Adteractive Settles With FTC Over Lead-Generation Practices

In the first case of its kind, performance marketing company Adteractive has agreed to pay a $650,000 fine to settle Federal Trade Commission charges that it tricked consumers into signing up at third-party sites like Netflix by offering supposedly "free" laptops, flat-screen TVs and other merchandise.

The proposed settlement, which was filed this week in the U.S. District Court for the Northern District of California, also provides that San Francisco-based Adteractive won't advertise "free" merchandise without also making it clear that consumers must first spend money to qualify for the promotions.

While this case marks the first time the FTC has obtained a fine for this type of practice, it likely won't be the last. The agency also is investigating other companies--including, most notably, ValueClick --for its lead-generation practices.

In the Adteractive complaint, which was made public along with the proposed settlement, the Department of Justice charged the company with violating CAN-SPAM by sending e-mails to consumers with subject lines like: "Test and keep this Flat-Screen TV," and "Test it - Keep it - Microsoft Xbox 360." Adteractive also allegedly served banner ads and pop-ups with copy like: "Participate Now and You'll Receive a FREE SONY PLAYSTATION."

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The FTC alleges those messages were misleading because in most cases, consumers couldn't qualify for the free products without first spending money.

Adteractive, which did business as FreeGiftWorld.com and SamplePromotionsGroup.com, has a client roster that includes national brands like eBay, AOL, Chase and Publishers Clearing House, according to a job ad the company recently placed.

Adteractive didn't admit to any wrongdoing as part of the settlement. The company's general counsel, Greg Wharton, says the case stemmed from questions about the use of the word "free." The case primarily centered around "the terms that you need to disclose when you use the word 'free' in advertising," he says.

The stipulation provides that future Adteractive ads that characterize merchandise as "free" will also state in the same color, font and size that purchases are required to obtain the item. Wharton says the company is currently in compliance.

FTC Commissioner Jon Leibowitz dissented from the decision to accept the settlement--saying that the fine was too little, given that the company reportedly has annual revenues surpassing $115 million. "I am concerned that the civil penalty that Adteractive must pay is a downward departure from our other CAN-SPAM Act cases and is not adequate to deter violations in the future," Leibowitz says.

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