The FTC has been waging a steady war against advertisers that use introductory offers that turn into subscription agreements. With the FTC threatening to seek full consumer redress and to impose joint and several liability, most companies and their principals cannot afford to litigate such cases and are forced to settle. In March 2015, the FTC sued DIRECTV, alleging that DIRECTV failed to properly disclose material terms of its introductory offer and its subscription agreements. DIRECTV chose to fight. Last August the case went to a bench trial. After the close of the FTC’s case, the judge suspended the trial so that DIRECTV could move for a judgment in its favor. Last week, the judge granted DIRECTV’s motion in part, tossing out large parts of the FTC’s case. The opinion provides insightful guidance on how to structure continuity offers and illustrates the difference between alleging something is deceptive and proving it.
In its complaint, the FTC alleged that DIRECTV failed adequately to disclose that: (1) introductory prices were limited to the first 12 months of 24-month subscriptions; (2) the subscriber is subject to a 24-month commitment; (3) early termination fees would apply if subscriptions were cancelled early; and (4) premium channels were free for three months and then would be automatically charged at the regular rate unless the subscriber called to cancel. The FTC alleged these deceptive statements were made in print, TV, and banner advertisements as well as the directv.com website. Based on these allegations, the FTC sought restitution of $3.95 billion based on DIRECTV’S alleged unjust gains from the deception.
In its ruling, the court found that the FTC had failed to prove that the print, TV, or banner ads were deceptive. First, the FTC’s case was based on over 40,000 different ads spanning 2007 to 2015, and the court found that the FTC had failed to introduce adequate evidence on the “net impression” conveyed by those advertisements—let alone evidence showing that the “net impression” was one of deception. The court rejected the FTC’s experts’ findings based on an internet survey using three different ads. The opinion provides useful insight on how to [or not to] survey the adequacy of disclosures. The court ultimately found that the ads used by the experts were not themselves deceptive, and certainly could not serve as the predicate for an inference that the approximately 39,997 ads not presented by the experts were deceptive. The court found that disclosures contained in the ads in question were adequate (if not optimal) to disclose the terms that the FTC alleged were omitted or not adequately disclosed. The court noted that while the FTC did not need to offer all 40,000+ different ads into evidence, it should have done more to support the conclusions that it was asking the court to draw from a sample.
The court also rejected the FTC’s efforts to prove deception through three other means. First, regarding the FTC’s eye tracking studies used to analyze four circulars, the court found that the studies were not persuasive on the issue of what net impression a reasonable consumer might take from the circular. Determining where a consumer’s eye rests simply does not measure “consumer sentiment, persuasion, or understanding.” Second, regarding call center data, the court rejected an FTC expert’s analysis of reason tags for a random sample of calls to the DIRECTV call center—reasons that the FTC had alleged were indicative of consumers realizing the true terms of their subscriptions several months in. The expert opined that spikes in the timing for certain reason codes was consistent with the terms of the offer not being disclosed adequately. The court rejected the analysis because it failed to analyze at all the actual content of the calls, making the conclusions drawn by the expert unpersuasive as to actual consumer deception. Indeed, the court offered a more benign alternative that spikes in calls at the end of the introductory periods could just as easily reflect consumers’ good understanding of the subscription terms and indicate their intention to cancel or renegotiate their plans. Finally, the court rejected the FTC’s effort to use internal DIRECTV documents from a committee tasked with improving the customer experience as proving deception. The court found that the company’s efforts to be self-critical and improve customer service did not evidence violations of the FTC Act. As these three types of evidence are frequently cited by FTC staff in court filings or negotiations, the court’s rejection of them is noteworthy.
The judge retained, however, the FTC’s ROSCA and FTC Act claims based on DIRECTV’s website. The court found that it could not conclude from the evidence before it that the terms of negative option/continuity aspects of the subscription offer were adequately disclosed, especially if it was the case that key terms were only disclosed through hyperlinks. The trial will therefore continue on this issue and DIRECTV will present its defense.
The judge also expressed skepticism regarding the FTC’s remedy model, which was premised on the assumption that consumers expected to pay the introductory 12-month rate for the full 24 months. Based on that assumption, the FTC sought the difference between the two rates for all customers. The court indicated that the FTC had not supported the assumptions its expert relied upon in calculating those numbers.
Running throughout the judge’s opinion is a healthy skepticism to the premise of the FTC’s case that consumers did not understand the basics of a DIRECTV subscription when they signed up. The court noted that this case was different from many brought by the FTC that involved essentially a “bait and switch.” How much the judge’s criticisms of the FTC’s evidence—and the inferences the FTC asked the judge to make from that evidence—translate to other cases involving the adequacy of disclosures remains to be seen. What also remains to be seen is how this defeat changes the FTC’s approach to proving up these types of cases. Stay tuned.