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Move Over DOJ, It's FTC's Turn to Regulate

Gregory A. Piccionelli
The adult entertainment industry breathed a collective sigh of relief last November with the election of Barack Obama.

To be sure, the industry has good reason to believe that the change in administration in Washington will mean less risk of federal obscenity and 2257 prosecutions.

With a former 1st Amendment attorney, David Ogden, now second in command at the Justice Department, such optimism certainly seems warranted.

But while the risk of obscenity and 2257 prosecutions may well have diminished, persons in the adult entertainment business should not mistakenly believe that the federal government will turn a blind eye to the activities of the business, especially when it comes to activities involving the Internet.

Indeed, if the Obama administration adopts a similar regulatory posture towards the business as the Clinton administration did in the 1990s, the focus of federal activity will switch from criminal actions prosecuted by the DOJ to civil actions conducted by the Federal Trade Commission.

What the FTC does. The primary mission of the FTC is to prevent unfair competition and to protect consumers from unfair or deceptive practices in the marketplace.

To accomplish that end Congress has provided the FTC with broad powers to prosecute fraudulent or deceptive trade practices. For example, the FTC has powers to issue, and seek court enforcement of, cease and desist orders to prevent the continuation of practices that violate the FTC Act.

Through an FTC action a company can also be forced to provide restitution to consumers and/or purchase corrective advertising. But regardless of the specific course of action taken by the FTC, the bottom line is that an FTC enforcement action can be a costly matter for a company, very costly.

A violation of the FTC Act can easily cost the violator millions of dollars and force a company to fundamentally change the way it operates.

The FTC is also responsible for the enforcement of a number of consumer protection acts including Controlling the Assault of Non-Solicited Pornography And Marketing Act of 2003, commonly known as the "CAN-SPAM Act.

Thus, as is implied by its formal name, the CAN-SPAM Act provides the FTC, as the Act's enforcer, with a special responsibility that brings it into a special regulatory relationship with the online adult entertainment business.

While FTC actions are generally not matters of criminal law enforcement, the FTC's role in enforcing the civil statutes within its authority can affect whether, and how, related criminal regulations are enforced by the DOJ. For example, in the recent criminal convictions of James Schaffer and Jeffrey Kilbride for violations of certain criminal provisions of the CAN-SPAM Act, and for distributing obscene matter via email, government prosecutors presented evidence of a large number of consumer complaints received by the FTC regarding the spam at issue in the case.

It is likely that the volume of complaints to the FTC was a significant factor in the DOJ's decision to pursue criminal charges against the adult webmasters.

(After the defendants' convictions our firm was engaged to represent Kilbride on appeal. In early June, I argued his appeal before the 9th U.S. Circuit Court of Appeals. While my co-counsel, Gary Kaufman [attorney for Shaffer] and I are both cautiously optimistic that the court will reverse the defendants' convictions, we both agree that the court decision could also be of industry-wide importance. This is because one of the issues the court may decide is whether in obscenity cases it is appropriate to judge materials transmitted via the Internet to points all over the world by the standards of a single local community, which has been the rule since 1973, or whether the materials should be judged by a national or Internet-wide community standard. Most of the 1st Amendment bar, including myself, believe the law should use a national or Internet community standard. Hopefully, the 9th Circuit, a court just one level below the U.S. Supreme Court, will agree with our arguments to that effect. Stay tuned.)

There is a lesson here for online adult entertainment companies. It is important to remember that Schaffer's and Kilbride's legal problems, including federal felony convictions that resulted in lengthy prison sentences and multimillion dollar fines, all originated as consumer complaints to the FTC. So adult website owners are well-advised to do their best not to run afoul of any FTC regulations.

Schaffer and Kilbride were by no means the first adult entrepreneurs to incur the wrath of the FTC.

During the early days of the adult Internet under the last democratic administration, the FTC was very active. From the mid-1990s though the end of Bill Clinton's second term, most FTC enforcement actions involving adult Internet companies involved fraudulent billing practices or what the FTC considered to be deceptive uses of the word "free" in association with free trial website memberships that automatically converted into a monthly membership with recurring credit card billing.

We handled a number of those cases and I can tell you that while FTC complaints are civil actions and not criminal prosecutions, each was a very unpleasant experience for the targeted defendants. In one case we handled, for example, at the time we were engaged, the client's business was being run by an outside receiver appointed by a federal judge at the request of the FTC. We got the receiver removed and resolved the case favorably for our client, thankfully.

But some companies, however (not any of our clients, fortunately) did not fare as well in that round of FTC actions. Some were effectively shut down by the FTC.

More recently, in 2007 the FTC initiated a high-profile action against Various Inc., the company that operates the AdultFriendFinder.com website and associated online services.

In the government's complaint, the FTC alleged that Various engaged in unfair acts or practices in violation of Section 5 of the FTC Act regarding Various' use of popup ads. Specifically, the FTC claimed that "in numerous instances, in connection with the online advertising, marketing, sale, or offering for sale of defendant's products and services to consumers, defendant has caused, directly or indirectly, unwanted sexually explicit marketing media, including but not limited to the advertisements described in [the complaint] ... to be displayed on an unsolicited basis on the computer screens of consumers, including minors ... defendant's actions have caused or are likely to cause substantial consumer injury that cannot be reasonably avoided and is not outweighed by countervailing benefits to consumers or competition."

Fortunately, Various settled with the FTC. You can view the stipulated order on the FTC website.

A chance to get ahead of the enforcement curve. In early FTC actions against online adult entertainment companies I noted that often our clients' lack of detailed knowledge of the regulations and the FTC's unfamiliarity with the industry's business models were often contributing, if not originating, causes of our client's FTC problems.

To avoid a repeat of that scenario, I helped arrange a meeting between a representative of the FTC, Steve Cohen, a senior staff attorney in the FTC's consumer fraud division and a gathering of webmasters at the annual XBIZ Summer Forum.

I felt that such an informational meeting was particularly important for adult webmasters at the present time, in part because of the anticipated shift of focus from the DOJ to the FTC. But I also thought that the timing was good for such a meeting given that the tough economic environment and ever more fierce competition among webmasters appears to be generating more and more aggressive marketing methods that could, if unchecked, lead well-intentioned but uninformed webmasters into problems with the FTC that could easily have been avoided.

By all accounts the meeting was positive, informative and valuable for all in attendance, including Cohen. The meeting also confirmed the FTC is already applying substantial resources to combat fraudulent and deceptive practices involving the Internet, and that those efforts are expected to expand both qualitatively and quantitatively in the coming years under the current administration. But while the FTC does seem to be ramping up its online efforts, Cohen disclosed that FTC does not have any specific task force in place specifically targeting the adult industry (unlike the DOJ's anti-obscenity unit).

Nevertheless, Cohen also cautioned that if an adult business engages in unfair or deceptive practices or violates the CAN-SPAM Act, it might well find itself to be the subject of an FTC action just like any other business.

Cohen also confirmed what we have been telling our clients regarding the use of aggressive cross-sales. Specifically, that cross-sales are not per se illegal. However, if a cross sale offer is deceptive, it might well violate FTC regulations and cause the FTC to bring an enforcement action.

Our meeting with the FTC also confirmed that it is a good time for webmasters to get ahead of the enforcement curve and invest the required effort to become familiar with the FTC regulations applicable to their business practices if they have not done so already.

To do this, a good place to start is the FTC website at www.ftc.gov. I have found it to be an unusually informative government website.

But as good as the FTC website is, it is no substitute for a professional evaluation of your business practices by an adult entertainment attorney with experience handling FTC matters to evaluate your business practices for compliance with FTC regulations.

To help you and your counsel evaluate your potential exposure to a costly FTC action here are a few areas that, in my experience, have provoked FTC actions against adult entertainment businesses:

  • Potentially deceptive use of the term "free" in association with trial memberships and other offers of goods and services;
  • Potentially improper use of pop-up advertising, particularly pop-ups containing explicit sexual content;
  • Potentially deceptive or otherwise improper tying of one offer of goods or services to another; and
  • Commercial email marketing in violation of the CANSPAM Act.

In addition, the following are a few new and evolving areas of online adult business practices that I believe might well provoke FTC scrutiny, if not actual enforcement actions, in the relative near future:

  • Potentially deceptive cross-sale offers, such as those that hide relevant payment terms or those that do not require an affirmative act of acceptance (such as by requiring the customer to populate a field or affirmatively check a box to accept the offer);
  • Potentially deceptive or fraudulent use of real or automated "messages" generated by adult dating sites to induce an existing or prospective subscriber to spend money to view the "profile" of, or "contact", the message sender; and,
  • Potentially deceptive or fraudulent use of consumer email or other information, for example by sharing or selling such information in violation of a website's privacy statement.

A final observation: Cash-strapped governments favor enforcement that pays for itself. The federal government is deep in debt and going in deeper. Because of this, all federal law enforcement agencies are now more likely than ever to be encouraged to bring actions that can result in sizeable payments to the government to help pay for the costs of enforcement whenever possible.

The FTC has been a particularly good performer in this regard in the past. I have no reason to doubt that the FTC will continue to be one of the government's star law enforcement profit centers. And while the adult business has not been specifically targeted by the FTC for enforcement, that could change relatively rapidly.

In fact, if the wave of aggressive marketing we are currently seeing continues, the inevitable increase in consumer complaints to the FTC could again focus that federal agency's wrath on the adult business.

This article is not intended to be, nor should be considered to be, legal advice. I strongly urge you to seek the counsel of a qualified and experienced adult entertainment attorney familiar with the types of legal matters discussed in this article.

Gregory A. Piccionelli is an intellectual property and adult entertainment attorney experienced in Internet matters, including Federal Trade Commission matters. He can be reached at Piccionelli & Sarno at (805) 497-5886 or greg@piccionellisarno.com.

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