FTC Settlement with Adteractive Leaves Unanswered Questions for Troubled Firm

In the first of what could be many settlements surfacing from an extensive Federal Trade Commission investigation of the online lead generation industry, Adteractive has settled with the FTC and agreed to pay $650,000 in civil penalties for alleged deceptive advertising practices. But those familiar with the company say the FTC investigation and subsequent settlement is the least of its concerns.

The settlement also leaves unanswered questions about other nefarious practices of lead gen firms, and has been deemed “inadequate” by one dissenting FTC commissioner.

“It’s unclear from the language related to the settlement whether the process of selling personally identifiable information to third parties who then choose to e-mail and resell those e-mail addresses�will be prohibited in the future,” said Jordan Rohan, managing director US Equity Research at RBC Capital Markets, an observer of the lead gen sector and the FTC’s investigation of it.

The crux of the settlement lies in Adteractive’s alleged failure to disclose the cost of offers advertised as “free.” In operating as FreeGiftWorld.com and SamplePromotionsGroup.com, Adteractive violated The FTC Act, claims the commission, by not notifying consumers that some form of payment was required in exchange for so-called “free gifts” such as flat screen TVs and laptops. The commission also said the firm violated the CAN-SPAM Act by using deceptive e-mail subject lines in promoting such offers.

According to the settlement, Adteractive must conspicuously mention payments or obligations required of consumers in order to obtain gifts and prizes; the agreement also allows the FTC to monitor the company to ensure compliance. The Adteractive settlement precedes a much-awaited agreement with Valueclick, another firm undergoing inspection by the FTC as part of its ongoing investigation of the online lead generation industry.

Adteractive Legal Counsel Greg Wharton said the company has been abiding by the FTC’s disclosure requirements “for almost a year.”

Deceptive use of the term “free” by online advertising firms has also been the target of ongoing investigations by the Florida Attorney General’s Office, which recently slapped Azoogle Ads with a $1 million “contribution” requirement after charging the firm for unfair and deceptive trade practices relating to “free” online ringtone offers.

“The use of the word ‘free’ is the easiest thing to explain to people, but in our view it’s not the [most egregious] practice in lead gen,” said Rohan, who believes reselling or “data licensing” of personally identifiable information (PII) deserves attention in future FTC decisions.

“We’re looking forward to more definition from the FTC on… use of the word ‘free,’ ” said Gayle Guzzardo, chair of the Interactive Advertising Bureau’s Lead Generation Committee. However, she agrees data reselling and disclosure of such practices is another important issue. “Both are critical; I don’t know if one is more important than the other,” she said.

“This inquiry by the FTC had nothing to do with [data licensing] and I’m not aware of any action by the FTC along those lines,” said Wharton. “It’s certainly an issue for the industry,” he continued, noting Adteractive “does not support the reuse of PII without consumer consent.

Whether or not the $650,000 penalty Adteractive agreed to pay is harsh enough to deter similar violations also is up for debate. Of the five commissioners voting on the settlement decision, one dissented on grounds that the civil penalty is “inadequate.” In his dissenting statement, Commissioner Jon Leibowitz referenced Adteractive’s reported annual revenues of over $115 million, citing a 2005 San Francisco Business Times article. Industry observers agree the firm, founded in 2000, was making around $100 million annually by 2005, and a former employee told ClickZ News last month the company was valued at more than $400 million when business was booming.

Still, RBC Capital Markets’ Rohan thinks Adteractive is no longer flush with cash. “Adteractive doesn’t have the financial resources that it once did, so while the $650,000 civil settlement is a very light slap on the wrist given the volume of past complaints, we believe the company’s current financial condition influenced the size of that settlement with the FTC,” he said.

Company watchers and former Adteractive employees say the company is no longer flying high. They allude to unrestrained growth including excessive increases in staffing, executive leadership problems, as well as a multi-million dollar bank loan default as contributing to Adteractive’s financial woes.

Wharton denied the FTC’s consideration of the firm’s financial status when determining the penalty, noting Adteractive did not use it as a defensive crutch, either. “The penalty that we got from the FTC reflects, we believe, our decision to work thoroughly and actively with the FTC,” he said. Wharton added he met with the commission about 4 times this year to discuss the investigation.

Wharton would not comment regarding the company’s current financial status, though he did set straight rumors wafting for several months regarding Adteractive’s supposed acquisition. “We have not changed ownership,” he said.

Still, he suggested despite recent legal inspection of the lead gen sector, “The overall backdrop is there’s a lot of investor interest in this space.”

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