In a case closely watched by privacy advocates and behavioral targeting executives, the Federal Trade Commission has given final approval to a settlement with retail giant Sears Holdings Management Corporation about tracking software.

The agreement requires Sears to destroy all data it collected from people who downloaded tracking software it distributed between April of 2007 and January of 2008. The company also promised to "clearly and prominently" notify Web users about any tracking applications in the future.

The settlement grew out of a Sears market research program for which users were paid $10 each to download tracking software that would monitor their Web activity. The FTC announced this week that it had finalized the settlement, which was initially proposed in June.

Sears said in a statement that consumers who downloaded the software "were informed upfront of the nature of the work being conducted and were paid for their participation." The company, which did not admit wrongdoing, also said it doesn't plan to conduct similar research projects in the future.

The FTC's complaint against Sears surprised some observers, largely because it seems to indicate that the agency is cracking down on potential online privacy violations even where it's not clear that consumers have been harmed. The move is also seen as signaling that the FTC expects companies to provide conspicuous notices about all forms of online tracking. "This decision is sending the message that the FTC is going to keep online business on their toes," says Alan Charles Raul, a privacy lawyer with Sidley Austin. "I think they're saying to online businesses: 'You better err on the side of more disclosure than you previously thought.'"

Sears's program allegedly involved sending pop-up ads to 15 of every 100 visitors that asked for their email addresses. Respondents were then invited by email to download software that would track "online browsing," and promised $10 if they kept the software for at least one month.

The FTC faulted Sears for its email solicitation, alleging that it did not adequately convey that the program would "monitor nearly all of the Internet behavior that occurs on consumers' computers."

But two commenters -- the law firm Sidley Austin and The American Insurance Association -- expressed concerns that the FTC was actually creating a new disclosure standard with this case.

"Before this case, one would likely have considered Sears's disclosures both legally valid and commonplace," Sidley Austin argued in an eight-page article in E-Commerce Law Daily that was submitted to the FTC. "The proposed Sears settlement is at odds with established industry and regulatory practice allowing consumers to opt in to contracts of their choice."

The FTC rejected those arguments, stating that it was merely applying the standards set out in previous adware cases involving Zango and Direct Revenue. In those instances, the FTC had said that companies couldn't bury critical disclosures about the nature of adware in fine print.

But there were differences between adware by Zango and Direct Revenue and the software offered by Sears. For one, adware didn't just track people online, but also served them pop-up ads -- and in some cases, allegedly slowed down their computers.

In addition, says Sidley Austin's Raul, the sole purpose of the Sears software was to track consumers. That's in contrast to the adware cases where some consumers thought they were downloading free screensavers or other content and didn't realize that they were also getting software that would follow them and serve pop-up ads.

"Here, the consumers were being paid to have their activity tracked, and the company told the consumers in the contract exactly what activities were being tracked, and the FTC said that wasn't good enough," Raul says.

The FTC also reiterated in its comments that it's keeping an eye on behavioral targeting. "The Commission is concerned about the privacy implications of online tracking data, particularly in the context of online behavioral advertising," the FTC said in a letter to the New York Consumer Protection Board (which had submitted comments about the settlement). "The Commission continues to encourage industry to do a better job of disclosing infornation collection practices to consumers."

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