Senate Panel Blasts E-Commerce ‘Scams’

How do you curb a business practice that, while technically legal, seems on its face patently deceptive and harmful to consumers?

One answer is to change the law. Another is to shame the companies involved into mending their ways through a high-profile public display of righteous indignation.

Both received a healthy show of support at a Senate hearing this afternoon, as members of the commerce committee reacted with shock and outrage to stories about otherwise reputable e-commerce companies that partner with largely unknown marketing firms that enroll unsuspecting customers in fee-based online membership clubs.

“What’s happening is that many online merchants have decided to betray their customers’ trust,” commerce Chairman John Rockefeller said. “It’s truly unbelievable.”

Rockefeller’s committee has been looking into the practice of post-transaction marketing for several months, and today released the findings of the investigation, concluding that three firms and their e-commerce partners have bilked consumers out of $1.4 billion by enrolling them in membership clubs and automatically billing them at a later date.

The process is fairly simple. After a consumer completes a transaction, such as purchasing movie tickets from Fandango or placing an order with PizzaHut.com, a pop-up appears offering a coupon or some other promotion or discount. But that offer doesn’t come from the e-commerce company the consumer sought out. Instead, it comes from a marketing firm the company has partnered with to serve up the promotion.

Within a click or two, the user can unwittingly accept the offer without proactively entering any information. That’s because the e-commerce company has agreed to provide the vendor with the consumer’s payment information, so, within a billing cycle or two, a recurring monthly charge of $10 or $20 might begin showing up on the person’s credit card statement.

Customers for sale

The marketing firms pay the e-commerce companies a commission for each consumer they enroll in the programs through their sites.

“They literally put a price on the customer’s head,” Rockefeller said.

In the face of the committee’s investigation, the three companies under fire — Affinion, Vertrue and Webloyalty — have updated their policies to require consumers to enter a modest amount of information, such as the last four digits of a credit card number, before enrolling them in the program and initiating the billing process.

Responding to today’s hearing, Affinion Senior Vice President James Hart said the company would continue to work with Rockefeller’s committee and defended the company’s practices.

“We have always offered clear and conspicuous terms of service agreements to our customers in all our programs which have provided tremendous value for millions of consumers worldwide,” Hart said in a statement e-mailed to InternetNews.com.

But Rockefeller called the company’s changes “totally insufficient,” and said he would consider drafting legislation “to make sure this process comes to a complete halt,” similar to the 1991 law that gave federal regulators the authority to crack down on telemarketers.

Preying on the good faith of consumers

Page 2 of 2: Preying on the good faith of consumers

The problem, as he sees it, is that the practice preys on the good faith of consumers, who often assume that the pop-up is an offer from the trusted e-commerce company, and don’t realize that they’re enrolling in a fee-based club.

The firms say they offer coupons and other deals in exchange for the membership fees, though many consumers said they didn’t receive any communication alerting them they were enrolled in the clubs.

“Most consumers don’t realize they have been scammed until months later when they realize the club has been charging their credit card,” Rockefeller said.

No representatives from industry were on hand to defend themselves at today’s hearing. A spokeswoman for Rockefeller told InternetNews.com that the committee is planning a separate hearing where executives from the companies will be called to testify. The committee has not set a date for that proceeding.

Instead, Rockefeller assembled three business and law professors to rail against the post-transaction marketing practice, and two consumers who fell victim to the scams and made for very sympathetic witnesses. One was a disabled veteran of the wars in Iraq and Afghanistan who had suffered a brain injury in combat and been awarded the Purple Heart. The other was a woman from Minnesota whose daughter had become a quadriplegic after a skiing accident.

“It’s shocking that they can basically sell my credit card information to an unknown company,” the woman, Linda Lindquist, told the outraged senators.

Several e-commerce companies have said they plan to sever ties with the membership club promoters in the face of the inquiry.

Authorized to share personal information?

The practice of sharing data has survived legal challenges in the past because courts have found that by clicking through the pop-up window, a user is affirming consent to enroll in the program. Meanwhile, the e-commerce companies are covered by stipulations in their privacy policies that explain they will only share their customers’ personal information with outside vendors with their permission, which is implied by the act of clicking to accept the pop-up offer.

“The existence of disclosure does cause some confusion in the courts,” said Prentiss Cox, a professor at the University of Minnesota Law School.

Cox, a former staffer at the office of the Minnesota attorney general, said he has been fighting the practice of post-transaction marketing for a decade.

“This is one of those rare cases where there is a clear and obvious answer,” he said.
“Financial institutions and retailers shouldn’t sell account numbers and access to accounts to third parties, period.”

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