to access the service.
  
• Gateway also claimed that the service could be accessed at the cost of a flat fee of $14.95 per month. However, some customers incurred long distance charges to access Gateway.net or were charged $3.95 per hour to use the "toll-free" number.
  
• Gateway represented that a 1-888 number consumers could use to connect to Gateway.net was "toll-free," while charging consumers $3.95 per hour for its use.
  
• Gateway represented that the cost of using the Internet for one year would be zero, or that Gateway.net could be purchased for a flat monthly fee of $14.95 per month. Gateway failed to adequately disclose the material fact that consumers would possibly incur significant additional costs such as long distance charges or charges for the use of Gateway's "toll-free" number.
  

Gateway will be required to take several remedial steps under this agreement:

• Gateway shall not misrepresent, in any manner, expressly or by implication, the price or cost to consumers of any service to access the Internet or other electronic network or what is included in the price of any such service, or the price or cost incurred by consumers, if any, for the use of "1-800," "1-877," or "1-888 " telephone numbers, or any other telephone numbers for which Gateway is a toll-free subscriber.
  
• Gateway shall not make any representation, in any manner, expressly or by implication, about the use of "1-800," "1-877," or "1-888" telephone numbers, or any other telephone numbers for which it is the toll-free subscriber, unless it clearly and conspicuously discloses any fees for the use of such numbers.
  
• Gateway shall not make any representation about the price or cost to consumers of any service to access the Internet or other electronic network unless it clearly and conspicuously discloses: a) that consumers may have to pay additional long distance charges or other fees to access the service if that is the case; b) the dollar amounts of any fees within the service provider's control; c) a means for a consumer to ascertain whether he or she would incur additional charges, such as providing lists of local access numbers; and d) that consumers should contact their local telephone company to determine whether the use of local access numbers will incur a fee.
  

Within forty-five (45) days after the consent agreement becomes final, Gateway will contact Gateway.net local access subscribers who, according to Gateway's records, paid any fee for the use of a "1-800," "1-877," or "1-888 " telephone number between January 19, 1999 and August 15, 1999 and have not received full reimbursement for such use. Gateway is required to furnish the list of the local access subscribers who have applied for reimbursement, the amount of each reimbursement request, and the date of mailing and the amount of reimbursement provided to each applicant within one (1) year after the consent agreement becomes final.

The Commission vote to accept the proposed consent settlement was 5-0. An announcement regarding the complaint and proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 30 days, until June 14, 2001, after which the Commission will decide whether to make it final. Address comments to FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

For More Information

For more information on online advertising and Internet access services, the staff of the Commission's Office of Consumer and Business Education has published two consumer brochures on what shoppers should know about "free" Internet service and PC offers entitled "Hide and Go Seek. Finding the Disclosures in "Free" Internet Service Offers" and "'Free' and 'Low Cost' PC Offers. Go Figure."

NOTE: The 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.

Copies of the complaint, the consent agreement, and an analysis of the agreement to aid public comment 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. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC Matter No. 9923276)