[Senate Hearing 111-513]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 111-513
 
 AGGRESSIVE SALES TACTICS ON THE INTERNET AND THEIR IMPACT ON AMERICAN 
                               CONSUMERS

=======================================================================


                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 17, 2009

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation




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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            JOHN ENSIGN, Nevada
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri           JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota             DAVID VITTER, Louisiana
TOM UDALL, New Mexico                SAM BROWNBACK, Kansas
MARK WARNER, Virginia                MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                   Bruce H. Andrews, General Counsel
             Ann Begeman, Acting Republican Staff Director
             Brian M. Hendricks, Republican General Counsel
                  Nick Rossi, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 17, 2009................................     1
Statement of Senator Rockefeller.................................     1
Statement of Senator LeMieux.....................................     3
    Prepared statement...........................................     4
Statement of Senator Dorgan......................................     5
Statement of Senator Udall.......................................    52
Statement of Senator Klobuchar...................................    54
Statement of Senator Nelson......................................    56

                               Witnesses

Ray France, Former United States Paratrooper.....................     6
    Prepared statement...........................................     8
Linda Lindquist, Citizen of Sussex, Wisconsin....................     9
    Prepared statement...........................................    10
Robert J. Meyer, Gayfryd Steinberg Professor of Marketing, The 
  Wharton School, University of Pennsylvania.....................    11
    Prepared statement...........................................    13
Florencia Marotta-Wurgler, Associate Professor, New York 
  University School of Law.......................................    24
    Prepared statement...........................................    25
Prentiss Cox, Associate Professor of Clinical Law, University of 
  Minnesota Law School...........................................    39
    Prepared statement...........................................    41

                                Appendix

Hon. Mark Pryor, U.S. Senator from Arkansas, prepared statement..    99
Response to written questions submitted by Hon. Claire McCaskill 
  to:
    Robert J. Meyer..............................................    99
    Florencia Marotta-Wurgler....................................   101
Response to written question submitted to Professor Prentiss Cox 
  by:
    Hon. John D. Rockefeller IV..................................   102
    Hon. Claire McCaskill........................................   106


                    AGGRESSIVE SALES TACTICS ON THE



                      INTERNET AND THEIR IMPACT ON



                           AMERICAN CONSUMERS

                              ----------                              


                       TUESDAY, NOVEMBER 17, 2009

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:58 p.m. in room 
SR-253, Russell Senate Office Building, Hon. John D. 
Rockefeller IV, Chairman of the Committee, presiding.

       OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    The Chairman. This hearing will come to order. I'll make an 
opening statement.
    Every single day, millions of American consumers sit down 
in front of their computers to make travel plans, to send 
somebody some flowers, or to order movie tickets or sundry 
other transactions. For many Americans, shopping online is now 
as routine as going to the grocery store for milk. According to 
a recent survey, 59 percent of all adult Americans have now 
purchased goods or services over the Internet.
    Shopping online is, in fact, an exciting new way for people 
to learn about products, to compare prices, and to find a good 
bargain. In tough economic times when Americans are doing all 
they can to make ends meet, every nickel, every dollar counts.
    But when we go online to buy things, we all have a few very 
important expectations about how we should be treated, 
regardless of how and where we make a purchase. First of all, 
we expect the merchants that we do business with to treat us 
honestly, fairly, and we expect that on the Internet.
    We expect online merchants to clearly explain their prices 
and their terms to us, so that we know exactly what we're 
getting if we decide to spend our money at their websites. And 
when we agree to buy something from them, we expect merchants 
to protect our credit card and other financial information that 
we share with them.
    That's why it is so darn disturbing to me to learn through 
our investigation that we've done in this committee, over 
300,000 pages of research, what's happening to millions of 
American consumers every day who are shopping on the Internet, 
including the two consumers we have invited to testify today.
    What's happening is that many online merchants have decided 
to betray their customers' trust. For a few extra bucks in 
profits, these merchants pass their consumers' personal billing 
information on to mysterious companies with names like 
Affinion, Vertrue, Webloyalty, companies that have a long, 
troubling history of misleading sales practices.
    From the consumers' point of view, here's how it happens. 
Section one: the scam. You're shopping online and you decide to 
send somebody flowers or buy a plane ticket or a movie ticket 
or whatever, or even order a pizza. You type in your home 
address, you type in your e-mail address and other information 
necessary to process the sale.
    Then at the very end of the process you do the really 
important thing. You pull your wallet out. You type in your 16-
digit credit card or debit card number, and you press 
``Purchase.''
    What our Committee has been investigating is what can 
happen to you after you have made that purchase. It's truly 
unbelievable. While you think that you're going through the 
final checkout process--and I associate this with buying books 
on AOL.com. I mean, there's a definite checkout process that 
takes a number of steps. What's really going on is that some 
very sophisticated online businesses are tricking you into 
signing up for useless membership clubs.
    These businesses take the credit card number you typed in 
for your purchase and they use it to enroll you in a bogus club 
with names like ``Reservation Rewards,'' ``Great Fun,'' ``Value 
Max,'' ``Shopping Service.'' Most consumers don't realize 
they've been scammed until months later when they notice that 
the club has been charging their credit card $10.95 a month or 
whatever.
    Why does this matter? A ten dollar monthly charge may not 
sound like a big deal to some people in this room. There are 
these numbers to consider. Today as we conduct this hearing, 
there are more than 4 million American consumers whose credit 
cards are being charged by these clubs. And most of these 4 
million customers don't even know that it's happening.
    According to a report the Commerce Committee staff 
presented to me about this problem, these online scams have 
made more than $1.4 billion through these tactics and charged 
more than 30 million American people.
    Consider these numbers for a moment. That is a lot of money 
and simply outrageous to me and, frankly, I think it's un-
American, and I know you share my views. I suspect you share my 
views.
    What I find most outrageous about these scams are the 
reputable online businesses that are willing to take part in 
these scams. Committee staff has provided me with a list of 88 
well-known online businesses that each made more than a million 
dollars through sharing their customer credit card information 
with Internet scammers, so they get what they want.
    We have printed copies of this if anybody is interested. 
Several of them have already withdrawn since they knew this was 
going on, that we were going to have this hearing. They have 
already--USAirways, Continental Airlines, et cetera, they've 
withdrawn from all this, or say they're about to get rid of all 
of this.
    But we've all heard of these companies and we've probably 
shopped at some of their websites.
    Conclusion: America is a country of businessmen and 
businesswomen. We all have great respect for enterprising 
people who have developed good products and sell them in our 
competitive marketplace. But we are here today because we want 
to highlight the very important point that tricking customers 
into buying goods and services they do not want is not OK, not 
even close. It's not ethical, it's not right, and it's not the 
way business should be done in America, and it should be 
stopped. It will be stopped.
    American consumers shouldn't have to worry that their 
favorite websites are ripping them off during the checkout 
process. The checkout process is complicated.
    We haven't completed this investigation yet, but what I've 
learned about these business practices so far is very, very 
troubling and, to be frank with my colleagues who are here, 
starting with this hearing today I'm thinking that the 
Committee needs to start thinking about legislative steps to 
make sure that this process comes to a complete halt. We did it 
with telemarketing. We did it with phone scams. We can do it on 
the Internet.
    That's the end of my statement. Senator LeMieux, do you 
have a statement you'd like to make?

             STATEMENT OF HON. GEORGE S. LeMIEUX, 
                   U.S. SENATOR FROM FLORIDA

    Senator LeMieux. Thank you, Mr. Chairman. I want to commend 
you for holding this important hearing. The Chairman has a 
great record and reputation for fighting fraud and having this 
hearing today to talk about these issues is extremely important 
to the people of this country, as well as the people of 
America, the people of Florida who I represent.
    We have too many hardworking Floridians who are being 
scammed in transactions just like that, and one of our great 
Floridians, Mr. Ray France, is here today, and he has fallen 
prey to these exact type of predatory techniques on these post-
transaction marketers. People are often unaware that they have 
signed up for these scams. That's why they are scams.
    I had a chance to meet with Mr. France today, Mr. Chairman. 
He is an American hero. He served our country bravely in the 
Army as part of Airborne. In fact, he was so committed, Mr. 
Chairman, to be in the Airborne that when he sought to enlist, 
they said no, you can't be in the Airborne, and he fought and 
he fought and he fought, and they said: Well, you can be in the 
Airborne, but you have to give up your $12,000 bonus we were 
going to give you for joining the Army. And he said: That's OK 
because I want to serve my country and that's why I'm 
volunteering for the Army.
    He was injured in Iraq fighting for our freedom. Now he 
came home and was living his life as a good Floridian, and he 
gets scammed. But like the good Army soldier that he is, he 
went after these fraudsters and he tracked them down and he 
helped figure out what they were doing and why they were doing 
it. You'll hear more from him today.
    Mr. Chairman, I call this post-transaction marketing 
``click-and-scam.'' You go on, you're purchasing something like 
you described on AOL, buying a book or whatever it may be, and 
then all of a sudden this pop-up comes up. You think it's one 
of those normal sort of disclosures that no one reads. You 
click it to go through with your transaction, and all of a 
sudden you're signed up for ten dollars a month, like you said.
    These fraudsters are out there stealing from our people. My 
Attorney General in Florida, Bill McCollum, is doing a great 
job going after these folks and he has filed several actions 
and is working hard against them. But we need to do more, and 
you are drawing light to this problem, Mr. Chairman, and I 
really appreciate it because the people of this country need to 
know through information that these scams are out there. The 
best prophylactic they can have against these scams is knowing 
about them.
    Then later, as you suggest, perhaps we need to increase 
penalties or help on the enforcement side so we can stop these 
fraudsters from stealing from our people.
    I really appreciate you having this hearing today, Mr. 
Chairman. Thank you.
    [The prepared statement of Senator LeMieux follows:]

Prepared Statement of Hon. George S. LeMieux, U.S. Senator from Florida
    Mr. Chairman, thank you for holding this important hearing. The 
aggressive online, click-and-scam, marketing techniques highlighted 
today are a problem in Florida and across this country, and I support 
your leadership in getting to the bottom of this.
    In Florida, far too many good, hardworking Americans, like Mr. 
France, are falling prey to the kind of predatory techniques used by 
these so-called ``post-transaction marketers.'' Often, people are 
unaware that they have purchased anything until the notice a fee added 
to their credit card bills.
    Because the process for signing up is hidden and fees are generally 
small, these companies are able to capture consumers and bill them for 
months and months with very little effort and very little risk.
    In these times of economic hardship, when Americans are trying to 
find ways of tightening the belt and making ends meet, it is simply 
unconscionable to allow this practice to continue.
    Unfortunately, the experiences described by Mr. France and Mrs. 
Linguist dealing with these companies are far too common. I had the 
opportunity to sit down with Mr. France this morning, and I can tell 
you that this Committee would be hard pressed to find a finer and more 
decent and proud American soldier to testify than this man. He is proud 
to have served this country, and he continues to serve our country here 
today.
    As we will hear from the professors testifying today, these 
practices are designed to lure consumers in using familiar looking 
websites, capture their information without their knowledge, and bill 
them for services they have no interest in. As Mr. Meyer stated in his 
testimony, these practices are ``marketing'' as is understood and 
taught--this click-and-scam fraud is an elaborate con perpetrated 
against consumers for the sole purpose of generating profit without any 
exchange of value.
    At the state level, officials are working to end these deceptive 
practices, but they need help. Just like other forms of consumer 
protection, we need to use Federal resources and standards at the front 
end to discourage these activities, rather than attempting to chase 
down bad actors after the fact.
    Florida's Attorney General, Bill McCollum, get countless complaints 
about companies using deceptive techniques to lure and bill consumers, 
and they are working aggressively to prosecute companies that have 
violated Florida's consumer protection laws. They doing a great job, 
but could use some assistance. The practices described here today are 
so prevalent on the web and in on-line purchases, that Federal action 
is needed.
    Simply put, this click-and-scam fraud is unacceptable, and we need 
to put a stop to it. I look forward to working with the Chairman and 
the rest of the Committee to meaningfully address this issue.
    Again, I would like to thank the Chairman for holding this 
important hearing.

    The Chairman. Thank you, Senator.
    Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much.
    In the last Congress I held a couple of hearings on the 
issue of Internet privacy. The question is what's happening to 
information that they have on virtually all of us--what sites 
do we visit, where do we navigate? I made the point then that 
if somebody followed you when you went to the shopping center 
and made notes about everywhere you went, everything you looked 
at, and so on, the question in your mind would be: Why are you 
following me, number one? And number two, who are you selling 
the information to about where I went and what I did?
    Well, the privacy issue is very important. We held two 
hearings on it and I hope that we will get some legislation 
together, which I've been working on, on that issue.
    But this is another piece of this issue of the Internet, 
the online activities. First of all, advertising on the 
Internet is what supports the Internet. The Internet is a 
remarkable thing. I mean, no one wants to withdraw the support 
that is necessary for the Internet to exist and survive. Online 
commerce is very important as well. That's what we're talking 
about, online commerce.
    But the question for all of this with online commerce is, 
who uses our credit card information and for what purpose? When 
you put your credit card information in in order to purchase 
something, as Senator Rockefeller indicated, you would always 
expect, especially on a reputable website, that that's not 
going to be shared with anybody, that that's protected.
    Well, we find out now by some good work by some 
investigators on our staff that that's not the case. The issue 
of post-transaction marketing, data passing, free-to-pay 
conversions--I mean, that's all a fancy way of describing 
practices that are engaged in by people that ought to be 
ashamed of themselves, really ought to be ashamed of 
themselves.
    Websites--I guess I've been to all these websites: Fandango 
to buy movie tickets, I've certainly done that. Pizza Hut, 
Continental Airlines. You have people go to websites that you 
know are reputable and then they do this bait-and-switch and 
that website is used by somebody else that pops something else 
that say ``Free,'' except it's just free for a bit. Then it's 
the monthly billing they're after. And, oh, by the way, the 
reputable website shifts your financial data to the company 
that pops up the ad that says ``Free'' and is trying to sucker 
you into this.
    I mean, that's unbelievable to me. Now, when you see things 
that are shameful, it seems to me that you would expect that 
that would stop immediately. But shame is not always an emotion 
that persuades people who are making a lot of money to stop.
    My understanding is that Affinion and some of the others 
that the Chairman mentioned have changed some of their 
practices since this investigation began, and we welcome that. 
But there are others out there, and I think this is a really 
important reason to have a hearing.
    At the root cause here, the question is who gets financial 
information and how is it used or how is it misused? This 
investigation has turned up, I think, some shoddy business 
practices that have to stop, and I don't think they'll stop on 
their own necessarily. I think the Chairman has suggested there 
may well need to be required some legislation here, and I 
appreciate that work and the work of the Committee.
    Let me just finally quickly say I appreciate the witnesses 
who have been here and who are going to present testimony 
today. We thank you for traveling and being with us and 
shedding some light on these issues.
    The Chairman. Thank you, Senator.
    Incidentally, the work that Webloyalty and some of the 
others have pulled back a little bit is totally insufficient. I 
think some of our legal scholars are going to make that very 
clear.
    Ray France, we're very proud to have you here. Linda 
Lindquist, you also. Florencia Marotta-Wurgler, who is an 
Assistant Professor at New York University School of Law, you 
too. Professor Prentiss Cox, University of Minnesota Law 
School--you're one panel, so you're all one person. Professor 
Robert Meyer, Wharton School, University of Pennsylvania, who's 
done a lot of work on all of this.
    Mr. France, let me go to you first, if I might. Sort of 
pull that microphone up. First of all, I'd like to thank you, 
as the Senator did, for your service to our country, for your 
bravery, turning down that $12,000.

                   STATEMENT OF RAY FRANCE, 
                FORMER UNITED STATES PARATROOPER

    Mr. France. It was actually 13.
    The Chairman. OK. A superhero plus. Now I think we've got 
to defend you from some scams, and we're going to.
    In your testimony you made the point that when you made a 
purchase on a website called Intelius----
    Mr. France. Yes, sir.
    The Chairman.--you got automatically signed up in a so-
called membership club called Value Max, and then Value Max 
started charging you $19.99 a month; is that correct?
    Mr. France. That is correct, sir.
    The Chairman. Oh, that would seem fair. Starting with you, 
Mr. France, forget my questions and make a statement.
    Mr. France. OK, sir.
    The Chairman. Questions will follow.
    I do this quite frequently.
    Mr. France. It's your show, sir.
    The Chairman. That is true.
    [Laughter.]
    Mr. France. First of all, I would like to thank you, 
Chairman Rockefeller, and Ranking Member Hutchison, for 
inviting me out to speak. I would also like to thank the 
Senator of my beautiful home State of Florida for his kind 
words. It was unexpected, but greatly appreciated.
    My name is Raymond France. I'm a former United States 
paratrooper and a two-time combat veteran. I fought in 
Afghanistan and Iraq. In Iraq, I received a traumatic brain 
injury when my Humvee was struck by an IED which exploded next 
to my vehicle. I was awarded the Purple Heart and now I have a 
service-connected disability of 100 percent.
    Early this year, I paid to use the service of an online 
company called Intelius to look up people on the Internet. It's 
just an informational website. I had used this company in the 
past and was familiar with their website and their services. On 
this particular occasion, just like before, I got the 
information I was looking for, entered my billing information, 
and completed the transaction.
    The next day the fee I paid posted to my account, just as 
usual. About 2 or 3 months later, I was notified by my bank 
that my account had been overdrawn. I was unsure how this could 
happen since I live on a fixed income and I support myself 
within those means.
    I went to the bank to figure this out. At first they were 
only able to tell me it was due to an automatic withdrawal that 
was active on my account at the time. Eventually the bank was 
able to give me the name of the company that made these 
withdrawals, Value Max. The bank manager also informed me that 
this had been a reoccurring transaction that I had supposedly 
agreed to. They were unable to give me any more information.
    I had no idea who this company was and still to this day do 
not know what they do. I started searching the web in hopes of 
finding some way of contacting this company. What I found was 
hundreds of blogs asking the same question as I. Eventually I 
found an e-mail address for Value Max and sent an e-mail, to 
which I received no reply.
    Later on I found a phone number. When I called, the person 
who answered repeatedly asked for personal information on 
myself, things such as social security number and e-mail 
addresses. When I was reluctant to give up this information, I 
was told I had reached the wrong division of the company and 
needed to call another branch in another state.
    This process repeated itself quite a few times, and through 
it all I still had no answers. So, I decided to write the 
Better Business Bureau. Quite some time passed with no reply 
from Value Max. Then I received an e-mail from the Better 
Business Bureau.
    Value Max had told them they would refund my money, but 
that it was my fault because I had agreed to a free 4-day trial 
and then a $19.99 fee every month after that. According to 
them, I had agreed to this when I used the service of the 
company I mentioned earlier, being Intelius.
    In total, this all took over 8 months, and the refund took 
even longer. If my account had not been overdrawn, who knows 
how long before I would have noticed these withdrawals?
    I'm a disabled vet who loves his country and served her 
with pride. Though I may not have it as bad as some of the 
soldiers returning from the front lines, I do have a lot of 
challenges I must face due to my service-connected 
disabilities. But this company, Value Max, caused me both 
financial and mental hardship. It took me close to a year to 
recover my money, money that I did not give them permission to 
take.
    I am 27 years old. I use the Internet constantly. I both 
understand it and am able to utilize it with ease. I have even 
earned college credits in computer applications. With that 
said, I believe it is easy to see I would not have agreed to a 
financial obligation which I knew nothing about nor wanted.
    It is still unclear to me at this point how they were able 
to access my account. That is, unless you consider the fact 
that this company chooses to use deceiving methods in 
correlation with other companies to take advantage of online 
consumers. This is nothing short of theft.
    My country promised to take care of me when I returned 
home. But without laws to govern these unethical practices, 
instead my country is allowing me to be taken advantage of. 
This is a problem that must be resolved. It is not just vets 
who are victims, but all Americans. If not today, then tomorrow 
or next week. The bottom line is, if left unchecked these kind 
of practices will spread out of control. Now that this issue 
has been brought to light, it is imperative that the leaders of 
this great country are proactive and aggressive in putting an 
end to it.
    Thank you.
    [The prepared statement of Mr. France follows:]

   Prepared Statement of Ray France, Former United States Paratrooper
    Thank you, Chairman Rockefeller and Ranking Member Hutchison, for 
inviting me to speak with you today. My name is Raymond France. I am a 
former United States Paratrooper and a two-time combat veteran. I 
served in Afghanistan and Iraq where I suffered a traumatic brain 
injury when an I.E.D. exploded next to my vehicle. I was awarded the 
Purple Heart and now have a service-connected disability rating of 100 
percent.
    Early this year I paid to use the services of an online company 
called, ``Intelius'' to look up people on the Internet. I had used this 
company in the past and was familiar with their website and services. 
On this particular occasion, just like before, I got the information I 
was looking for, entered my billing information and completed the 
transaction. The next day the fee I paid for the service was posted on 
my account as usual.
    About 2 or 3 months later, I was notified by my bank that my 
account had been overdrawn. I was unsure how this could have happened 
since I live on a fixed income and support myself within those means. I 
went to the bank to figure this out. At first they were only able to 
tell me it was due to an automatic withdrawal that was active on my 
account. Eventually the bank was able to give me the name of the 
company that made these withdrawals, Value Max. The bank manager also 
informed me this had been a recurring transaction that I supposedly 
agreed to. They were unable to give me any more information.
    I had no idea who this company was and still to this day do not 
know what they do. I started searching the web in hopes of finding some 
way of contacting this company. What I found was hundreds of blogs 
asking the same question. Eventually, I found an e-mail address for 
Value Max and sent an e-mail to which I received no reply. Later I 
found a phone number. When I called, the person who answered repeatedly 
asked for personal information on myself. When I was reluctant to give 
up this information I was told I reached the wrong ``Division'' of the 
company and needed to call another branch in another state. This same 
process repeated itself quite a few times and through it all I still 
had no answers. So I decided to write the Better Business Bureau. Quite 
some time passed with no reply from Value Max. Then I received an e-
mail from the B.B.B.
    Value Max had told them that they would refund my money but it was 
my fault because I had agreed to a free 4-day trial and then a $19.99 
fee every month after that. According to them I had agreed to this when 
I used the service of the company I mentioned earlier. In total this 
all took over 8 months. And the refund took even longer. And if my 
account hadn't been overdrawn, who knows how long it would've been 
before I noticed these withdrawals.
    I am a disabled Vet who loves his country and served her with 
pride. Though I may not have it as bad as some soldiers returning from 
the front lines I do have a lot of challenges I must face due to my 
service-connected disability. But this company caused me both financial 
and mental hardship. It took me close to a year to recover my money. 
Money that I did not give them permission to take. I am 27 years old. I 
use the Internet constantly. I both understand it and am able to use it 
with ease. I have even earned college credits in computer applications. 
With that said I believe it is easy to see I would not have agreed to a 
financial obligation I knew nothing about nor wanted. It is still 
unclear to me at this point how they were able to access my account. 
That is unless you consider the fact that this company chooses to use 
deceiving methods in correlation with other companies to take advantage 
of online consumers. This is nothing short of theft.
    My country promised to take care of me when I returned home but 
without laws to govern these unethical practices, instead my country is 
allowing me to be taken advantage of. This is a problem that must be 
resolved as it is not just Vets who are victims but all Americans. If 
not today then tomorrow, or next week. The bottom line is if left 
unchecked these kinds of practices will spread out of control. Now that 
this issue has been brought to light it is imperative that the leaders 
of this great country are proactive and aggressive in putting an end to 
it.

    The Chairman. Thank you very much.
    Ms. Lindquist.

                 STATEMENT OF LINDA LINDQUIST, 
                  CITIZEN OF SUSSEX, WISCONSIN

    Ms. Lindquist. Good afternoon. My name is Linda Lindquist 
and I am from Sussex, Wisconsin. In April 2007, my 19-year-old 
daughter and I went to temporarily live in Atlanta, Georgia. My 
daughter had sustained a spinal cord injury in January 2007 
while downhill skiing and was a quadriplegic. She started to 
get movement back in her legs and both my husband and I felt 
that she needed to go to a specialty spinal cord facility in 
order to give her the best possible opportunity for recovery. 
This would mean that my husband would have to care for our 
other three children solo back in Wisconsin.
    One of the best things about being in Atlanta was meeting 
and socializing with other families in the same situation. One 
of our favorite things to do was to go to the movie theater. In 
July 2007, I started purchasing tickets from movietickets.com. 
I remember that at the end of the transaction on the 
confirmation page was a coupon stating ``Get $10 off your next 
purchase.'' So I clicked on the coupon because it seemed that 
it was a legitimate offer from movietickets.com and I thought 
they were a reputable website.
    The next page needed my personal information. I then 
decided that I did not have enough time to fill out that page, 
so I closed out of the website.
    Approximately 2 weeks later, again I purchased tickets on 
movietickets.com. This time, however, I did start to fill out 
the personal information, but after going to the next page I 
realized that this was probably a scam. At no time did I ever 
include my credit card information or knowingly agree to any 
terms and conditions.
    After 4 months of physical rehab, my daughter was beginning 
to make great improvements and our stay ended up being 
lengthened by another year. We finally returned home in August 
2008 and finally, in October 2008, my husband was paying our 
bills and asked me to take a look at the credit card statement. 
There were two charges for $10 each, one from Reservation 
Rewards and one from Shoppers Discounts. I did not know what 
these charges were for, but I told my husband that I would find 
out.
    I first called the 800 number that was listed on the credit 
card statement under Reservation Rewards. I spoke with a 
customer service representative, who told me that I had signed 
up for Reservation Rewards and Shoppers Discounts online after 
a movie ticket purchase on movietickets.com. I told the 
representative that I had not knowingly signed up for this 
service and asked how they had gotten my credit card number. 
She stated that movietickets.com gave them my credit card 
number.
    I then asked what service exactly I was paying for. She 
stated they offered coupons and discounts for restaurants and 
hotels. I told the representative that I had never gotten any 
correspondence from them, either online or via mail, regarding 
my so-called membership and also to tell me how much money I 
had paid to date. She replied that I had paid $320. I was 
shocked. I asked if I could get a refund for my money since I 
had no idea that I had even subscribed to the service. She 
stated that she would cancel my membership and could credit me 
the last month's payment of $20.
    At that time, I did not think I had any other options as 
far as getting my money back, but the more I thought about it 
the more I was upset with movietickets.com. Here was what I 
thought was a reputable website, when in reality they were 
allowing this scam at the end of the purchase.
    I then went on movietickets.com and sent them an e-mail 
regarding the money I had lost due to them giving my credit 
card number to a scam. Approximately 30 days later I had gotten 
a correspondence from them stating that I would be getting a 
full refund.
    I am a college-educated person who is online every day. I 
have made hundreds of online purchases over the last 10 years. 
I have seen many scams and offers on the Internet and have only 
been lured in by one, this one, due to the fact that the scam 
was associated with a reputable website and required just one 
click.
    Just last week, in fact, when I purchased the airline 
ticket for my son to travel here to Washington, D.C., with me 
on AirTran Airways, what should appear on their confirmation 
page but a ``Get $20 cash back'' offer from Great Fun? You can 
bet that I will be sending AirTran an e-mail regarding my 
disappointment in their choice of an affiliate.
    Thank you.
    [The prepared statement of Ms. Lindquist follows:]

  Prepared Statement of Linda Lindquist, Citizen of Sussex, Wisconsin
    Good afternoon. My name is Linda Lindquist and I am from Sussex, 
Wisconsin. In April 2007, my 19-year-old daughter and I went to 
temporarily live in Atlanta, Georgia. My daughter had sustained a 
spinal cord injury in January 2007 while downhill skiing and was a 
quadriplegic. She started to get movement back in her legs and both my 
husband and I felt that she needed to go to a specialty spinal cord 
facility in order to give her the best possible opportunity for 
recovery. This would mean that my husband would have to care for our 
three other children, solo, back in Wisconsin.
    One of the best things about being in Atlanta was meeting and 
socializing with other families in the same situation. One of our 
favorite things was to go to the movie theater. In July 2007, I started 
purchasing tickets from movietickets.com. I remember that at the end of 
the transaction on the confirmation page was a coupon stating, ``Get 
$10 off your next purchase,'' so I clicked on the coupon because it 
seemed that it was a legitimate offer from movietickets.com and I 
thought they were a reputable website. The next page needed my personal 
information. I then decided that I did not have enough time to fill out 
the form, so I closed out of the website. Approximately 2 weeks later, 
I again purchased tickets on movietickets.com. This time, however, I 
did start to fill out the personal information, but after going to the 
next page, I realized that this was probably a scam. At no time, did I 
ever include my credit card information or knowingly agree to any terms 
and conditions.
    After 4 months of physical rehab, my daughter was beginning to make 
great improvements and our stay ended up being lengthened by an 
additional year. We finally returned home in August 2008. In October 
2008, my husband was paying our bills and asked me to take a look at 
our credit card statement. There were two charges for $10, one from 
Reservation Rewards and one from Shoppers Discounts. I did not know 
what these charges were for but I told my husband that I would look 
into it. I first called the 800 number that was listed on the credit 
card statement.
    I spoke with a customer service representative who told me that I 
had signed up for Reservation Rewards and Shoppers Discounts online 
after a movie ticket purchase on movietickets.com. I told the 
representative that I had not knowingly signed up for this service and 
asked how they had gotten my credit card number. She stated that 
movietickets.com gave them my credit card number. I then asked what 
service, exactly, I was paying for. She stated that they offer coupons 
and discounts for restaurants and hotels. I told the representative 
that I had never gotten any correspondence, either online or via mail 
regarding my so-called membership. I then asked her to cancel my 
membership and also to tell me how much money I had paid to date. She 
replied that I had paid $320. I was shocked! I asked if she could 
refund my money since I had no idea that I had even subscribed to this 
service. She stated that she would cancel my membership and could 
credit me the last month's payment of $20.
    At that time, I didn't think I had any other options as far as 
getting my money back, but the more I thought about it, the more upset 
I was with movietickets.com. Here was what I thought was a reputable 
website, when in reality they were allowing this scam at the end of the 
purchase. I then went on movietickets.com and sent them an e-mail 
regarding the money I had lost due to them giving my credit card number 
to a scam. Approximately 30 days later, I had gotten a correspondence 
from movietickets.com stating that I would be getting a full refund.
    I am a college-educated person who is online everyday. I have made 
hundreds of online purchases over the last 10 years. I have seen many 
scams and offers on the Internet and have only been lured in by one, 
this one, due to the fact that the scam was associated with a reputable 
website and required just one click. Just last week, in fact, when I 
purchased the airline ticket for my son to travel to Washington, D.C., 
with me on AirTran Airways, what should appear on their confirmation 
page, but a ``$20 cash back offer from Great Fun''. You can bet that I 
will be sending Airtran an e-mail regarding my disappointment in their 
choice of an affiliate. Thank you.

    The Chairman. Thank you very much.
    Professor Meyer.

 STATEMENT OF ROBERT J. MEYER, GAYFRYD STEINBERG PROFESSOR OF 
                MARKETING, THE WHARTON SCHOOL, 
                   UNIVERSITY OF PENNSYLVANIA

    Mr. Meyer. Thank you. Good afternoon. My name is Robert 
Meyer. I am the Gayfryd Steinberg Professor of Marketing at the 
Wharton School of the University of Pennsylvania, where I have 
served on the faculty since 1990. Throughout my career, my 
research has focused on the study of consumer decisionmaking, 
particularly the psychological processes that lead consumers to 
adopt novel goods and services. In addition to my research, I 
have spent the past 27 years teaching the practice of marketing 
at the undergraduate, graduate, and executive levels in both 
the United States and abroad.
    I was invited by the Committee to offer testimony on a 
class of post-transactional marketing methods used by firms to 
sell subscription memberships in third-party benefit programs 
online. I originally became familiar with these practices while 
serving as an expert in a class action suit involving a direct 
marketing company in 2007 and more recently while serving as an 
expert for the Iowa Attorney General's Office.
    My overall opinion of these practices is threefold. First, 
the sales methods used by these firms do not constitute 
marketing as the term is commonly understood and practiced by 
ethical businesses and as is taught in major schools of 
management. In almost all cases, the membership programs being 
offered to consumers hold limited, if any, value, no attempt is 
made to communicate information about the programs in a way 
that would allow informed choices by consumers, and the firms 
who use these methods display little interest in building or 
nurturing long-term relationships with the contacted consumers.
    In contrast, the sales methods are the cornerstone of a 
scheme in which firms seek to earn profits by luring consumers 
into paying for memberships in programs that they would not 
subscribe to given their full awareness.
    Second, while the substantive content of these sales 
practices varies, the deception is achieved through a 
coordinated set of communications that display distinctive 
common architecture. These include the use of web designs that 
obscure the relationship that exists between the first and 
third-party sellers, offering enticements of free premiums or 
incentives that consumers will have little chance of ever 
obtaining, creating false beliefs that no financial risks are 
incurred by agreeing to the transaction, and by creating exit 
barriers that make it difficult to avoid and/or recover 
unintended membership payments, such as by making continued 
membership the default option for consumers who are not fully 
cognizant of what they have signed up for.
    Third, the architecture achieves deception by exploiting a 
series of well-known psychological biases that are known to 
limit consumers' abilities to make fully-informed choices in 
markets. The most general of these is the creation of web 
environments that lead consumers to make decisions using 
automated or unconscious processes that do not fully consider 
all the information that is available on a website or presented 
in a decision setting.
    Examples include site designs that create the false 
impression that the offer is being made by a familiar, trusted 
seller, designs that misdirect consumers' attention away from 
text that might describe the true nature of the transaction, 
and by exploiting tendencies to choose default or accept 
options when there is confusion about what the correct course 
of action would be in a web session.
    I should also note that the lack of ethicality of these 
practices is inflated by the fact that they are often targeted 
at vulnerable populations who are ill-equipped to absorb the 
financial losses they impose. Specifically, the practices may 
be particularly effective when targeted to consumers of limited 
means, for whom the small cash enticements promised by the 
programs would represent significant financial assets, and/or 
older consumers who have limited experience navigating the web.
    Naive consumers with limited web experience may be taken in 
for no other reason than harboring beliefs that the sellers on 
the web follow the same norms of ethical exchange that they 
have come to expect in traditional markets, where payment for 
goods and services is a volitional choice of the consumer, not 
something one has to opt out of.
    Finally, the persistence of these sales schemes also pose a 
long-term risk to legitimate businesses who conduct sales in an 
ethical manner over the web. As these practices proliferate, 
the negative experience of consumers who are taken in by these 
schemes may serve to foster feelings of mistrust toward 
legitimate sellers, thus impeding the growth of a major modern 
channel of commerce.
    Thank you.
    [The prepared statement of Mr. Meyer follows:]

 Prepared Statement of Robert J. Meyer, Gayfryd Steinberg Professor of 
       Marketing, The Wharton School, University of Pennsylvania
    Chairman Rockefeller, Ranking Member Hutchinson, members of the 
Committee:
    My name is Robert Meyer. I am the Gayfryd Steinberg Professor of 
Marketing at the Wharton School of the University of Pennsylvania, 
where I have served on the faculty since 1990. Prior to arriving at 
Penn, I served on the marketing faculties at the University of 
California, Los Angeles and Carnegie-Mellon University. Throughout my 
career my research has focused on the study of consumer decisionmaking, 
particularly the psychological processes that lead consumers to adopt 
novel goods and services. In addition to my research, I have spent the 
past twenty-seven years teaching the practice of marketing at the 
undergraduate, graduate, and executive levels both in the United States 
and abroad. My complete curriculum vitae is available at http://
marketing.wharton.upenn.edu/documents/cv/Meyer_Vita_Dec
_2007.pdf.
    I was invited by the Committee to offer testimony on a class of 
post-transactional marketing methods used by firms to sell subscription 
memberships in third-party benefit programs on line. I originally 
became familiar with these practices while serving as an expert in a 
private class-action suit involving a direct marketing company in 2007, 
and more recently while serving as an expert for the Iowa Attorney 
General's office. The selling methods of concern are those where a 
customer makes a volitional purchase at a familiar website and is then 
transferred--often without their awareness--to a separate site 
maintained by a third-party. At this new site the customer is typically 
offered a free premium (such as a gift card or discount) for agreeing 
to trial membership in a program offering an array of benefits, such as 
the potential ability to obtain price discounts from known retailers. 
If the customer agrees to this trial, the credit card information that 
was provided to the first party during the original transaction is 
automatically transferred to the third party. If the customer does not 
cancel the membership within the trial period, the third party then 
uses this billing information to charge the customer a monthly 
membership fee. A common characteristic of these transactions is that 
many consumers unwittingly agree to the trial memberships without being 
cognizant that they have purchased anything or are at financial risk, 
and, as a result, they incur several months of membership charges 
before they are able to cancel.
Overall Assessment
    My overall opinion of these practices is threefold:

   First, the sales methods used by these firms do not 
        constitute marketing as the term is commonly understood and 
        practiced by ethical businesses and as is taught in major 
        schools of management. In almost all cases the membership 
        programs being offered to consumers hold limited if any value, 
        no attempt is made to communicate information about the 
        programs in a way that would allow informed choices by 
        consumers, and the firms who use these methods display little 
        interest in building or nurturing long-term relationships with 
        contacted customers. In contrast, the sales methods are the 
        cornerstone of a scheme in which firms seek to earn profits by 
        luring customers into paying for memberships in programs that 
        they would not subscribe to given their full awareness.

   Second, while the substantive content of the sales practices 
        varies, this deception is achieved though a coordinated series 
        communications that display a distinctive common architecture. 
        These include the use of web designs that obscure the 
        relationship that exists between the first and third party 
        sellers, offering enticements of free premiums or incentives 
        that consumers will have little chance of ever obtaining, 
        creating false beliefs that no financial risks are incurred by 
        agreeing to the transaction, and by creating exit barriers that 
        make it difficult to avoid and/or recover unintended membership 
        payments, such as by making continued membership the default 
        option for consumers who are not fully cognizant of what they 
        have signed up for.

   Third, this architecture achieves deception by exploiting a 
        series of well-known psychological biases that are known to 
        limit consumers' abilities to make fully informed choices in 
        markets. The most general of these is the creation of web 
        environments that lead consumers to make decisions using 
        automated or unconscious processes that do not fully consider 
        all of the information that is available or presented in a 
        decision setting. Examples include site designs the create the 
        false impression that the offer is being made by a familiar, 
        trusted, seller, designs that misdirect consumer's attention 
        away from text that might describe the true nature of the 
        transaction, and by exploiting tendencies to choose default 
        ``accept'' options when there is confusion about the correct 
        course of action in a web session.

    I should also note that the lack of ethicality of these practices 
is inflated by the fact that they are often targeted at vulnerable 
populations who are ill-equipped to absorb the financial losses they 
impose. Specifically, the practices are likely to be particularly 
effective when targeted at consumers of limited means for whom the 
small cash enticements promised by the programs would represent 
significant assets, and/or older consumers who have had limited 
experience in navigating the web. Naive consumers with limited web 
experience may be taken in for no other reason than harboring beliefs 
that the sellers follow the same norms of ethical exchange that they 
have common to expect in traditional markets, where payment for goods 
and services is a volitional choice made by the consumer, not something 
one has to opt out of.
    Finally, the persistence of these sales schemes also pose a 
potential long-term risk to legitimate businesses who conduct sales in 
an ethical manner over the web. As these practices proliferate, the 
negative experience of consumers who are taken in by these selling 
schemes may serve to foster feelings of mistrust toward legitimate 
sellers, this impeding the growth of a major modern channel of 
commerce.
    In the sections below I elaborate the basis of this opinion. The 
discussion is partitioned into two phases. I first provide an overview 
of the approach to selling used by firms and describe the common 
architecture that characterizes most web scripts. I then discuss the 
psychological mechanisms that explain why these scripts are effective 
in deceiving consumers into purchasing memberships in programs that 
have no material value.
The Deceptive Architecture
Overall Structure
    Although the web designs and program scripts used by the third-part 
firms vary in their specific content, almost all display a common 
architecture that is comprised of six essential parts:

   An initial legitimate sales setting. A customer first visits 
        a familiar first-party website in which they make a volitional 
        purchase using a credit card provided by the customer;

   A disguised link and enticement. After making the purchase 
        customers are taken to a landing page maintained by a third-
        party seller that describes an opportunity to realize a free 
        benefit, such as dollars off a previous purchase or a cash gift 
        card. This page is disguised to look like it is maintained or 
        endorsed by the first party seller, such as by featuring the 
        first party seller's logo on the website.

   Distraction and confusion ploys. The landing page then 
        describes the conditions required to receive the premium in a 
        way that minimizes the likelihood that a consumer will pay 
        close attention to its details, and potentially misconstrue 
        what the premium is being awarded for. This is achieved by 
        including distracting elements in the website--such as fake 
        surveys--that direct the consumer's attention away from 
        critical details about the membership program and its terms.

   Concealment of the payment mechanism. The landing pages 
        never require customers to provide their credit card or billing 
        information, an omission that fosters beliefs that nothing has 
        been purchased, and that the consumer faces no financial risk 
        going forward.

   Post-acceptance retention ploys. To maximize the chances 
        that monthly charges are incurred before the consumer can 
        cancel, the firm employs such tactics as the use of modest 
        charge levels and nondescript program names that are likely to 
        be overlooked in consumers' monthly credit card statements, and 
        requiring consumers to be an active member of the program for a 
        longer than the ``free trial'' period before the promised 
        premium is be awarded.

   Negative-option pricing. Finally, the centerpiece of the 
        architecture is a negative-option pricing scheme that makes 
        acceptance of membership the default action for consumers, 
        shifting the burden of effort in the sales process from the 
        seller to the consumer. Whereas in traditional markets it is 
        the burden of the seller to convince the buyer that offered 
        goods or services are worth paying for, under negative-option 
        pricing the default assumption is the opposite, making it the 
        responsibility of the consumer's to take action to stop payment 
        if he or she feels the good or service is not worthwhile.

    Figures 1 through 3, I provide examples of how these elements are 
implemented. Figures 1a-1c illustrates the sequence of web pages that 
would be viewed by a customer who makes a purchase at Vistaprint, a 
familiar online merchant of pre-printed gift cards, labels, and home 
office supplies (www.vistaprint.com). As shown in Figure 1a, when the 
consumer concludes his or her purchase at Vistaprint, he or she does 
not leave the site, but is rather taken to a new page--seemingly still 
part of the Vistaprint site--that promises $10 cash back on the 
previous purchase as a ``special thank you'' for their purchase (Figure 
1b) . The website also seems to imply that the primary condition for 
receiving the cash back is the completion of a short survey that 
prominently appears on the right-hand side of the page (Figure 1c). 
What few consumers likely realize, however, is that both the ownership 
of the page and the survey are ruses; this new site is not part of the 
V istaprint site, but is a page maintained by an unaffiliated third-
party direct marketing firm (in this case, Vertrue) who has no 
intention of using or analyzing the survey data. Rather, the goal of 
the survey is to direct the consumer's attention away from dense text 
to the left that describes the real purpose of the site, which is 
attract monthly memberships in a subscription program. Specifically, by 
agreeing to apply for the $10 cash-back discount the customer is 
consenting to trial membership in a program that costs $14.95 a month, 
and is giving Vertrue permission to secure his or her credit card 
information from Vistaprint for billing purposes (Figure 1d). 
Variations this same general sequence of tie-ins and mis-directs are 
illustrated in Figures 2 and 3 (a-c).
    What is not depicted in the Figures is that the sequence of 
deceptive actions continues after the customer consents to 
participate--often unknowingly. Few consumers, for example, will ever 
receive the promised $10 ``cash back'' in the Vistaprint solicitation. 
The reason is that Vertrue, the direct marketer, deliberately attempts 
to minimize redemption rates by requiring the consumer to complete two 
phases of forms that must be completed and mailed back in, a process 
that takes up to 8-10 weeks. Because active membership is typically 
required at the time the refund is awarded, customers who manage to 
cancel their memberships within the ``free trial'' period never receive 
the promised premium. Finally, for those few customers who are aware of 
their membership in these programs and attempt to utilize their 
advertised benefits, they will quickly encounter similar usage 
barriers. To illustrate, most programs promise discounts on gift cards 
that can be used at well -known merchants, but these can be secured 
only if the customer first purchases the cards at full price, then 
endures similarly-lengthy transaction costs to realize the savings. As 
a result, actual usage of the benefits of these programs is typically 
negligible--either because customers are never aware that they are 
members, or the costs of making claims are such as to render the 
programs useless.
Summary Assessment
    It is my belief that these aspects of the web scripts--from the 
opening link to the programs themselves--form a carefully-crafted 
scheme for generating revenue by fostering and then arbitraging 
ignorance: maximizing the number of customers being makes lured in to 
the sales scheme on the front end, and then minimizing the number of 
customers who had the knowledge or ability to withdraw from it on the 
back end.
    Each aspect of the script plays a clear-cut role in achieving this 
goal. The initial setting of a familiar website not only provides a 
mechanism for securing the customer's credit card information without 
their knowledge, but also fosters a misplaced sense of trust in the 
legitimacy of the subsequent disguised appeal by the third-party 
seller. The use of monetary enticements and distracters then lures 
customers into signing up for a membership program whose terms and 
conditions are not understood, or, in many cases, without the 
consumer's conscious awareness that they have signed for anything. 
Finally, once agreement is secured from customers, an array of post-
sale concealment tactics are used to insure that at least some charges 
are incurred by consumers before they discover their purchasing 
mistake.
How and Why the Schemes Work
    A remarkable feature of the numerous consumer complaints that have 
been filed with better business bureaus and state attorney general 
offices in connection with these practices is the ubiquity of claims by 
consumers that they have no recollection of ever having consented to 
membership in programs--even when confronted with evidence to the 
contrary. What is notable about these schemes is thus that their effect 
goes well beyond simply misleading consumers as to the real value of 
the trial memberships that they are consenting to. Rather, they induce 
many consumers to take actions that they have no conscious awareness 
of, and whose consequences are discovered only months after the initial 
web contact.
    While a number of factors contribute to the effectiveness of these 
schemes, the most fundamental is that they work by exploiting one of 
the most fundamental frailties of human decisionmaking: the tendency to 
make decisions using automated--and often unconscious--heuristics that 
respond to only limited aspects of an information environment. As noted 
by Kahneman (2002), human decisionmaking is currently widely seen as 
being governed by two cognitive systems: automated rules or heuristics 
(System I) that produce rapid actions and perceptions over which we 
have little conscious control, and a deliberative or reasoned rules 
(System II) that more carefully consider features of the environment, 
and over which we have considerable conscious control. The deceptive 
sales schemes used by direct marketers work by endowing websites with 
features that encourage decisions to be made by System I (instinctive) 
processes, while suppressing features that would activate System II 
(reasoned) processes--processes that would otherwise alert and 
discourage consumers from signing up for programs that have little real 
value.
    To elaborate on this idea, the schemes described above lure 
consumers into consenting to memberships by fostering and exploiting 
the following four decision biases that are often associated with 
System I (automated) problem solving:

   Optimism biases that cause consumers' to selectively 
        interpret the information provided by the firm in a favorable 
        (or trusting) light;

   Conditioned-response biases, in which certain behaviors and 
        perceptions are automatically triggered when a decisionmaker is 
        exposed to familiar cues;

   Inter-temporal judgment biases, which include tendencies to 
        overweight short-term prospects and to postpone deliberations 
        when there is uncertainty about the best course of action;

   Status-quo (default) biases, or the tendency to prefer 
        inaction (accept the status quo) to action when confronted with 
        uncertainty in a decision environment.

    Each of these biases and how they induced unintentional choices in 
response to the web schemes will be described and illustrated in turn.
The Optimism Bias
    A central starting element of the various schemes is an initial 
tie-in to a familiar website--typically one that the consumer had just 
made a volitional purchase--followed, in most cases, by the promise of 
a free premium--such as cash, gift card or dollars-off the previous 
transaction. These features have two likely psychological effects. 
First, the tie-in works to insure that the feelings of positive affect 
and trust that the consumer had developed in the course of the initial, 
volitional, transaction would persist while the consumer was reading 
and processing the information presented in the new landing page. If 
consumers believed that the web screen they were viewing was merely a 
continuation of the same exchange with the initial seller, they would 
have little reason to ``raise their antennas'' when viewing this new 
information--thus making it more likely this new information would be 
processed using System I (automated, heuristic) thought processes 
rather than System II (deliberative).
    The second effect is that when these feelings of trust are 
accompanied by an offer of a free reward (a positive cue), this new 
information would be processed not just in a heuristic manner, but also 
with a positive bias. The basis of this conclusion is the large 
literature on biases in human inference, which has repeatedly laid 
credence to the adage that people tend to ``hear what they hope to 
hear'' when processing information. The academic term for this is 
confirmatory or goal-motivated reasoning (e.g., Kunda 1990; Weinstein 
1980; Meyer, Zhao, and Han 2007) . Once a decisionmaker has a goal or 
desired outcome in mind for a task, he she will selectively process 
that information that consistent with the goal rather than 
inconsistent. Hence, for example, when asked to estimate how long it 
will take to finish a project people consistently underestimate 
durations--an effect called the ``planning fallacy'' (e.g., Buehler, 
Griffin and Ross 1994 ). The reason this arises is that when estimating 
completion times people are more likely to imagine those scenarios that 
lead to early completion than late. Likewise, when imagining how useful 
new-product features will be prior to their adoption, consumers often 
over-estimate later use by the same mechanism: given that the goal is 
to use features, scenarios in which we indeed use them come to mind 
more readily than those in which we do not.
    The same mechanism would be at work here. Given the goal of 
obtaining cash back on a purchase or a free gift card consumers would 
have been motivated to selectively process information in a way that 
most easily rationalize their attainment--such as by believing that the 
offers were legitimate and there would not be ``catches'' that put them 
at risk. In short, once a consumer adopted a belief that the lures were 
real and being made by a seller for which he or she felt trust, he or 
she would have been hooked; the consumer would have no motivation to 
search for and/or interpret information on the site such in a way that 
would disconfi rm this belief.
Conditioned Response Biases
    A central feature of System I processes is that consumer 
perceptions and behaviors are often driven more by the cues consumers 
expect to see an environment rather the cues that are objectively 
there. Hence, in the same way that a hiker in a forest who has a phobia 
for snakes might jump when seeing a rope on the ground, when processing 
website information consumers may be prone to perceive and respond to 
what they expect to website to contain rather than what it objectively 
does.
    The schemes considered here are designed to exploit these illusory 
perceptions. For example, a consumer who quickly views the solicitation 
illustrated in Figure 1b-1d and sees the Vistaprint logos would presume 
that it is a Visatprint site, which would trigger a set of expectations 
about the kind of content and offer terms that would be normally be 
associated with a legitimate Vistaprint promotion. For example, a 
consumer would naturally assume that the survey on the page was there 
as part of Vistaprint's marketing research efforts, and that the ``$10 
cash back'' was being awarded as an incentive for completing this 
survey--a well-established practice. Likewise, and most critically, the 
consumer would have no perception of having purchased anything (or 
committing to purchase) after having clicked the ``yes'' button at the 
bottom of the survey for the simple reason that all of the cues that 
are normally when making a purchase from Vistaprint--such as provision 
of credit card information and a description of what is being 
purchased--are absent. The fact that some many consumers leave the site 
unaware that they have committed to making a purchase is thus not 
surprising; for most, the transaction was never perceived as such.
    Another example of the exploitive use of conditioned responses is 
given in Figures 3a-3c, which shows a different kind of solicitation 
tied to the I ntel ius people-search site (www.Intelius.com) . When a 
customer visits the Intelius site, for a small fee they can get a 
report of available public information on a person of interest. After 
paying the fee with a credit card, they click a red button that says, 
``confirm the purchase and show my report'' (Figure 3a). But when 
clicking this button, they are not shown the report, but are rather 
unexpectedly taken to a new site maintained by Vertrue designed to 
solicit membership in a benefit program called ``24 Protect Plus.'' A 
central feature of the page is a request for an e-mail address, under 
which is a prominent red button labeled ``yes and show my report''--
presented in the same font as the earlier button. Having no 
expectations of having to navigate a promotion, and simply wanting to 
see the report that has been paid for, many consumers will reflexively 
click the red button again--an action that will trigger automatic 
membership.
Inter-temporal Judgment Biases: Hyperbolic Discounting and Preferences 
        for 
        Deferral
    One of the most robust findings in studies of decisionmaking is 
that when consumers are asked to consider options that promise up-front 
benefits at the expense of delayed costs they tend to put excessive 
weight on the former--a bias known as hyperbolic discounting (e.g., 
Loewenstein and Prelec 1992; Trope and Lieberman 2003). This bias helps 
why consumers who are exposed to the prospect of a free premium in 
exchange for trial membership in a program might under-attend to fine-
print descriptions of its terms and conditions, such as the what would 
be required to cancel. When considering the notion of afree-trial 
period, consumers would tend to mentally focus more on the pleasure 
that will be derived from the up-front premiums (e.g., the promise cash 
back) than the costs of time and energy that might be involved in later 
canceling the service--something that would lead them to accept trial 
membership in a program that they would later regret.
    Curiously, the third-part promoters of these schemes then exploit 
this bias again after a consumer accepts membership as a means of 
discouraging attempts to claim the premium or utilize their membership 
programs. As noted above, redemption typically requires the consumer to 
incur significant up-front transaction costs (such as sending in forms 
and/or paying full price for gift cards), with benefits being 
significantly delayed by multiple week ``processing times''. A consumer 
prone to hyperbolic discounting would thus likely conclude that the up-
front effort is not worthwhile, thus fulfilling the firm's hope that 
they will never utilize the program benefits that they signed up for.
    A tendency for consumers to be lured by prospects of free trial 
periods could also be explained by the widely-documented tendency to 
defer deliberations when presented with choices for which the best 
course of action is uncertain (e.g., Tversky and Shafir 1992). In many 
cases such instincts are rational; deferral allows more time for a 
thoughtful analysis of the decision problem and/or allows other options 
to emerge that are superior to the ones currently being considered 
(Meyer 1997). In other cases the appeal lies simply in a preference for 
making errors of omission rather than commission; in most consumer 
contexts decisions not to buy a product are more easily reversible than 
decisions to buy (Dhar 1997; Samuelson and Zeckhauser 1988).
    The web schemes can be seen as exploiting this instinct as a way of 
``freeing them'' from the need to read in close detail terms and 
condition of the programs and learn about their benefits. Consumers are 
encouraged to believe that the effortful task of deciding whether the 
program can be delayed until later, whereas the benefits of the prize 
can be enjoyed immediately. In other words, the consumer is persuaded 
to believe that they are not immediately purchasing anything or 
contracting for any future purchase; they are being awarded a free 
prize simply if they would agree to consider the programs for possible 
purchase at a later point.
Status-Quo Biases
    The payment mechanism used by the third-part sellers--negative-
option pricing--here is an unusual one. While negative-option pricing 
is sometimes justified on the basis of consumer convenience (to avoid 
the need for effortful renewal), the motivation is anything but that; 
the goal was to extract unwanted charges by exploiting another well-
known bias in consumer decisionmaking alluded to above: the preference 
for default or status-quo courses of action given uncertainty (e.g., 
Johnson, Hershey, Meszaros, and Kunreuther 1993; Kahneman, Knetch, and 
Thaler 1991; Samuelson and Zeckhauser 1988).
    Once the firm has access to the consumer's credit card information 
and charge authorization, they are, in essence, holding the consumer's 
wallet hostage. The longer it takes for consumers to discover that they 
have unwittingly signed up for membership, or the longer it takes for 
them to discover that the benefit programs have limited value, the more 
money they make as pure profit; each month of delay means more charges 
to the consumer.
    Consistent with this, the firms set up significant barriers to 
charge detection. The monthly charges levels--typically $14.95--are 
designed to be low enough to just fall under the radar screen for many 
consumers who do not careful reconcile their credit card statements 
each month. For consumers who focus only the size of the overall bill, 
they would know something was amiss only if the total amount (or 
monthly minimum payment) was significantly higher than in the past--a 
perception that a $14.95 charge is unlikely to induce. In addition, 
even for consumers who do carefully reconcile their bills, the firms 
are careful to use program names that could easily be confused with 
legitimate firms or businesses. Finally, a consumer who signs up for 
one of these programs is typically sent a ``membership package'' in the 
mail--but it is commonly designed to resemble a junk-mail solicitation 
would be discarded by many consumers, particularly if they had no 
awareness that they had signed up for anything.
    The negative-option pricing mechanism essentially turns the tables 
on how transactions are normally conducted in a marketplace; whereas 
not buying a good or service is normally the default action in markets, 
here it is the default. This is a reversal that consumers would have 
had little experience dealing with, something that would likely lead to 
numerous cases of automatic purchases being made for programs that they 
neither wanted or, possibly, even knew they were acquiring. The 
reversal also highlights an unfortunate paradox of the transaction: as 
noted above, consumers were drawn to the appeal of a ``free trial'' 
period in the belief that it allowed them to avoid taking the overt 
action of purchasing the services--when in fact, it had just the 
opposite effect. By accepting the free trial they were implicitly 
making the decision--which was surely unintentional--to to make 
purchasing the passive act, and not purchasing the effortful one.
Conclusion and Remedies
    My overall assessment of these web schemes is straightforward: they 
represent an enterprise whose primary purpose is to foster and exploit 
weaknesses in consumer decisionmaking in an effort to con consumers 
into purchasing memberships that hold limited value and without their 
fully informed consent. The combination of the sellers' perceived need 
to use deceptive selling tactics and the low rate of utilization of the 
benefits supposedly provided by their programs implies they did not 
believe they were marketing a good or service that held value for 
consumers. As such, the operation cannot be defined as either a 
legitimate marketing operation or a legitimate consumer business.
    In my view the suggested remedies for these practices are also 
straightforward:

   Negative-option pricing should be prohibited for any service 
        or program that enlists customers through ``free-trial'' 
        periods. When the trial period has expired the default 
        assumption must be that the consumer has elected not to adopt 
        the program. Adoption would occur only if, at the end of the 
        trial period or earlier, the consumer takes a positive action 
        to secure membership, providing complete payment and billing 
        information.

   Firms that partner in selling goods and services on the web 
        should be prohibited enacting automatic ``hand-offs'' and from 
        passing on customers' credit card and billing information. 
        While at the end of a sale at one site a customer may be 
        presented with the option to visit a new site offering 
        potential benefits, visiting the new site should require a 
        volitional act by the consumer. Likewise, if a new purchase is 
        to be made at the new site, it should require the consumer to 
        re-provide his or her billing information.

   In such partnership arrangements, firms should also be 
        required to utilize web designs and scripts that make it 
        unambiguous that the consumer has left the original website and 
        is now in site managed by separate firm, so as to minimize 
        confusion as to the identity of the seller a customer was 
        dealing with.

    Of course, the enactment of such remedies would likely eliminate 
the profit potential current direct marketers who use the web scripts 
of concern, as few consumers would voluntarily choose to pay for 
memberships in the programs if fully informed. But they would have the 
positive effect of precluding a recurrence of the losses suffered by 
consumers who fell prey to the deceptive practices discussed here.
References
    Buehler, R., D. Griffin, M. Ross. 1994. Exploring the planning 
fallacy: Why people overestimate their task completion times. Journal 
of Personality and Social Psychology. 67 (3) 366-381.
    Dhar, Ravi (1997), ``Context and Task Effects in Choice Deferral,'' 
Marketing Letters Special Issue on the Time Course of Preferences, 8 
(1).
    Johnson, E. J., Hershey, J., Meszaros, J., and Kunreuther, H.. 
1993. Framing, Probability Distortions, and Insurance Decisions. 
Journal of Risk and Uncertainty, 7, pp. 35-51
    Kahneman, Daniel (2002), ``Maps of Bounded Rationality: A 
Perspective on Intuitive Judgment and Choice'', Nobel Prize Lecture, 
December 8, 2002.
    Kahneman, D., Knetsch, J. L. and Thaler, R. H.. 1991. Anomalies: 
The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of 
Economic Perspectives, 5, 1, pp. 193-206
    Kunda, Ziva. 1990. The case for motivated reasoning. Psychological 
Bulletin. 108 (3) 480-498.
    Loewenstein, G. and D. Prelec (1992), ``Anomalies in Intertemporal 
choice: Evidence and an Interpretation,'' Quarterly Journal of 
Economics, 107, 573-598.
    Meyer, R. J. 1997, ``The Effect of Set Composition on Stopping 
Behavior in a Finite Search Among Assortments'', Marketing Letters 
Special Issue on the Time Course of Preferences, 8 (1).
    Meyer, Robet, Shengui Zhao and Jin Han. 2007., ``Biases in 
Valuation and Usage of Innovative Product Features'', Marketing 
Science, in press.
    Samuelson, W. and R. J. Zeckhauser. 1988. Status quo bias in 
decisionmaking. Journal of Risk and Uncertainty, 1, pp. 7-59.
    Trope, Yaacov, Nira Liberman. 2003. Temporal construal. 
Psychological Review. 110 (3) 403-421.
    Tversky, Amos, and Eldar Shafir. 1992. ``Choice Under Conflict: The 
Dynamics of Deferred Decisions'', Psychological Science, 3 (November), 
358-361.
    Weinstein, Neil D. 1980. Unrealistic optimism about future life 
events. Journal of Personality and Social Psychology. 39 (5) 806-820.

















    The Chairman. Thank you very much.
    Now, Professor Marotta-Wurgler.

 STATEMENT OF FLORENCIA MAROTTA-WURGLER, ASSOCIATE PROFESSOR, 
               NEW YORK UNIVERSITY SCHOOL OF LAW

    Ms. Marotta-Wurgler. Chairman Rockefeller, members of the 
Committee: Thank you for inviting me to testify on the issue of 
aggressive sales tactics on the Internet and their impact on 
American consumers. My name is Florencia Marotta-Wurgler and 
I'm an Associate Professor at New York University School of 
Law. I teach courses in contract law, ecommerce, and sales, but 
much of my research focuses on contracting practices in 
electronic commerce.
    The key question regarding post-transaction marketing in 
today's hearing is whether consumers are legitimately entering 
into these transactions or whether they're being effectively 
tricked into them. My general assessment based on both the 
norms of online commerce and academic research is that 
consumers may indeed need further protections from these 
marketing practices.
    My first point is that post-transaction marketing 
techniques violate consumer expectations. One of the well-
established norms of online commerce is that sellers require 
consumers to complete a checkout process that includes entering 
their payment information whenever they want to make a purchase 
online. This norm allows consumers to be comfortable with 
online purchases and greatly facilitates ecommerce activity.
    Post-transaction marketing techniques interfere with these 
established norms. The timing of these third-party offers 
interrupts the standard checkout process with the original 
vendor, thus increasing the likelihood that consumers end up 
subscribing to an unwanted service without even noticing, 
because they were prompted to enter an e-mail address instead 
of payment information for the second transaction.
    So, what I would like to highlight here is that these 
practices violate norms of online commerce. Consumers associate 
purchases with payment details and e-mail addresses with e-mail 
messages.
    The next question is then whether fine print explaining the 
nature of the transaction can substitute for this deviation 
from norms and provide a legitimate basis for the transaction. 
So my second point is that current methods of disclosure of the 
terms of the post-transaction marketing offers are insufficient 
to provide adequate notice. The basic problem with relying on 
disclosures in fine print is that people simply don't read it.
    For example, two co-authors and I have studied the extent 
to which people who buy software online choose to click on and 
read the fine print governing the use of the software. We found 
that only one or two out of every thousand shoppers chooses to 
read these contracts. Moreover, those who did actually click on 
the contract spent too little time on it to have actually read 
it.
    In a follow-up study, we found that the prominence of the 
disclosure did little to increase the probability that 
contracts would be read. In fact, consumers are unlikely to 
read the fine print even when sellers put the terms right in 
front of them and require explicit assent by checking a box 
immediately below the terms.
    Even if it were the case that consumers were inclined to 
read fine print, which they're not, post-transaction marketers 
structure and display fine print in a format that further 
discourages reading and comprehension. These marketers often 
present their offers in a format that is deceptively similar to 
that one used by the original selected vendor and even include 
the selected vendor's brand name and logo. Consumers who are 
induced to believe that they are dealing with similar vendors 
can easily be lulled into complacency. Our study suggests this 
is a genuine problem.
    We found that even fewer than two in 1,000 consumers read 
fine print when they were dealing with bigger, more reputable 
sellers. This makes sense, as consumers will feel a lessened 
need to read the fine print when dealing with known vendors. 
Post-transaction marketing firm offers exploit this trust.
    Another way in which these marketers discourage reading is 
by identifying their offers as rewards or bonuses that 
consumers should, in fact, be grateful to receive. The offers 
also splash relatively larger-font terms on the page, such as 
``Congratulations'' and ``Thank you.'' Studies have shown that 
consumers focus on only a few salient aspects of a product or 
service when deciding on a purchase. These bells and whistles 
have the effect of diverting attention from important 
information about fees.
    Just as good news is conspicuously splashed on the screen, 
the bad news is suspiciously hidden. The terms related to the 
fees and automatic transfers of payment information appear in 
small print, in the left or bottom of the page, and appear 
under another layer of unrelated and boldly displayed happy 
titles, such as ``Congratulations'' and ``Great News.''
    The relevant disclosures appear at the end of dense 
paragraphs. Of course, the problem with this is that research 
has also shown that the manner in which sellers display 
information affects the attention consumers pay to it. So, 
given the way some of this fine print is written, even the rare 
consumer who actually does take a quick look at it could be 
forgiven for not understanding it.
    I have a few suggestions to help remedy these problems. 
First, automatic transfers of payment information from known 
vendors to post-transaction marketers should not be allowed. 
Instead, consumers should be asked to enter their credit card 
information at each transaction. This will preserve the well-
established norms of ecommerce.
    Second, they should be required to identify themselves 
prominently and differentiate themselves from the original 
selected vendors.
    Third, they should clearly and prominently explain the fees 
and services.
    Finally, they should plainly explain how enrolled consumers 
can cancel or seek a refund.
    Thank you very much.
    [The prepared statement of Ms. Marotta-Wurgler follows:]

 Prepared Statement of Florencia Marotta-Wurgler, Associate Professor, 
                   New York University School of Law
    Chairman Rockefeller, Ranking Member Hutchison, members of the 
Committee:
    Thank you for the invitation to testify on the issue of aggressive 
sales tactics on the Internet and their impact on American consumers.
    My name is Florencia Marotta-Wurgler and I am an Associate 
Professor at New York University School of Law. Much of my research 
focuses on contracting practices in consumer mass market transactions 
and especially online transactions. In other words, I study the fine 
print, and whether online consumers read the fine print.
    Today's hearing examines an online business practice known as 
``post-transaction marketing'' in which third-party companies offer 
discount subscription services for a fee while consumers complete the 
check-out process from selected vendors. Consumers are generally 
invited to accept these offers by entering their e-mail address. 
Consumers' payment information is then automatically transferred to the 
third-party marketers from the known vendors. This practice has been 
the subject of numerous buyer complaints, critiques by consumer 
advocates, and class action litigation.
    Here, in brief, is essentially how sellers and buyers view this 
practice. Marketers are likely to claim that a legitimate transaction 
took place because consumers explicitly communicated assent by actively 
entering their e-mail address (or, in some recent cases, the four last 
digits of their credit card number). Because the fine print of the 
offer discloses the fees and other key terms, the marketers argue the 
assent is legitimate and not the result of an oversight or 
misunderstanding.
    On the other hand, consumers may argue that they didn't 
meaningfully assent to the terms of the offer because based on years of 
experience in both online and real-world settings, a transaction that 
triggers financial obligations doesn't take place until the consumers 
provide and confirm payment details, including personal financial 
information, often a credit card. Consumers don't feel compelled to 
read the fine print informing them that have completed a transaction 
because, as everyone knows, financial obligations don't arise until a 
payment is explicitly given. Moreover, the consumers would argue, if 
the fine print was supposed to alert them of this change in practice, 
they didn't read it because it was presented in a deceptive manner and 
because consumers generally don't pay attention to fine print.
    Whose interpretation is correct? The marketers' perspective that 
consumers are willingly subscribing to these services, or the 
consumers' perspective that they are effectively being tricked into a 
transaction?
    In this statement I will start with some general observations about 
the nature of online transactions and then I will discuss some academic 
research that is relevant to answering this question. Generally, the 
well-settled norms in online commerce and research findings suggest to 
me that consumers may need further protections from these marketing 
practices. I will conclude by recommending some measures that might 
help to address some troubling aspects of these transactions.
1. Post-Transaction Marketing Techniques Violate Consumer Expectations 
        Online
    Consumers who access the Internet can quickly access the sites of 
thousands of different vendors. The reason why consumers can 
comfortably browse and window shop without having to delve into the 
fine print governing each vendor's site is that, based on experience, 
they know that until they follow some well-established steps, they are 
not financially bound to the vendor. In almost all consumer 
transactions online, consumers select a product or service and complete 
a multi-step checkout process that requires entering a preferred 
payment method as well as shipping and billing addresses. When the 
transaction is completed, consumers are presented with a confirmation 
page with details of the completed transaction. This norm of online 
commerce is what allows consumers to safely explore the web, become 
informed about advertisement offers, and complete transactions online. 
The fact that this norm has been widely accepted and in a way 
standardized has helped drive the explosive and economically beneficial 
growth of online transactions.
    So called ``post-transaction marketing techniques'' interfere with 
these established norms, creating consumer confusion in a way that 
would appear deceptive. Post-transaction marketing offers are generally 
presented to consumers while they are in the process of checking out 
from a selected merchant. Usually, the consumer selects a product in 
the site of the selected vendor and begins a check-out process to 
complete the transaction. However, instead of receiving a confirmation 
page from the selected vendor notifying the consumer that the 
transaction has been successful, the consumer receives a post-
transaction marketing offer from a third party vendor. The offer is 
often deceptively entitled ``Reward'' or ``Bonus'' and at first glance 
appears to be some sort of gift, something to be happy about. The 
consumer can then accept the offer by entering his or her e-mail 
address or by completing a survey. Once this step is completed, the 
selected merchant will automatically transfer the consumer's payment 
information to the third-party vendor and the consumer's credit card 
will be automatically billed $12 a month, for example, until the 
consumer notices the charge and figures out how to cancel it. An amount 
of $12 is small enough often to go unnoticed, but it is large enough to 
add to $50 or $100 within a few months.
    This practice obviously raises concerns. The presentation of the 
offer by a third party interrupts the normal checkout process with a 
selected vendor. Consumers who reasonably expect to receive a 
confirmation page as a signal that a transaction is finalized may be 
deceived into thinking that the third-party offer is part of the 
selected vendor's checkout process. Wishing to complete the transaction 
with the selected vendor, consumers thus might end up subscribing to an 
unwanted service without even noticing.
    Alternatively, even if consumers understand that the third-party 
offer is not part of the checkout-process, they nevertheless may be 
deceived into subscribing because they are never prompted to enter 
their payment information. Given the aforementioned norms, consumers 
may thus reasonably expect that no financial obligation attaches. If 
anything, by providing their e-mail address, consumers might expect at 
worst to receive some advertising that e-mail account provided. 
Consumers associate purchases with payment details and e-mail addresses 
with e-mail messages.
    So what I would like to highlight here is the violation of norms of 
online commerce. Now I will turn to some academic research that 
addresses the issue of whether fine print can substitute effectively 
for this deviation from norms and provide a legitimate basis for the 
transaction.
2. Disclosure of the Terms of the Post-Transaction Marketing Offers are 

        Unlikely to Provide Adequate Notice Because Research Shows that 
        Most Consumers Simply Do Not Read Fine Print Online
    Post-transaction marketers argue that their offers adequately 
disclose to consumers the terms and fees associated with the 
transaction. Although this is the case, one of the reasons these 
disclosures are unlikely to correct consumers' likely mistaken beliefs 
is that the vast majority of consumers do not read the fine print 
online.
    In a recent study, two co-authors and I examined the detailed 
online browsing behavior of 45,091 households with respect to 66 
software vendors that made their products available online. We studied 
the extent to which consumers chose to become informed about the fine 
print governing the purchase and use of the products (in the context of 
software, these contracts are known as End User License Agreements).\1\ 
Although we expected to find that relatively few consumers would bother 
reading the fine print, we were surprised to find that the number was 
so low.
---------------------------------------------------------------------------
    \1\ ``Does Anyone Read the Fine Print? Testing a Law and Economics 
Approach to Standard Form Contracts,'' Yannis Bakos, Florencia Marotta-
Wurgler, David R. Trossen (NYU Law and Economics Research Paper No. 09-
40, 2009).
---------------------------------------------------------------------------
    What we found was that one or two of every thousand shoppers choose 
to access these contracts. We were also surprised by how consistent 
this attitude was. Consumers generally don't read contracts regardless 
of age and income level. And even though consumers are only slightly 
more likely to read contracts of products that command higher prices, 
the percentage of people who read contracts remains tiny. Moreover, 
those who did access the contract spent too little time on it to have 
actually read it. The median time spent on these contracts was 29 
seconds. Given that the average contract in the sample 2,277 words 
long, making it impossible that the typical consumer reads more than a 
tiny fraction of it.
    In a follow-up study, we found that the prominence of the 
disclosure did little to increase the probability that contracts would 
be read.\2\ Consumers remained similarly apathetic when finding the 
contract is several ``mouse-clicks'' away as when the contract appears 
in the familiar link next to a box mandating consumers to click on ``I 
agree'' to finish the transaction.\3\ We also found that consumers are 
unlikely to read the fine print even when sellers put the terms right 
in front of them and require explicit assent by checking a box 
immediately below the terms. We found that consumers spent a median of 
72 seconds in single checkout pages that presented the contract to 
consumers (and required them to explicitly agree to it) but also 
required consumers to enter their name, address, and credit card 
information. A contract of this type is attached as Exhibit A of this 
testimony. Given all the tasks that consumers had to complete in these 
pages, I believe that it is highly unlikely that consumers spent more 
than a fraction of their time reading it. (To be clear, I do not view 
Exhibit A as an example of a deceptive presentation of fine print, 
rather it is fairly typical contract, and of course, another aspect to 
note is that the transaction is fully with the selected vendor as 
opposed to a transaction connected to a third party.)
---------------------------------------------------------------------------
    \2\ ``Does Disclosure Matter?'' Florencia Marotta-Wurgler and 
Yannis Bakos (mimeo, 2009).
    \3\ Even less than 0.1 percent of consumers that were presented 
these contracts chose to access the contract.
---------------------------------------------------------------------------
    The conclusion from this study is that there is an overwhelming 
tendency to ignore the fine print in online transactions, regardless of 
how clearly or prominently terms are disclosed. Although these studies 
only give us a general picture of consumer behavior online and they are 
drawn from a slightly different context, I believe that in combination 
with common sense and introspective observation, these studies strongly 
suggest that it is unlikely that consumers actively peruse the details 
of many online transactions. To summarize, I believe that it is 
unlikely that disclosure of the post-transaction marketing offers in 
fine print can effectively alert consumers of the transaction that they 
are undertaking.
3. Post-Transaction Marketers Structure and Display Fine Print in a Way 
        that Discourages Consumers From Becoming Informed About Their 
        Terms
    I'll now turn to consider several features of post-transaction 
marketers' offers that based on common sense and academic research seem 
likely to further reduce the effectiveness of their disclosures.
3.1. The Method of Disclosure Exploits the Empirical Fact that 
        Consumers are Less Likely to Read the Terms Offered by Known 
        Vendors
    Post-transaction marketers often present their offers in a format 
that is deceptively similar to that one used by the originally selected 
vendor. For example, if the vendor is a site that sells movie tickets 
the third-party vendor will include pictures of popcorn and reels. In 
many cases, the page with the third-party offer will have the brand 
name and logo of the known vendor, implying that the new offer comes 
from the known vendor. Consumers who are induced to believe that they 
are dealing with familiar vendors can be easily lulled into 
complacency.
    Our study of consumer online behavior supports the validity of this 
concern. We found that as rarely as our sample consumers accessed 
contracts, they were even less likely to read when the terms were 
offered by bigger, more reputable sellers.\4\ This makes sense. When 
consumers become familiar with firms or know their reputation, they 
will feel a lessened need to read the fine print. Post-transaction 
marketing offers exploit that trust.
---------------------------------------------------------------------------
    \4\ See Bakos et al., supra note 1.
---------------------------------------------------------------------------
3.2. Many Offers Are Deceptively Framed as Rewards or Rebates
    Post-transaction marketers often identify their offers as rewards 
or bonuses that the consumers in fact should be grateful to receive. 
Offers may feature a prominently displayed coupon with a title such as 
``$10 off your next purchase--Good for your next Fandango Purchase'' or 
``$10 CASH BACK ON YOUR PURCHASE TODAY!'' Fandango is a very popular 
vendor of movie tickets, among other products. (See for example, 
Exhibits B and C.) It is natural to imagine that the new offer is part 
of the original transaction.
    The offers also splash relatively larger-font terms around the page 
such as ``Congratulations,'' ``MEMBER REWARDS,'' and ``Thank You . . . 
Please Complete Your Survey and Claim Your Reward.'' These phrases are 
likely to distract attention from the disclosures that explain the new 
charges associated with the new offer. Given the general emphasis on 
the reward component and consumers' aforementioned expectations that 
financial liability is incurred only after entering a payment method, 
it seems unlikely that barely noticeable disclosures will correct 
consumers' misperceptions.
    Existing research supports this view. Studies have shown that 
consumers focus only on a few, salient aspects of a product or service 
when deciding on a purchase.\5\ By highlighting the ``reward'' 
component of the offer and framing it as something that the consumer 
should be pleased to receive, marketers make the ``good news'' as 
salient as possible.
---------------------------------------------------------------------------
    \5\ See Russell Korobkin, ``Bounded Rationality, Standard Form 
Contracts, and Unconscionability,'' U. Chi. L. Rev. 1203, 1243-44 
(2003), for an overview of these studies.
---------------------------------------------------------------------------
3.3. Key terms are Designed and Positioned in Way That Makes it Likely 
        that They Will be Overlooked
    Just as good news is emphasized, the bad news is suspiciously 
hidden. The terms related to the fees and automatic transfers of 
payment information appear in small print, in the left or bottom of the 
page, and appear under unrelated and boldly displayed happy titles such 
as ``Congratulations,'' ``Great News,'' ``Thank You,'' and ``Register 
for Reservation Rewards and get our Money-Saving Discounts up to 50 
percent . . . plus your $10 cash back incentive at your next Fandango 
Purchase.'' Moreover, the relevant disclosures appear at the end of 
dense paragraphs that for the most part again recite the bonus or 
reward aspect of the offer. Even consumers who glance at the fine print 
might think there are few strings attached. Indeed, research has shown 
that the manner in which sellers display information affects the 
attention consumers pay to it and, consequently, the likelihood of it 
being a salient component in purchase decisions.\6\
---------------------------------------------------------------------------
    \6\ See, e.g., J. Edward Russo, ``The Value of Unit Price 
Information,'' 14 J. Marketing Rsrch. 193, 194 (1977). Don N. 
Kleinmuntz & David A. Schkade, ``Information Displays and Decision 
Processes,'' 4 Psy. Sci. 221-27 (1993).
---------------------------------------------------------------------------
    To offer some perspective, the vast majority of contracts in our 
study that were for the most part ignored by consumers in the sample 
were clearly labeled as contracts or disclaimers, and included titles 
in bold or capital letters explaining the provisions that would follow. 
For example, paragraphs explaining liability disclaimers would be 
titled ``DISCLAIMERS,'' or ``IMPORTANT: PLEASE READ THIS CONTRACT.'' If 
contracts with clear and prominent titles were not able to successfully 
catch consumers' attention, the terms of post-transaction marketers are 
even less likely to do so. Indeed, they seem designed to attract as 
little attention as possible.
    Even if some consumers have become savvy enough to detect these 
deceptive practices and stay away from them, it is well worth the 
effort to help as many consumers as possible fully understand the 
contract that they are being offered.
4. Recommendations
    I have a few suggestions to help remedy the problems created by 
post-transaction marketing techniques.
    First, automatic transfers of payment information from known 
vendors to post-transaction marketers should not be allowed. Instead, 
consumers should be asked to enter their credit card information at 
each transaction. This will preserve the well-established norm that 
financial liability in these contexts arise only after the consumers 
takes certain well-established steps. The benefit of clarity outweighs 
any cost of inconvenience.
    Second, post-transaction marketers should be required to identify 
themselves prominently and differentiate themselves from the originally 
selected vendors. To avoid confusion, they should not present 
themselves before the transaction with the selected vendor is 
completed. This will put consumers on notice that they are dealing with 
a different entity.
    Third, post-transaction marketers should improve the quality of 
their disclosures by framing their offers in a manner that is not 
deceptive and by clearly and prominently explaining the fees and 
services. These disclosures should also include regular e-mail updates 
reminding them of the subscription and any ongoing charges. They should 
be written in short, clear, and plain language with no distracting 
features.
    Fourth, post-transaction marketers should implement a clear process 
by which enrolled consumers can easily cancel or seek a refund. This 
alternative should be prominently present in every periodic e-mail 
communication with consumers.
    To summarize, because post-transaction marketers present themselves 
to consumers in an unexpected fashion at an unexpected juncture of the 
transaction, they violate the norms of online commerce and should be 
held to a higher standard of disclosure and transparency.
    Thank you very much for hearing my views. I hope they are helpful 
in your consideration of these practices.
Exhibit A




Exhibit B




Exhibit C




                                 ______
                                 
  Statement of My Experience Signing Up for Webloyalty's Reservation 
  Rewards--Florencia Marotta-Wurgler, Associate Professor of Law, New 
                     York University School of Law
    On Saturday, November 14, I visited the website Fandango.com with 
the intent of purchasing a movie ticket. After having selected the 
ticket (for ``Where the Wild Things Are''), I proceeded to checkout. 
The first step of the Fandango checkout process, entitled ``Checkout: 
Order,'' required that I enter the number of tickets desired and to 
either register using my existing account with my username and password 
(which I did), or register as a guest. The second step, entitled 
``Review,'' provided information about the date and time of the show, 
the selected number of tickets, and a summary of my billing 
information, including my name, e-mail address, last four digits of my 
credit card number, and zip code. As I clicked on a button entitled 
``Complete my Purchase,'' a large pop-up page with a prominent $10 
coupon promising me $10 off my next purchase at Fandango appeared on my 
screen. It is notable that I was not presented at this point with the 
typical purchase confirmation page.
    The page with the coupon was a typical post-transaction marketing 
offer. This time the third-vendor was Webloyalty. At the top of the 
page was a prominent statement ``***IMPORTANT: Limit 1 per person***.'' 
The $10 coupon was the focal point of the page, with notes such as 
``$10 cash back incentive'' and ``$10 off your next purchase.'' 
Immediately to the left of the coupon a colored text read 
``Congratulations . . . Here's your Special Offer for Fandango 
Customers!'' followed by ``Register for Reservation Rewards and get 
your Money Saving Discounts up to 50 percent . . . plus your $10.00 
Cash Back Incentive on your next Fandango Purchase.'' (A copy of the 
page is attached as Exhibit A of this statement.) One paragraph below, 
under a title labeled ``Great News'' and after several lines 
highlighting the reward component of the offer, was a disclosure of the 
fees stating ``Enjoy this FREE for the next 30 days and only $12 a 
month thereafter billed to the credit card or deducted from the debit 
card you used at Fandango today.'' Any person in my position could 
easily have ignored this last line, thus concluding that the offer came 
from Fandango (after all, it was displayed during the checkout process) 
and that it was for some sort of genuine reward (perhaps to create 
brand loyalty).
    As I scrolled down the page to enroll I was told to ``Complete the 
information below and click YES to sign up for your membership in 
Reservation Rewards.'' I was asked to enter the last four digits of the 
credit card number I used to purchase my Fandango ticket and to enter 
my e-mail address. Not wanting to stand up to reach my wallet to look 
for my credit card number, I remembered that Fandango had conveniently 
showed me the last four digits of my credit card number in the previous 
checkout step. I clicked on ``My Account'' in the Fandango page and I 
saw just the last four digits of my credit card number displayed on the 
page. After simply entering these numbers and typing my e-mail address 
in the Reservation Rewards page, I clicked YES and signed up for the 
service.
    I should note that companies typically ask users to provide the 
last four digits of their credit card number as a way of verifying the 
identity of the user and not as a part of a regular checkout process. 
Consumers in this situation who mistakenly believe they are dealing 
with Fandango would understand this request as a mere request for 
identity verification. In the absence of reading the fine print, 
consumers are unlikely to understand they are entering a new 
transaction by simply entering the last four digits of their credit 
card number.
    I then checked my e-mail account to see whether I had received any 
notifications explaining in detail the characteristics of the 
transaction. Companies that sell products online routinely send 
confirmation e-mails explaining the item purchased, the amount charged, 
the payment method used, and information about shipment. The e-mail I 
received was entitled ``Get Your $10 Monthly Member Bonus Today!'' 
(attached as Exhibit B to this Statement). The e-mail was as deceptive 
as the original offer. The text, phrased as a letter, offered a 
friendly reminder of the $10 discount from the next Fandango purchase. 
It then listed a series of other rewards I should be able to claim as a 
member of the club. Next, it explained that I could obtain these 
rewards by sending an e-mail to reservation rewards. The letter was 
signed by the Senior Vice President of Reservation Rewards. Disclosures 
regarding the costs and payment for this service were minimal. At the 
bottom of the e-mail, significantly away from the general text of the 
letter, there appeared the following statement: ``You can view the 
Billing Details of your membership on your Member Profile page. For 
questions, e-mail customer service or call 1-800-732-7031. To use your 
benefits visit Reservations Rewards.'' Just like the terms of the 
original offer, this statement does not provide notice sufficient to 
inform the average consumer of the nature of the services offered. The 
confirmation e-mail thus does not correct any prior beliefs about the 
offer being a no-strings reward.
    As soon as I completed the sign-up process, I used the number 
posted in the fine print of the offer to cancel my services. I was 
greeted by a recording that gave me a menu of options and asked me if I 
wanted to cancel my subscription. After selecting that option, the 
recording asked me whether I was sure that I wanted to cancel my 
subscription, and if I did not want to cancel, I should press the 
number 1 on the phone, and if I did want to cancel, I should press the 
number 2.
    After I pressed the correct number, I was told that my subscription 
was terminated. I later received an e-mail confirming my cancellation 
(included as Attachment C to this statement).
    Thank you very much.
    
    
    
    
    
    
    
    

    The Chairman. Thank you very much.
    Before I go to you, Professor Cox, you both talked about 
fine print and the fine print is just the greatest scam of all 
time. I see some charts over there. Do any of those have fine 
print on them?
    Mr. Meyer. Yes, they do.
    The Chairman. I'd like to see.
    I wouldn't make this the Metropolitan Art Show.
    Actually, that's not as good as some that I've seen, where 
they'll have ``$10'' in bright blue, a big square up at the 
top, and then there will be like 5 more of those paragraphs, 
small print, which I'm not 20, but I have good eyesight, and if 
I had a Galilea telescope I would not be able to read that fine 
print. I mean, it is absolutely impossible.
    In that fine print, if I'm not mistaken, is all the damage 
that they're going to do to you. But of course you don't read 
it because underneath in the same bright blue that I'm thinking 
of, which said ``$10,'' underneath that in big print is 
``Yes.'' So what do you do? You go ``$10, yes,'' and you don't 
read anything in between because--you said one out of every one 
million do it?
    Ms. Marotta-Wurgler. One out of every 1,000.
    The Chairman. Out of 1,000 do it.
    So anyway, I just want to make that point and, Professor 
Cox, go on to you.

STATEMENT OF PRENTISS COX, ASSOCIATE PROFESSOR OF CLINICAL LAW, 
               UNIVERSITY OF MINNESOTA LAW SCHOOL

    Mr. Cox. Thank you, Mr. Chairman.
    For over a decade, first as an Assistant Attorney General 
within the Minnesota Attorney General's Office and then as a 
Law Professor, I've attempted to combat and call attention to 
the practices examined here, practices that drain the financial 
accounts of Americans without legitimate purpose, cause 
cynicism about commerce, and harm competitors who are trying to 
be honest. I'd like to make three points.
    First, the practices examined here are not limited to the 
Internet. They're part of a bigger problem, a problem called 
``pre-acquired account marketing.'' The essence of ``pre-
acquired account marketing'' is the sale by retailers and 
financial institutions of special access to consumers' 
accounts, so that third parties can charge these accounts 
without obtaining account numbers from consumers.
    It occurs through every channel of direct marketing, 
including direct mail, inbound telemarketing, as well as 
Internet transactions. It involves all the Nation's largest 
financial institutions at some point and continues to involve 
the vast majority of the Nation's largest banks, credit card 
issuers, and mortgage companies. Interestingly, it is not 
something that is widespread among independent and community 
bankers or credit unions.
    It works by circumventing the shorthand methods we all use 
to signal consent to a transaction. We know we're done when we 
hand somebody our credit card, we swipe it in a machine, we 
read them the number over the phone, or we enter it into the 
Internet.
    This problem is especially bad with those with mental 
impairments due to illness or other reasons and those who do 
not speak English as a primary language. They are particularly 
victimized by the complexity of these transactions.
    My second point is that it is difficult to control this 
problem with existing deceptive practices laws and other 
consumer protection laws. Like it or not, they're fully 
disclosed even if in a fundamentally misleading context. This 
causes some courts to struggle with whether the consumer should 
be held responsible for carefully reading the fine print, as 
we've gone over.
    I think this is like blaming the crime victim for getting 
pick pocketed in a street where it says ``Beware of 
pickpockets'' on it. But the existence of disclosure does cause 
some confusion in the courts.
    This debate of law about deceptive practices is distinct 
from the larger and more important point. Pre-acquired account 
marketing, of which this is a prominent example, is a giant, 
insidious sorting machine, the result of which is millions of 
consumers have their accounts charged without their knowledge 
and without wanting the products they've supposedly purchased.
    The evidence on this point is absolutely overwhelmingly, 
and I'd like to say your staff report on this, I literally got 
up and cheered when I read it. It's phenomenal. It's detailed, 
it's thorough, and it's beautifully presented. And it's 
consistent with all the other information about this form of 
marketing and other direct marketing channels.
    For instance, Illinois Attorney General, Lisa Madigan, did 
a phone survey of people who were supposedly active paying 
members of membership clubs involving a direct mail 
solicitation with live checks, involving an agreement between a 
national bank and a membership club, and found literally nobody 
who was aware that they were a member, even though they were 
paying for it.
    Iowa Attorney General, Tom Miller, did a mail survey with 
Vertrue members and found essentially the same result. In my 
experience with the Minnesota Attorney General's Office 
prosecuting several of these cases, including one against Fleet 
Mortgage Company, where people's mortgage accounts were charged 
through both direct mail and telemarketing, and they did a 
survey of the consumer services representatives with Fleet 
Mortgage, and you got almost the same exact responses that are 
reported in your staff report from those consumer services 
representatives, quotes such as ``This is a fraud,'' ``This is 
a scam,'' ``Why do we allow our customers to be charged like 
this?''
    The third and final point is that, unlike the often 
difficult and tricky consumer regulatory problems where you 
have to balance how exactly you intervene in the market so as 
not to prevent legitimate commerce, this is one of those rare 
cases where there is a clear and obvious solution: Prohibit 
retailers and financial institutions from selling access to 
consumers' accounts to third parties. There is no legitimate 
commercial reason to do this. Consumers mostly already think 
this is the law and it should be the law.
    It is with great appreciation to you, Mr. Chairman, for 
calling this hearing. It has been a very frustrating decade 
trying to call attention to this problem, and with one fell 
swoop you've already made more impact on this than a decade 
worth of work by many other people who are trying to combat 
this problem.
    Thank you very much.
    [The prepared statement of Mr. Cox follows:]

  Prepared Statement of Prentiss Cox, Associate Professor of Clinical 
                Law, University of Minnesota Law School
    It is with great appreciation that I thank Chairman Rockefeller for 
holding this hearing, for exposing and carefully examining this 
problem, and for his obvious commitment to protecting consumers from 
abuses in the marketplace. I have had the pleasure of working with 
Senator Klobuchar, from my home state of Minnesota, on consumer 
protection issues, and I know she also understands the inadequacy of 
current regulatory systems for protecting consumers in today's 
marketplace.
    Unauthorized charges for membership clubs following consumer 
website purchases flow from Internet retailers selling access to the 
financial accounts of their customers. This problem is part of a larger 
practice known as pre-acquired account marketing, which has festered 
largely unattended for more than a decade. Today's hearing is long 
overdue. The business practices that are being examined in this hearing 
drain the financial accounts of American consumers without legitimate 
purpose.
    I first encountered the problem of unauthorized account charges 
resulting from pre-acquired account marketing as a public attorney 
enforcing consumer protection laws. Prior to joining the University of 
Minnesota Law School faculty in 2005, I worked as an Assistant Attorney 
General and Manager of the Consumer Enforcement Division in the 
Minnesota Attorney General's Office. I was involved in the prosecution 
of a series of cases against banks, mortgage companies, retailers, 
insurers and membership club sellers using pre-acquired account 
marketing.\1\ For the last few years, I have studied and written about 
this practice, including its rapid growth as an Internet marketing 
system.\2\
---------------------------------------------------------------------------
    \1\ These cases included publicly filed consumer protection actions 
by the Minnesota Attorney General against Fleet Mortgage Corporation, 
Memberworks, Inc. (now known as Vertrue, Inc.), Damark International, 
Inc. (now known as Provell, Inc.) and U.S. Bancorp.
    \2\ An article examining this issue in more detail, including a 
proposed model law to control the problem, can be viewed at: http://
ssrn.com/abstract=1460963. The article, entitled The Invisible Hand of 
Pre-acquired Account Marketing, will be published in June 2010 in 
Volume 47, Issue 2 of the Harvard Journal on Legislation.
---------------------------------------------------------------------------
    Pre-acquired account marketing creates the same result in all of 
its modalities--massive consumer confusion and extraordinary numbers of 
consumer complaints about unauthorized charges to financial accounts. 
It accomplishes this result by acting as a sorting mechanism to 
identify vulnerable and distracted consumers unaware that their 
accounts have been charged. My testimony will focus on how this sorting 
occurs and why current laws are inadequate to control the problem. I 
will conclude by asking you to consider a law that bans e-retailers, 
other retailers and financial institutions from selling special access 
to their customers' financial accounts. Further disclosure requirements 
will not solve the problem of consumer confusion and harm caused by 
pre-acquired account marketing.
I. Pre-acquired Account Marketing Results In Unauthorized Account 
        Charges
    An Internet retailer acquires an account number, such as a credit 
card number, when selling goods or services to a consumer. The consumer 
enters his or her account number on the e-retailer's website when the 
consumer believes he or she understands and agrees to the terms of the 
transaction. Internet transactions mimic traditional retail 
transactions in this respect--consumers signal consent to a charge by 
providing an account number to the seller, much as a consumer swipes or 
hands over a debit or credit card to a physical retailer.
A. How Pre-acquired Account Marketing Works
    The flood of consumer complaints about unauthorized charges 
following website purchases is the predictable result of using pre-
acquired account marketing techniques on the internet. The e-retailer 
agrees to sell the consumer's account number it obtained, or sell the 
ability to charge its customer's account, with a membership club 
seller. After the initial e-retailer transaction, the membership seller 
solicits the consumer for a free trial in a membership club or an 
insurance policy. If the marketing company determines the consumer 
consented, and the consumer fails to cancel in time, the marketing 
company charges the consumer's account. The retailer who sold the 
consumer's account number shares in the revenue.
    This is the same process, with the same result, that occurs when 
pre-acquired account marketing is used in other contexts, including 
direct mail, outbound telemarketing and various forms of inbound call 
marketing.\3\ Most of the Nation's largest financial institutions also 
sell the right to charge their customers' accounts to membership club 
sellers and other companies employing pre-acquired account 
marketing.\4\ Credit card, checking and mortgage accounts all are 
commonly accessed through pre-acquired marketing.
---------------------------------------------------------------------------
    \3\ The Better Business Bureau, which rates Vertrue with a grade of 
``F'', describes consumer problems with the company's business practice 
as follows: ``Complaints reported to the Bureau primarily involve 
claims of unauthorized charges by the Company's affiliates. In such 
cases, customers reported no recollection of having agreed to the 
programs that were billed to their credit card, debit card or bank 
account. In some of the cases, consumers reported being charged for two 
or 3 years.''
    \4\ Affinion, one of the largest pre-acquired marketing seller of 
membership clubs, lists its ``affinity partners'' as including ``18 of 
the top 20 U.S. credit card issuers, 17 of the top 20 U.S. debit card 
issuers, 5 of the top 5 U.S. mortgage companies.''
---------------------------------------------------------------------------
    These are not trivial charges. Membership clubs now routinely 
charge about $100 or more per year. Membership club sellers claim tens 
of millions of members. Affinion alone asserts that it adds one million 
members per year through Internet solicitations alone.
B. The Deception Problem with Pre-acquired Account Marketing
    Consumers are confused and misled by this marketing system for 
three reasons. First, this type of selling process circumvents the 
short-hand methods used by consumers to indicate consent to a 
transaction. In an Internet transaction, the entry of an account 
number, and perhaps CVV code, alerts consumers that they are providing 
that authorization. When e-retailers sell the right to charge their 
customer accounts, membership club sellers can defeat consumer 
expectations that withholding this information prevents consent to a 
charge for the transaction.
    Second, membership club sellers and other pre-acquired account 
marketing companies layer multiple sales practices with deceptive 
potential. These sellers invariably provide a ``free trial offer'' or 
similar inducement to begin the solicitation, suggesting a lack of 
commitment required of the consumer. This is consistent with the 
consumer's expectation that he or she has not provided an account 
number authorizing a charge. These sellers then employ a ``negative 
option'' method to charge the consumer's account without further action 
by the consumer if he or she fails to cancel during the trial period. 
Finally, agreements purportedly entered into through pre-acquired 
account marketing typically include an ``automatic renewal'' provision 
so that the charge is re-assessed periodically, often at a higher rate 
on later charges, until canceled by the consumer. Combining the 
circumvention of short-hand consent signals and the layering of 
multiple suspect sales methods makes it inevitable that many consumers 
will not understand the complicated solicitation terms.
    Third, pre-acquired account marketing raises special concerns for 
deception of vulnerable consumers. The elderly who have substantial 
mental diminishment, those with mental impairment from illness and non-
native English speakers are more susceptible to the deception potential 
with this form of marketing. It is one thing to have individuals in 
these groups read or enter an account number, but quite a different 
experience to allow vulnerable populations to be charged for failing to 
notice and comprehend complicated disclosures when they have not 
provided an account number to the seller.
C. The Sorting of Distracted and Vulnerable Consumers
    Membership club sellers will respond that the entire transaction 
sequence is fully disclosed to the consumer. This assertion generally 
is true, especially on the Internet where human deviation from script 
is not possible. Are we left with a debate about whether these 
disclosures are adequate to overcome the problems with consumer 
deception described above? No. The fundamentally corrupt business model 
that drives this form of marketing gains focus if we shift perspective 
from the various experiences of millions of individual consumers during 
the solicitation process to the net effect of this system on consumer 
account charges.
    This result occurs because pre-acquired account marketing acts as a 
sorting system to identify consumers who will have their financial 
accounts charged without their full understanding. Pre-acquired account 
marketers (and the enabling e-retailers, banks and other companies that 
sell account access) rely on a combination of consumers who never 
understand the solicitation and consumers who grasp it at the time of 
solicitation but fail to remember the terms of the transaction through 
the trial period. For consumers in these groups who notice the charge 
on their account statement, the sellers take a pro-rated amount of the 
charge. The bulk of revenue lies in those consumers who do not notice 
the charge and are assessed the full amount, and who later suffer 
automatic renewal charges at higher rates, sometimes for years, before 
canceling. These consumers not only pay all of the cost of the 
membership club, but do not demand anything of value from the service 
because they do not even know they are members.
    This situation could present a difficult public policy problem if a 
substantial number of consumers were charged for membership services of 
which they were unaware, but where most members understood the process 
and happily paid for the service. Mounting evidence, however, shows 
this latter group is almost non-existent--that almost every consumer 
charged through pre-acquired account marketing is unaware of or did not 
want the membership service they allegedly agreed to purchase. This 
evidence includes the following:

   The Iowa Attorney General sued Vertrue, a pre-acquired 
        seller, in 2006. As part of the investigation, Attorney General 
        Tom Miller surveyed consumers that Vertrue had identified as 
        paying for one of its membership programs. Of the 88 club 
        members who returned surveys, 59 (or 67.0 percent) were unaware 
        of the membership and stated that the charge was totally 
        unauthorized, 24 (or 27.3 percent) stated that they were aware 
        of the club but they never used it and believed they had 
        already canceled, 6 (or 6.8 percent) stated generally that the 
        charges were ``unauthorized,'' and 3 (or 3.4 percent) gave 
        unclear answers that indicated some awareness of the club but 
        dissatisfaction with the service, including one member who 
        ``felt coerced'' into paying for the membership.\5\
---------------------------------------------------------------------------
    \5\ The Iowa Attorney General action against Vertrue was recently 
tried before the trial judge and the parties currently are submitting 
post-trial briefs.

   In 2004, Illinois Attorney General Lisa Madigan surveyed by 
        telephone customers of a national bank that had cashed ``live 
        check'' direct mail offers for a free trial offer in membership 
        programs solicited under a pre-acquired account marketing 
        arrangement. Of the 56 bank customers who were listed as active 
        members of a membership program, 37 indicated no awareness that 
        they were club members. None of the 56 customers stated that 
        they were both aware of the charge and intended to sign up for 
---------------------------------------------------------------------------
        the program by cashing the live check.

   When Minnesota Attorney General Mike Hatch sued the mortgage 
        subsidiary of Fleet National Bank in 2001 for pre-acquired 
        marketing, he presented evidence that Fleet's own customer 
        service agents overwhelmingly objected to these charges, 
        calling them ``unethical,'' ``a scam,'' and ``a fraud'' based 
        on their conservations with homeowners whose mortgage accounts 
        were charged for membership clubs and insurance policies 
        through pre-acquired marketing.

    The data collected so far strongly supports the conclusion that 
there appears to be few, perhaps almost no, consumers among the club 
members who are aware they are paying for the service.\6\ This 
situation makes irrelevant the issue of whether some or even most of 
the consumers accepting the free trial offer understood the disclosures 
at the time of solicitation. The evidence indicates that the business 
model underlying pre-acquired account marketing works as a sorting 
scheme that results in account charges to consumers who do not know 
they have been charged and do not want the purported service.
---------------------------------------------------------------------------
    \6\ This data does not include usage information for these 
membership programs. It would be instructive to know how many consumers 
charged for these membership clubs actually use the service, which 
would be evidence of awareness of the charge. For example, many of 
these membership clubs offer to their members as a primary benefit 
reimbursements for certain types of purchases. If a majority of members 
are taking advantage of this offer, one could infer awareness of at 
least club membership, although not necessarily awareness of the 
account charge.
---------------------------------------------------------------------------
    After a decade of observing the membership club industry develop on 
the foundation of pre-acquired account marketing, I have little doubt 
that this business sector would cease to exist almost overnight if it 
had to sell its products like every other retailer. In other words, 
these membership clubs could not survive if they had to get consumers 
to give them a credit card number to purchase the services the 
membership clubs are selling.
II. Failure of Existing Law to Control These Unauthorized Charges
    Current law does not control the problem of pre-acquired account 
marketing, particularly in the context of e-retailers selling customer 
account access in post-transaction offers. Neither laws of general 
application nor specific rules in consumer protection statutes or 
regulations contain adequate tools to stop this unfair practice.\7\
---------------------------------------------------------------------------
    \7\ It is worth a brief word about why the market fails to control 
pre-acquired account marketing. The most obvious market correction for 
the problem is the adverse reputational consequences for the companies 
involved in a practice that generates angry, voluminous complaints of 
account theft by consumers. In fact, membership club sellers routinely 
change their trade names (Memberworks became Vertrue; Damark became 
Provell; Trilegiant became Affinion; etc.), which might suggest some 
concern of this sort. Yet reputational problems are lessened when 
consumers just respond to a direct marketing solicitation rather than 
making affirmative choices to seek out the seller and because the 
primary initial brand presentation with pre-acquired marketing is the 
name of the retailer or financial institution, not the membership club 
seller. This leads to the more promising possibility of financial 
institutions and referring retailers who sell access to their 
customers' accounts abandoning pre-acquired marketing because of 
substantial reputational interests. Unfortunately, adverse reputational 
consequences for the account issuers and referring retailers are 
mitigated by the structure of the free trial offer. The solicitation is 
usually closely tied to the reputation of the account issuer or 
referring seller, but when consumers discover weeks or months later the 
account charges on their statements that they believe are unauthorized, 
the pre-acquired seller typically is listed as the initiator of the 
charge. As the consumer is likely to have no idea how this charge 
appeared on his or her account, there is less risk of harm to the 
reputation of the financial institution or retailer that obtains 
revenue from selling the access to its customers' accounts.
---------------------------------------------------------------------------
A. Legislative and Regulatory History
    The most promising avenue for controlling pre-acquired account 
marketing in the last decade was the prohibition against financial 
institutions sharing customer account numbers enacted in 1999 as 
section 502(d) of Title V of the Gramm Leach Bliley Act (codified at 15 
U.S.C.  6802(d)). Unfortunately, this Act gave Federal regulators the 
authority to promulgate rules for the implementation of section 502(d), 
and the resulting regulations essentially made section 502(d) 
meaningless as a limit on pre-acquired marketing.\8\ Even if this 
prohibition had not been undermined by Federal regulators, it would not 
have prevented retailers that are not financial institutions from 
engaging in pre-acquired account marketing.
---------------------------------------------------------------------------
    \8\ See 12 C.F.R.  40.12. Regulation P was adopted jointly by the 
Federal banking regulators, the Federal Reserve Board and the Federal 
Trade Commission. Regulation P allows the sharing of encrypted account 
numbers. Financial institutions, therefore, can sell access to their 
customers' accounts to direct marketers as long as they encrypt the 
numbers given to the marketers, which does nothing to control the 
problem of account charges unknown to the consumer.
---------------------------------------------------------------------------
    The Federal Trade Commission promulgated amendments to the 
Telemarketing Sales Rule in 2003 that put some limits on the use of 
pre-acquired account marketing in the telemarketing context, 16 C.F.R. 
 310.4(a)(6). The amendment proposed in the initial rule-making notice 
would have prevented the practice entirely, but the FTC substantially 
limited the reach of the final rule while noting that it would continue 
to watch the evolution of this suspect marketing practice. Again, these 
rules do not apply to Internet transactions and thus would have no 
impact on e-retailers selling account access.
B. Legal Actions
    Lawsuits brought by state attorney generals, the FTC and private 
attorneys have had some impact on pre-acquired account marketing, but 
so far have been of limited value in addressing the underlying issues 
driving the consumer complaints of unauthorized charges. State 
attorneys general and FTC actions alleging consumer deception and 
misunderstanding have been successful, but the cases against the 
largest membership club sellers by state attorneys general have so far 
mostly yielded only modest reforms in the form of improved 
disclosures.\9\ This outcome is consistent with the theory of these 
cases, which is that the solicitation process misled or deceived 
consumers.\10\
---------------------------------------------------------------------------
    \9\ See, e.g., Assurance of Discontinuance, In re Citibank (NYS 
Dept. of Law filed Feb. 22, 2002) (multistate settlement), available at 
http://www.oag.state.ny.us/media_center/2002/feb/feb
27b_02attach.pdf; Press Release, Office of the Washington Attorney 
General, Settlement with Discount Buying Club Highlights Privacy 
Concerns (August 4, 2000), available at http://www.atg.wa.gov/
pressrelease.aspx?&id=5010; Assurance of Discontinuance, Minnesota ex 
rel. Hatch v. Damark Int'l, Inc., No. C8-99-10638 (Ramsey County Dist. 
Ct. Dec. 3, 1999).
    \10\ The lawsuit filed by Iowa Attorney General Tom Miller against 
Vertrue, Inc. was based in part on a broader theory that encompassed 
the assertion that consumers who pay for Vertrue membership clubs 
rarely know they are members whose accounts have been charged for the 
service. See Iowa ex rel. Miller v. Vertrue, Inc., Equity No. EQ53486 
(Polk Co. Dis Crt. May 15, 2006), available at http://www.state.ia.us/
government/ag/latestnews/releases/may2006/Mem
berWorksVertuePETITION).
---------------------------------------------------------------------------
    Private legal actions have had less success. Of particular interest 
to the subject matter of this hearing is a multi-district litigation 
case recently dismissed in the United States District Court for the 
Southern District of Texas, In Re VistaPrint Corp. Marketing and Sales 
Practice Litigation.\11\ Plaintiffs alleged that the post-transaction 
sale of membership clubs following sales of business cards on the 
VistaPrint website were deceptive and violated numerous state and 
Federal laws. The court granted the defendants' motion to dismiss on 
the substance of the plaintiffs' legal claims, but denied defendant 
VistaPrint's attempt to have the case dismissed because the VistaPrint 
form contract required that all actions by its customers be filed in 
Bermuda courts. The trial court judge held that consumers ordering 
business cards on the VistaPrint website had a duty to read all of the 
disclosures about the free trial offer. The judge concluded that the 
disclosures were sufficient to make the website post-transaction 
solicitation not deceptive to the ``reasonable'' consumer as a matter 
of law. The case is on appeal.
---------------------------------------------------------------------------
    \11\ No. MDL 4:08-md-1994 (S.D.Tex 8/31/09), available at 2009 WL 
2884727.
---------------------------------------------------------------------------
C. Consumer Misunderstanding and Abuse Is What Matters
    The VistaPrint decision presents the fault line in a part of the 
legal debate associated with pre-acquired account marketing. Sellers 
who employ and profit from the practice stress the obligation of 
consumers to search and read website disclosures that set forth this 
unusual procedure leading to account charges. Consumer advocates assert 
that the disclosures are insufficient to overcome the misleading 
overall impression of the solicitation. While this makes for an 
interesting legal theory dispute that explores the current state of the 
law of deception, this argument is utterly misplaced for considering 
the public policy issue presented by pre-acquired account marketing. It 
is a red herring.
    If the net effect of this business practice is that the 
overwhelming numbers of consumers paying for a service are unaware that 
their accounts are being charged year after year, we should explore how 
to stop this real-world result from occurring. It should not matter 
whether this result occurs because the consumer failed in his or her 
alleged ``duty'' to closely read all website disclosures and thus 
misunderstood the solicitation terms, because the consumer does not 
speak English well and could not really understand the dense 
disclosures, because the consumer understood the disclosures when using 
the website but forget about the solicitation and thus failed to 
exercise the negative option during the attenuated free trial offer 
period, or because of any other such reason. No one should want a 
practice to continue that amounts to a predacious sorting out of 
consumers to have their financial accounts charged without their 
awareness.
III. Prohibit Pre-acquired Account Marketing
    Unlike the complex regulatory trade-offs typical when drafting 
consumer protection regulations, an obvious solution exists for the 
problem motivating this hearing. A retailer should be required to 
obtain from the consumer his or her account number before charging the 
account. Most consumers think this is the state of law now.\12\
---------------------------------------------------------------------------
    \12\ See, e.g., Supplemental Comments of the Vermont Attorney 
General's Office, Telemarketing Sales Rule Review Forum Before the 
Federal Trade Commission, FTC File No. R411001, available at: http://
www.ftc.gov/os/comments/dncpapercomments/supplement/vtag.pdf 
(describing AARP study showing a plurality (46 percent) of consumers 
thought that a telemarketer could not charge a credit or debit card 
without obtaining the account number from the consumer, while a 
majority (51 percent) didn't think a bank account could be charged in 
this manner, and another 15 percent and 13 percent, respectively, 
didn't know if this type of charge was possible).
---------------------------------------------------------------------------
    There is no legitimate commercial purpose supporting pre-acquired 
account marketing. A seller can always avoid a pre-acquired account 
marketing transaction by having the consumer provide his or her account 
number. This, of course, is how the referring e-retailer got the 
account number from the consumer that it later sold to the membership 
club. Put another way, a seller that has the consent of the consumer to 
be charged for a transaction can obtain payment by acquiring the 
account number it would otherwise charge through the pre-acquired 
account method. Therefore, the only benefit in allowing such conduct 
derives from the seller avoiding the act of acquiring the account 
number from the consumer who owns the account.
    The companies employing this practice have given few reasons for 
allowing the circumvention of this routine, but critical, part of a 
typical consumer transaction. In amending the Telemarketing Sales Rule, 
the Federal Trade Commission expressly sought industry input on this 
issue and asked in its Notice of Proposed Rule-Making: ``What specific, 
quantifiable benefits to sellers or telemarketers result from pre-
acquired account telemarketing?'' \13\ In its comments accompanying the 
final rule changes, the FTC characterized the industry's failure to 
provide a satisfactory response to this question as follows:
---------------------------------------------------------------------------
    \13\ 67 Fed. Reg. at 4538.

        [A]lthough business and industry representatives acknowledged 
        during the Rule Review that the practice of pre-acquired 
        account telemarketing was quite common, maintaining that it was 
        ``very important'' to them, they provided scant information 
        that would help to quantify the benefits conferred by this 
        practice or better explain how these benefits might outweigh 
        the substantial consumer harm it can cause.\14\
---------------------------------------------------------------------------
    \14\ 68 Fed. Reg. at 4617.

    The two arguments most commonly asserted in favor of permitting 
pre-acquired marketing are that it better protects consumer privacy and 
that it lowers the costs of transaction. Both arguments are patently 
wrong.
    The privacy argument is that pre-acquired account marketing allows 
fewer employees to see personal financial information because the 
information is electronically transmitted from seller to seller. 
Whether or not this is true, one need only reflect for a few moments to 
see the irony in this position. In the archetype situation presented by 
an e-retailer collaborating with a membership club seller in a post-
transaction free trial offer, the eretailer sells the consumer's 
account number, or the ability to charge the consumer's account, to the 
membership club without the consumer's consent to this transaction. Any 
negligible benefit from the membership club's employees not seeing the 
consumer's account number, if this is even the case, must be compared 
to the violation of the consumer's privacy right and trust by the e-
retailer selling access to the consumer's account without the 
consumer's permission. Furthermore, in situations where the actual 
account number is transferred by the e-retailer, the privacy concerns 
are multiplied rather than reduced.
    The argument about lowering costs is equally wrong and ironic. 
There is no meaningful reduction in cost to the membership club in an 
Internet pre-acquired account transaction because it is the consumer 
that has to enter his account information. The costs of handling this 
information cannot be materially less than the costs of coordinating 
with the e-retailer to obtain the information needed to charge the 
consumer's account at the end of the trial period. In any case, these 
costs are truly negligible compared to all the work that the membership 
club must incur to implement this complex system. Just the costs of 
handling tens of thousands of consumers complaining about unauthorized 
charges must exceed many fold any purported savings from not having a 
web system that allows consumers to enter account information.
    Finally, the discussion about pre-acquired account marketing often 
gets confused with the more difficult question of customer account data 
retained by sellers. There are legitimate commercial reasons for a 
seller to retain and re-use customer account numbers. For instance, the 
customer may regularly order merchandise from that seller. Sellers 
retaining account information can use that data in ways that are 
beneficial to and within the expectations of the consumer, or they can 
use the data in ways that mimic the deception problems of reacquired 
marketing.\15\ This situation, therefore, presents the more usual 
consumer protection regulatory quandary of how to proscribe the abusive 
conduct without needlessly burdening legitimate commerce.
---------------------------------------------------------------------------
    \15\ Statement of Basis and Purpose, Telemarketing Sales Rule, 68 
Fed. Reg. at 4598 (citing to public enforcement actions resulting from 
sellers using retained account information in ways that mimic the 
abuses of pre-acquired account marketing).
---------------------------------------------------------------------------
    The mixed character of seller retained account information does not 
mean the pre-acquired account marketing practices at issue in this 
hearing ever create public benefit. There is a clear line between the 
following two situations: (1) a consumer voluntarily gives retailer A 
his account number and retailer A uses that data in a later transaction 
with the same consumer (seller-retained data); and (2) a consumer 
voluntarily gives retailer A his account number and retailer A sells to 
membership club seller B the right to charge the consumer's account 
without the consumer providing his or her account number to membership 
club seller B. The former situation may (or may not) be with the 
reasonable expectations of the consumer, and may (or may not) cause 
consumer confusion and misunderstanding. The latter situation, pre-
acquired account marketing, probably is not within the reasonable 
expectations of many people, and definitely causes mass and nearly 
universal consumer confusion and misunderstanding as to the legitimacy 
of account charges for membership clubs.
Conclusion
    Pre-acquired account marketing has no legitimate commercial reason 
to exist yet drains the wealth of consumers who are unaware their 
accounts are being charged. Consumers are exposed to these charges for 
unwanted services when e-retailers, other retailers and financial 
institutions sell special access to their customers' accounts in return 
for a share of the gain. Congress should enact legislation to protect 
American consumers from such abuse.

    The Chairman. Thank you, Professor Cox. You're very kind to 
the Committee and its staff.
    I want to go back, Mr. France, to exactly where I was, 
because I think it's very important to get this stuff on the 
record so that we can achieve what some of you have called for.
    We were already at the part where you said then Value Max 
started charging you $19.99 a month, you said.
    Mr. France. Yes, sir.
    The Chairman. Had you ever heard of Value Max Club before 
it started charging you $19.99?
    Mr. France. Never before, sir.
    The Chairman. Did you ever authorize Value Max to charge 
your credit card $19.99 a month?
    Mr. France. In no way knowledgeable to me, sir.
    The Chairman. Did you ever give Value Max your credit card 
number or bank account number?
    Mr. France. No, sir.
    The Chairman. If you had been asked to type in your 16-
digit credit card number to join this Value Max Club, would you 
have done it?
    Mr. France. No, sir.
    The Chairman. Thank you.
    Ms. Lindquist, I'd like to ask you--and for your son, thank 
you for coming up today from Wisconsin, over, up, whatever. 
Your testimony is that you were using a website called 
movietickets.com, you thought that you were buying just movie 
tickets, but in return, it turns out that you also bought 
memberships in two clubs called ``Reservation Rewards'' and 
``Shopper Discounts,'' and both of these clubs were charging 
you $10 a month; is that correct?
    Ms. Lindquist. Yes.
    The Chairman. Had you ever heard of the Reservation Rewards 
or Shopper Discounts club before these clubs started charging 
you $10 a month?
    Ms. Lindquist. No.
    The Chairman. Did you ever authorize Reservation Rewards or 
Shopper Discounts to credit your card $10 a month?
    Ms. Lindquist. No, not knowingly.
    The Chairman. Did you ever give Reservation Rewards or 
Shopper Discounts your credit card number or your bank account 
number?
    Ms. Lindquist. No.
    The Chairman. If you had been asked to type in your 16-
digit credit card number to join the Reservation Rewards or 
Shopper Discounts club, would you have done so?
    Ms. Lindquist. No.
    The Chairman. So, Mr. France and Ms. Lindquist, I'm very 
sorry that you got caught in this scam. You clearly did. You're 
clearly highly literate, thus taking away this thing that 
people can get scammed even though they don't know the Internet 
very well. You know it very, very well and you got scammed.
    One of our members, Claire McCaskill from Missouri, has to 
be at something the Administration asked her to do. But her 
mother got scammed, and she is absolutely in a rage about it, 
and so she may come tearing in here in a few minutes.
    Millions of other Americans have been ripped off in the 
same way that you two have been. It's outrageous and we're 
going to find a way to stop it.
    Mr. France and Ms. Lindquist, one of the most disturbing 
things we have learned in our investigation is that hundreds of 
websites like Intelius and movietickets.com are selling their 
customers' information to these bogus membership clubs. In 
fact, we've discovered that every time a customer gets tricked 
into joining one of these clubs the online merchant gets what 
is known as a ``bounty.'' They literally put a price on the 
customer's head.
    Mr. France, how does it make you feel to learn that 
Intelius got paid a bounty for selling your credit card 
information to Value Max club?
    Mr. France. Hard to put that into words, sir.
    The Chairman. Try.
    Mr. France. But the easiest, disgust that they could even 
do that and enjoy it and profit off of it and believe that 
they're doing right, or that they can even sleep, especially if 
they're American companies, because if we claim that America is 
the greatest country in the world then it starts with taking 
care of our fellow citizens and not taking advantage of them. 
So ``disgusted'' would have to be the best way to describe 
that.
    The Chairman. And you, Ms. Lindquist?
    Ms. Lindquist. I would have to agree. It's shocking that 
they can basically sell my credit card information to an 
unknown company. Everybody I talked to that I told I was coming 
here, it has happened to so many people I know, but they just 
maybe got charged a month or two and then found out. Maybe 
that's the goal of these companies, is just to charge these 
people $10 or $20, but multiply that by millions of people.
    The Chairman. Like 30 million people at different times. 
You're right.
    My time is up and I turn to Senator Dorgan.
    Senator Dorgan. Ms. Lindquist, my understanding is you say 
that you were charged by this company and never received any 
product; is that correct?
    Ms. Lindquist. Correct.
    Senator Dorgan. No mailing from them?
    Ms. Lindquist. Hmm-hmm.
    Senator Dorgan. No coupons, no product of any kind?
    Ms. Lindquist. Nothing.
    Senator Dorgan. Does this sound like fraud to you?
    Ms. Lindquist. Yes.
    Senator Dorgan. So someone is charging you because they say 
you purchased something from them, except you got--you received 
nothing----
    Ms. Lindquist. Right.
    Senator Dorgan. --and they're charging your bank account. 
It just seems to me--I mean, I don't know the legal niceties. 
Maybe one of the professors can suggest this. But it just seems 
to me if someone is taking money out of your checking account 
and giving you nothing in return, that's something beyond just 
shameful. There must be a legal term there.
    The other issue that I find really troublesome here is that 
reputable sites--I buy movie tickets online from time to time, 
and you go to these sites because they're reputable, 
presumably. Reputable sites are actually being reimbursed by 
the companies that are scamming you, and I assume they're being 
reimbursed because they're able to be a rider on that company's 
website. That's where they get their customers. You show up at 
the website wanting to make a transaction buying a ticket for a 
movie or an airline ticket, and that brings you to this page, 
and then they pop up with some sort of an ad that suggests you 
get something free, and then the reputable website gives that 
company your--provides that company your credit card number.
    Ms. Lindquist. I know.
    Senator Dorgan. Mr. France and Ms. Lindquist, that's just 
unbelievable to me. That is so--in addition to being shameful, 
so dishonest. I think Professor Cox said it right, that this is 
a very important hearing in the sense that my hope from this 
hearing is that we will find ways to shut down this activity. 
There's no nice way of describing this. This is wholesale 
cheating of a lot of people, and I think it just has to stop.
    I had not previously, as I indicated earlier, I had not 
previously been even aware of the terms that are being used. 
But I'm aware there are a lot of charlatans out there looking 
for ways to cheat people to the extent that they can get by 
with it.
    Mr. France, you indicate you have no knowledge of how 
someone even got your credit card information; is that correct?
    Mr. France. Absolutely not, unless Intelius worked with 
this company and gave them my credit card information, put a 
so-called ``bounty'' on me.
    Senator Dorgan. Mr. Cox, you worked for the Attorney 
General's Office of Minnesota?
    Mr. Cox. I did. Senator Dorgan, Mr. Chairman, I used to run 
the Consumer Protection Division at the Minnesota Attorney 
General's Office. Five years, 4-1/2 years ago, I left to go to 
the University of Minnesota Law School.
    Senator Dorgan. It looks like we've got some consumers here 
that need protecting pretty badly, right? Probably millions of 
people.
    But what do you make of the notion of somebody extracting 
money from Ms. Lindquist and Mr. France's accounts, adding it 
to their credit card, without providing a product to them, 
without them even knowing they'd purchased something? That 
seems to me like fraud.
    Mr. Cox. Mr. Chairman, Senator Dorgan, I have been 
astounded for 10 years that this goes on and on, and tried 
every way to call attention to it that I could. The fundamental 
problems here are that the disclosures are made, so when you 
try to attack the problem you wind up in this legal battle 
about the sufficiency of the disclosures.
    You have to really shift focus and ask exactly the question 
you're asking: Who in God's name agrees that we should allow a 
practice where everyone who winds up getting charged is 
unaware, essentially everyone--maybe 1 or 2 percent--is 
essentially unaware that they're a member and they're being 
charged for something they don't know and they don't want.
    One other point. It partly works because you would think 
that the market might self-correct by the reputational hit to 
the eretailers with the legitimate sites or the banks that are 
involved, et cetera. But the problem is when the charge comes 
through, it comes through, in the name of the membership club 
and all the attention is directed to the club. So, you get this 
problem where the market doesn't take care of it because the 
reputational interests aren't at stake.
    Senator Dorgan. Let me ask. The very reputable websites are 
playing ball and making money off of this scam. Maybe we ought 
to take a look at saying to the reputable websites: You know 
what, you allow that sort of thing to bounce up on your web 
page, you've got some liability here. You better be finding out 
who's using your web page, and you certainly better find out 
who you're providing financial information on your consumers 
to. You buy an airline ticket, Ms. Lindquist, to come out here 
and if that company that you bought the airline ticket from 
provides your credit card to somebody else, shame on them.
    Ms. Lindquist. Right.
    Senator Dorgan. They have some liability in my judgment. 
They may not now, but maybe we ought to find out if there ought 
not to be some way to do that.
    My time is about up, but let me ask an obvious question, 
Ms. Lindquist. You started by talking about your personal 
situation. Tell me about your daughter? Is she better as a 
result of your trip?
    Ms. Lindquist. She is doing a lot better because we went to 
Atlanta. She can walk with crutches short distances. She's very 
lucky, but she's still walking. She still wants to get as far 
as she can.
    Senator Dorgan. Good for her.
    Ms. Lindquist. Thank you.
    The Chairman. Thank you, Senator Dorgan.
    These are available if anybody wants them. These are the 
bad guys that you're talking about, some very big companies 
who--they like their $10 every month or their $20 every month, 
and the money can go up or down at the discretion of the 
scammer. So if you want a copy, we'll be glad to give it to 
you.
    Senator LeMieux.
    Senator LeMieux. Thank you, Mr. Chairman.
    Thank you, all the witnesses, for your testimony today. I 
wanted to talk about some legal issues, if I could, with 
Professor Marotta-Wurgler and Professor Cox. I, too, had the 
honor to serve in the Attorney General's Office down in Florida 
and go after unfair and deceptive trade practices with our 
Economic Crimes Unit. And our folks in that office, now under 
Bill McCollum, are going after these different vendors.
    But I want to ask you and follow up on what Senator Dorgan 
was saying, because it seems to me that an Attorney General 
could go after one of these so-called reputable companies who 
are enabling these scam artists to steal the information from 
unsuspecting consumers. So if an airline, for example, allows 
this company to operate on its website without proper 
disclosures and to unwittingly take this money from consumers 
on this annuity scam that happens month after month after 
month, couldn't an Attorney General go under FUDTPA, the Unfair 
and Deceptive Trade Practices Act, or some other statute and 
hold these folks accountable?
    Mr. Cox. Mr. Chairman, Senator LeMieux, yes. These cases 
are a little more difficult to prosecute under what's called 
UDTPA authority than you would think they are. They're just 
extremely costly. As you know, they don't shake a lot of money 
on Attorney Generals' offices and you have to make tough 
choices between going after all kinds of bad guys.
    But yes. And thank you. As an academic, I'll plug my 
article. That's one of the suggestions I make in the article, 
is to shift the focus away from the nature of the disclosures 
to the usage and the fact that nobody knows it and to go after 
these other entities. But frankly, I think the hearing you're 
doing here is probably more effective at doing that than 
anything else. But the answer to your question is yes and it 
should happen.
    Senator LeMieux. Professor?
    Ms. Marotta-Wurgler. My answer is similar to that of 
Professor Cox. I believe that going under UDAP might be more 
effective. Clearly there are disclosures. The disclosures are 
not effective. Some courts might say that in order to have 
meaningful assent, particularly in fine print contracts in 
consumer transactions, there has to be notice and assent must 
be unambiguous.
    I'm highly suspicious that, given the way the offers are 
presented, assent is obtained in an unambiguous fashion. I 
believe some courts would believe that assent was not 
meaningful and thus not valid. However, there might be other 
courts who might believe that the disclosure is in fact valid. 
That's why I think that going under UDAP might be more 
effective.
    That doesn't mean that attacking the appropriateness of 
disclosure part has no bite. It certainly does. It just might 
not be that certain.
    Senator LeMieux. I agree with you. If I was still in the 
AG's office I would love to go after this case, because it's 
not just deceptive; it's unfair. It makes no sense, Mr. 
Chairman, that you can be in a situation where you're buying 
movie tickets and someone signs you up for a product or alleged 
product or service that you never receive, and yet you get 
charged monthly for it. Just, it's outrageous. It's 
unconscionable.
    I think that the Chairman is right and that Senator 
Dorgan's right, that there should be--and I want to follow up 
on Professor Cox's comment. You should be prohibited from 
selling this financial information. Businesses who are working 
on the Internet should be no different than businesses who are 
working in regular commerce. If I went to 7-11 to buy a cup of 
coffee and used my credit card and they took my financial 
information and sold it to somebody else, who then started 
charging me $10 a month, we all recognize that that is 
outlandish and outrageous.
    It's no difference if you're on the Internet. We are now so 
accustomed to these etransactions, and as you said, no one 
reads these disclaimers. I don't read them, nobody reads them. 
And they know that when they put them out there. It's one thing 
to give you information on these disclaimers about what you can 
or cannot do when you're using this product or service. It's 
another thing to bury deep within that you are buying a 
service, which probably is not even a real service or a real 
product.
    So, I commend and support the comments that were made by my 
colleagues earlier that there should be a prohibition in the 
law that prevents it, unless all sorts of hoops are jumped 
through, all sorts of hoops which would show knowledge and 
consent by the customer, that your financial information be 
sold to somebody else.
    And shame on these companies, these reputable companies who 
are allowing this to occur on their websites.
    I want to thank again, Mr. France and Ms. Lindquist, for 
coming forward and spending your time and being involved here, 
because you're shining light on a problem that I assume and 
believe is probably affecting thousands of Americans, and but 
for your willingness to come forward we might not know about 
it. So, I appreciate you and I appreciate the staff that's done 
such a great job in bringing these issues forward. And thank 
you for all of our experts who've testified here today.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator. Thank you very much.
    Senator Udall.

                 STATEMENT OF HON. TOM UDALL, 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Udall. Thank you very much, Chairman Rockefeller. I 
want, in particular, to thank you for doing this investigation 
and doing this hearing today because I think it raises consumer 
awareness in such a way that really brings sunlight to this 
process.
    As one of our witnesses said earlier, you could go and do a 
lot of things, but a hearing like this I think brings it out to 
the public. In a way, I'm reminded of my days as State Attorney 
General, where we used to say when we worked on the consumer 
protection context a good business wants bad business out of 
business.
    As Senator LeMieux just said, any legitimate business 
that's teaming up with these kind of scam operators, I wouldn't 
call them a good business any more. The good businesses should 
be stepping forward, they should be distancing themselves from 
this kind of behavior, and they should be working with 
prosecutors, with State district attorneys, with attorneys 
general to get this done and to get people prosecuted and to 
say we're going to take this very seriously.
    I have a case in New Mexico that I believe Professor Meyer 
has highlighted. Here you have a Santa Fe woman who was bilked 
out of $700 after multiple visits to Vista Print's website to 
purchase materials for a real estate business. You describe it 
in your written testimony, that the confusing charges appeared 
on her credit card long after the original online purchases. 
She didn't have a clue what was going on.
    It goes to, Professor Cox, I think what you were saying, is 
the sufficiency of these disclosures. I want to ask any of the 
witnesses here. We ought to be putting people that do this in 
jail. These are the same kinds of operators that we put in jail 
in New Mexico for doing telemarketing fraud. I would ask the 
witnesses that have the expertise here to tell me, should the 
Federal Trade Commission update its existing rules for 
telemarketing and mail order sales to address these new online 
scams, or does the agency lack authority?
    I mean, how do we get it so that State prosecutors, 
attorneys general, others, can focus on this, focus on this 
area and make sure that the bad guys are being brought to 
justice?
    You can all jump in, but just don't do it at once.
    Mr. Cox. I'm a little embarrassed. I've been talking too 
much. But I will add one little thing, which is at 18, I was 
the youngest member of the Udall for President national 
campaign staff.
    Senator Udall. Well, thank you for that.
    He was also a prosecutor in his old age.
    Mr. Cox. And a nice gentleman.
    Just real quickly, the problem with the FTC and the problem 
with, the civil enforcement problem here, is that this thing 
is, to use technical language, rotten at its core. It's not a 
matter of separating out the good parties from the bad parties, 
which it usually is in a civil enforcement context. This type 
of practice just shouldn't be allowed. Inevitably--I've never 
seen it ever, in any of its many modalities, ever do anything 
but result in millions of charges, overwhelming, 98, 99 percent 
of people being charged for things they don't know. So, I think 
the problem is regulatory.
    Real quickly on the Federal Trade Commission, many of 
these, in fact--I'm not sure what the percentages are these 
days. It used to be--it's primarily run through banks, and of 
course, the Federal Trade Commission has limited jurisdiction 
there. So, it's going to be a difficult problem to sort out 
exactly where the regulatory authority needs to happen in order 
to control fundamentally this problem of selling access to 
consumer accounts by retailers and financial institutions.
    Senator Udall. Do either of you?
    Mr. Meyer. Yes. My view of it is that sort of the web 
introduces sort of--basically opens the door to a wide array of 
exploiting people's frailties and vulnerabilities in processing 
information. I think a lot of existing legislation was designed 
for a previous world and in some sense it significantly needs 
to be updated.
    I agree with Professor Cox that the structure of these 
businesses is such that the only way these companies make money 
is through open outright deception. The one thing I've noticed 
is that they're incredibly good psychologists. You basically 
get them to cut back on one area and they find incredibly 
ingenious ways of luring people into these programs through 
other means. They're constantly doing online experiments. 
Essentially, if they find out that people catch on to existing 
methods, then they use experiments to find new ones that work.
    Senator Udall. Well, the folks ought to know that Chairman 
Rockefeller and AGs and district attorneys are going to focus 
on them and bring this out into the sunlight and bring these 
people to justice.
    Thank you, Mr. Chairman, for focusing the Commerce 
Committee on this issue. This is a very important issue to 
consumers and I think you've done the American people a big 
favor in focusing on consumer protection in a new way that I 
don't think has been done in the Commerce Committee in a long 
time.
    Thank you.
    The Chairman. Thank you, Senator Udall, very much.
    Senator Klobuchar.

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you very much.
    Was it you, Professor Cox, that was on the Udall for 
President Committee?
    Mr. Cox. Yes, I'm ashamed to admit.
    Senator Klobuchar. I was distracting Senator Udall because 
I was trying to figure out if you then jumped ship on Humphrey 
or Mondale during that time. But it appears that you did not.
    Mr. Cox. Actually, I will say I ran ``get out the vote'' in 
Illinois for Jimmy Carter that year.
    Senator Klobuchar. OK, all right.
    Mr. Cox. Very poorly, you might add. I actually got notices 
of how bad the ``get out the vote'' was in Illinois that year.
    Senator Klobuchar. Well, all right. I wanted to welcome 
you, Professor Cox, and for the purpose of the record Professor 
Cox has been very active in a number of very important consumer 
issues and has helped me on some of the work we're doing with 
cell phones, which has now emerged again this week with the 
early termination fees charged by Verizon, and other things. 
So, I want to thank you for that.
    I know--were you working with Mike Hatch, the Attorney 
General? Did you file suit on similar things like this before?
    Mr. Cox. Senator Klobuchar, yes. I filed suit against 
Memberworks, which was the predecessor to Vertrue, against U.S. 
Bancorp, against--there was about five suits filed, including 
Fleet Mortgage Company and several. We tried to do exactly what 
you're saying, which is go up the chain and try to hold people 
responsible at the financial institution level. We had some 
success, but then this whole thing just sort of died away. This 
is just--I'm giddy that you're taking a look at this huge 
problem.
    Senator Klobuchar. So do you think that there are things 
that we can do? What would you suggest that we do, the easiest 
thing to make the current laws and regulations sufficient to 
curb the abuses online?
    Mr. Cox. Thank you, Senator Klobuchar. This really again 
has an actual easy solution, which rarely is the case when you 
confront these problems. Financial institutions and retailers 
shouldn't sell account numbers and access to accounts to third-
party sellers, period. There's just no reason, there's no 
legitimate commercial reason to allow that.
    I think in my testimony, as well as in a longer article, I 
explain some of the attempted justifications and why they're 
just almost pitiful. There's really not much of an argument 
here.
    Now, you get into a more tricky legislative problem when 
you get the problem of sellers retaining account information 
and then later re-using it.
    Senator Klobuchar. For their own purposes, you're talking 
about?
    Mr. Cox. Right. For instance, you might let a website that 
you order contact lenses from every quarter retain your 
information and then just regularly bill you with that 
information. But then that information also can be misused in 
ways that mimic this problem. So I think you can attack that 
problem, but that's a little trickier legislative drafting 
issue. I really do think that there is an obvious and clear 
solution to this and it's just to shut down selling access to 
consumers' accounts.
    Senator Klobuchar. Have there been any attempts by online 
retailers to try to stop this, to try to exert pressure on 
this? Or do you think it's just because they're giving access, 
so why would they do anything?
    Mr. Cox. The online retailers are actually the ones that 
are profiting from selling this. I will say that if you look at 
section 502 of the Gramm-Leach-Bliley Act and Title 5, the 
privacy provisions that were enacted, section 502[d] has 
something that pretty much on its face says you can't do--
financial institutions anyway, which is a big part of this 
problem, can't do that, they can't make those sales.
    But the OCC, along with other Federal banking regulators, 
were authorized to enact regulations and they instituted 
regulations that essentially completely circumvented what I 
thought was the intent of that legislation and allowed access 
to consumers' accounts as long as the actual sharing of the 
information was just encrypted. But then the membership club 
says, yes, they consented, and then they just decrypt the 
numbers. So it didn't effectively do anything, even though on 
its face it seems to really solve the problem.
    Senator Klobuchar. So what do you think--evidence also 
shows of these people--maybe you know this. The people that get 
sucked into one of these, do most of them eventually cancel 
them?
    Mr. Cox. You can sort out into certain subgroups exactly--
great question, Senator Klobuchar. You can sort out into 
subgroups who the people are. Some people will cancel during 
the 30-day trial period. But what's interesting, in a very 
large database sample, which is consistent with some of the 
information your staff report pulls forth, shows that, in fact, 
most people who wind up getting this, catch it after it's 
initially billed, not during the 30-day period, which is 
totally counterindicated if you thought that it really worked 
the way they said it did.
    So most people catch it in like the 60- and 90-day 
timeframe. A lot of people--some people, some people, don't 
catch it, particularly when it's billed annually. They will 
sometimes be billed 3, 4, 5 years. So when I would talk to 
consumers who had this problem, if it looked like an annual 
bill I would say, go back and look at your bill, your credit 
card or bank statement or mortgage account for the year before 
and the year before and the year before and find out how long 
this has happened to you.
    These companies in part live on these consumers who pay 
full revenue and then are automatically renewed.
    Senator Klobuchar. Right. I've gotten into some of these 
situations, those kind of customers. Then I go back and look at 
the Visa bill and try to fix it.
    But still then, eventually do most people cancel it?
    Mr. Cox. Of course, because nobody--essentially nobody 
really wants it.
    Senator Klobuchar. Right, they don't want it.
    Mr. Cox. When you boil it all down, at the end of the day I 
don't think--it's not a partisan issue. I just can't imagine 
why anyone--and I'm so glad to see that it's not that way--
anyone would say we want people to sell products where the 
people being charged have no idea they're being charged for it 
and don't want it. It's just absurd.
    Senator Klobuchar. Professor Meyer, and then I'm out of 
time here. Well, if you want to add.
    Mr. Meyer. I just wanted to add that they also, in terms of 
those multi-charges, that for people that don't cancel, 
essentially every year they increase the charge by a couple 
dollars. So essentially, they keep increasing the charge until 
finally you do catch it. And like Professor Cox said, it could 
be 3, 5 years before some people find out.
    The Chairman. So there's an art form to seeing how far you 
can raise it without getting people too suspicious.
    Senator Nelson.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Thank you, Mr. Chairman.
    Mr. France, I'm sorry you had to go through what you went 
through just to get back your money, not even to speak of all 
of the trauma and time and so forth that you had to go through.
    Mr. France. Thank you, Senator.
    Senator Nelson. But you are an example of what's happening 
with this explosion of technology. We have people that are now, 
instead of using a crowbar to steal, now use technological 
improvements, and they're doing the same thing. And they're 
doing it with a lot of deception, as the Chairman's hearing has 
pointed out.
    This Committee has been handling a lot of other things 
called ``phishing'' with a p-h and ``pharming'' with a p-h, and 
spoofing, which is another one. We just had it in Florida, a 
spoofing case. That's when you look on your cell phone and you 
see the number that's calling you. Well, if you alter that 
number to make it appear like you're looking--what happened to 
this lady, a single woman, and suddenly she's getting a call 
from her own residence. Of course, somebody was doing this just 
to play a prank on her. Well, the lady's absolutely petrified. 
She thinks somebody's in her house.
    Or one of the worst ones is that they call 911 masquerading 
at a certain number, home, that there's a burglary going on. 
911 dispatches the SWAT team, and you can imagine what mayhem 
might happen on an unsuspecting household with the police 
suddenly breaking in.
    This is what technology has gotten us to and this is what 
we've got to change. So thank you for sharing your story with 
us, Mr. France.
    Mr. France. You're welcome. Thank you for having me.
    Senator Nelson. We're going to try to do something about 
it, and thanks to you, Mr. Chairman.
    The Chairman. Thank you, Senator Nelson, very much.
    I would point out again that this is not just a few people 
we're talking about. At any given point, I think the fact is 
that there are about 4 million people who are being scammed. 
And over--we have comments here from people in 2003, 2002. Over 
the years, we're talking about tens and tens of millions of 
people. So the amount may be small, but the amount is not small 
to those who are struggling to get by. You made, Ms. Lindquist, 
that point very, very well, as did you, Mr. France. Ten 
dollars, $19.95, can put you in bankruptcy, can have people all 
over you, can add to whatever other traumas are already taking 
place in your life.
    A question for our experts. There are thousands and 
thousands of businesses out there on the Internet trying to 
sell us their goods and services. They have to convince us that 
their product is good if they want us to purchase from them and 
stay with them and to be seen, from our point of view, as a 
trustworthy company.
    Then only after they've convinced us that their product is 
trustworthy, they are trustworthy, and their product is worth 
it, do we then pull out our credit cards and enter the 16 
digits to complete the purchase. In fact, according to Visa's, 
new to me, rules for merchants, to complete a valid online 
purchase customers must type in their billing information, 
their 16-digit full credit card number, and their digit 
security code, called CVV-2.
    So here's my question to any of the three of you. If 
anybody else can charge credit cards only after consumers have 
entered their full credit card information, how is it possible 
that those companies--Affinion, Vertrue, Webloyalty, et 
cetera--can charge millions of shoppers who have never given 
them their credit card numbers?
    Ms. Marotta-Wurgler. They can't and they shouldn't. Their 
argument is that the selected vendors disclose or demand 
authorization of this by the consumers by seeking authorization 
of automatic transfers of payment information in their privacy 
policies. If you go to the privacy policy--which nobody reads, 
by the way--of Fandango or other businesses, they actually say 
we're protecting all sorts of information, but you're also 
authorizing us to transfer your payment or personally 
identifiable information to some selected partners.
    So the authorization stems from this type of contract, 
which is, I should mention, unenforceable because the assent is 
not unambiguous enough. It would thus seem to me that there is 
no reasonable way in which this would be an enforceable--I'm 
sorry--a legal way of transferring payment information, without 
the consumer ever entering the numbers his or herself. Of 
course, it has been, but theoretically I don't think it should 
be.
    Mr. Meyer. I think the other related part of that is the 
question of how consumers suddenly find themselves having 
agreed to the transfer of this information. I think the answer 
is that in many circumstances consumers are making these 
decisions very quickly using automated processes that they're 
not really aware of, such that in many cases they think they're 
still in the original site. They think in many cases what 
they're being part of is the original purchase process of the 
original site.
    I should say that, for Mr. France, I actually was taken in 
by the Intelius site as well. What happened there was is you go 
to the site and you think you're getting some information and 
there's a little part where you have to pay a dollar on a 
credit card--to get the information. You then click a red 
button that says ``Give me my information'' and when you click 
it, you are not given the information, but suddenly you're at a 
new page, and you're wondering, ``where's my information''? 
Then you're looking around for a button to click to get the 
information and there's a red button at the bottom that says 
``Show my report.'' And you click on the report, and as soon as 
you've done that, you've become a member of this program.
    You would have no awareness whatsoever as to what you had 
agreed to do.
    The Chairman. You said, Professor Cox, in your testimony 
that this membership club industry, quote, ``would cease to 
exist almost overnight'' if it had to sell its products like 
every other retailer. Can you explain that?
    Mr. Cox. Thank you, Mr. Chairman. If nobody is aware that 
they're actually, quote, ``buying'' their product, that rather 
suggests that you're going to have a problem actually selling 
your product, if you have to convince people to pay you the 
money that you're demanding for the service.
    After 10 years of observing this, I have no question that 
if they had to sell this in a legitimate way that these 
companies would not exist.
    The Chairman. My time is out. Before I go to Senator 
LeMieux, one of the things I regret about this hearing actually 
is the lack of focus on the evilness and lethality of fine 
print, of small print; that if you can put something in in 
small print and you know--I mean, it's like you take a 
prescription out of a brown paper bag and you take the little 
bottle out and then there's this paper which you immediately 
throw in because you can't read it, or you would have to set 
aside an evening to read it. I mean, it's so phoney, and yet 
it's a flat-out practice that we allow to continue.
    Senator LeMieux.
    Senator LeMieux. Again, Mr. Chairman, thank you for holding 
this hearing.
    I just have one final question for our experts. That is, is 
there anything that we did not talk about today that you would 
offer as suggestions to how to best combat this fraud? We can 
start with Professor Meyer and go down, and then maybe we'll 
finish up with our citizen consumers and see if there's 
anything else they think of which would be a good way to 
prevent this fraud from happening to other unsuspecting 
Americans.
    Mr. Meyer. Sure. Well, some of this had been mentioned 
before, but one that, I think, is really important is that if 
you have a handoff from one site to the next, the consumer 
really needs to know that they are no longer dealing with the 
original merchant that they have. As an example, I have this 
figure over here on the right. This was a case where a customer 
was at a Vista Print site buying online labels, and this is 
sort of the site they're immediately taken to, and throughout 
the site there is all these references to the fact that it's 
Vista Print and it's Vista Print thanking you and Vista Print 
everywhere.
    And only if you look at the tiny fine print at the very 
bottom, do you find out that this is actually a site maintained 
by a firm that has nothing to do with Vista Print, and that 
they have no connection with any other merchants that are named 
on the site.
    One of the reasons why this happens is that customers are 
lured into not thinking very carefully and making decisions 
very quickly. Whatever could be done to sharpen customers' 
antennas to alert them that they are no longer in a safe zone--
that they are at a new site where they have to be wary and 
attend to the fine print, then that would be one small step.
    Senator LeMieux. They're trading off the credible brand.
    Mr. Meyer. Yes, absolutely. And there's no reason when you 
look at this to think that there'd be any reason for--that you 
couldn't totally trust whatever offers they're providing.
    Ms. Marotta-Wurgler. I guess what I'd like to highlight is 
the importance of preserving online norms. The reason why 
people don't have to delve into the fine print is because they 
know that with certain steps there are expected consequences, 
particularly for financial liability. If you enter your credit 
card information, you expect to be liable for something. If you 
enter e-mail information, you expect to get an e-mail. So 
that's extremely important. Otherwise, these trusted online 
markets will be seriously damaged and people might be reluctant 
to enter online transactions.
    The second point I'd like to make is that disclosures in 
the form of fine print are terribly ineffective at alerting 
consumers. Much of our current law focuses on the idea of 
disclosure, that as long as you disclose things in fine print, 
it's fine because consumers know what they're getting into and 
so they're actually assenting to the transaction that's being 
described in the fine print.
    Research after research, studies after studies, have shown 
that this is not the case. This is not the way consumers 
behave. So, I'd like to highlight the importance that 
disclosure is really not that effective into duping consumers 
into these types of transactions.
    Mr. Cox. Senator LeMieux, I'd just like to thank you 
because I always try to teach my students the value of the 
``Anything else'' question. But I think I've been heard today.
    Senator LeMieux. Mr. France, anything else that you think 
that we need to be aware of that might be helpful in preventing 
this fraud from happening in the future?
    Mr. France. I think one of the biggest steps that could be 
done is, like had been mentioned earlier, is to actually hold 
these reputable, or at one time reputable, companies 
responsible for allowing these other sites to come in and do 
that. Essentially, they're one and the same. They may not be 
taking as much money, but by allowing these other companies to 
come in they're just as guilty. If we can discourage them from 
allowing these companies in, then I think that we'll see a lot 
less of this problem in the future.
    Senator LeMieux. Thank you.
    Ms. Lindquist?
    Ms. Lindquist. I agree with Mr. France that the companies, 
the reputable websites, they need to be held more responsible 
for who they're affiliated with.
    Senator LeMieux. Thank you again, Mr. Chairman. I think 
we've gotten some good direction from our witnesses today. 
Thank you again for holding this hearing.
    The Chairman. I agree with you, Senator LeMieux, and thank 
you.
    Before--we're going to have a vote on a very good judge who 
turned out to be controversial, but isn't, in about 10 minutes, 
so we need to close. I wanted to ask one question and put 
something in the record. I ask and give unanimous consent to 
place several items in the record of today's hearing. One is a 
copy of the Commerce Committee staff report called ``Aggressive 
Sales Tactics on the Internet,'' which was circulated to 
members yesterday afternoon.
    The prepared statement of Robert McKenna, the Attorney 
General of Washington.
    The prepared statement of Professor Benjamin Edelman of the 
Harvard Business School.
    A letter and other material sent to the Committee by 
Richard Fernandes, the CEO of Webloyalty.
    [The information referred to follows:]

Committee on Commerce, Science, and Transportation--Office of Oversight 
                   and Investigations--Majority Staff
        Staff Report for Chairman Rockefeller--November 16, 2009
Aggressive Sales Tactics on the Internet and Their Impact on American 
        Consumers
Executive Summary
    In May 2009, Chairman Rockefeller launched an investigation into a 
set of controversial e-commerce business practices that have generated 
high volumes of consumer complaints. Since that time, Commerce 
Committee staff has been investigating three Connecticut-based direct 
marketing companies--Affinion, Vertrue, and Webloyalty--as well as the 
hundreds of online websites and retailers that partner with these three 
companies to sell club memberships to online shoppers. Although this 
investigation is not yet complete, it is clear at this point that these 
three companies use highly aggressive sales tactics to charge millions 
of American consumers for services the consumers do not want and do not 
understand they have purchased.
Controversial Sales Practices Migrate to the Internet
    Over the past fifteen years, the Internet has grown into an 
important commercial channel for American consumers and businesses. 
More than half of all American adults have either made an online 
purchase or an online travel reservation, and in the first half of 
2009, e-commerce revenue accounted for more than $60 billion of U.S. 
retail sales.
    The rapid growth of e-commerce has promoted business innovation, 
but it has also attracted direct marketing businesses that use 
aggressive sales tactics against online shoppers. These tactics involve 
selling unfamiliar membership programs to consumers who are in the 
process of purchasing familiar products offered by trusted websites. 
Many of these controversial practices are new to e-commerce, but are 
well-known in other commercial channels, especially in direct mail and 
telemarketing, and have been the subject of numerous legal actions. The 
three direct marketing companies that are the subject of this 
investigation--Affinion, Vertrue, and Webloyalty--are all operated by 
management teams that have years of experience in employing these 
aggressive sales tactics against consumers.
    The three companies gain access to online consumers by entering 
into financial agreements with reputable online websites and retailers. 
In exchange for ``bounties'' and other payments, reputable on-line 
retailers agree to let Affinion, Vertrue, and Webloyalty sell club 
memberships to consumers as they are in the process of buying movie 
tickets, plane tickets, or other online goods and services. The sales 
tactics used by these three companies exploit consumers' expectations 
about the online ``checkout'' process.
    With the cooperation of their online ``partners,'' the three 
companies insert their sales offers into the ``post-transaction'' phase 
of an online purchase, after consumers have made a purchase but before 
they have completed the sale confirmation process. These offers 
generally promise cash back rewards and appear to be related to the 
transaction the consumer is in the process of completing. Misleading 
``Yes'' and ``Continue'' buttons cause consumers to reasonably think 
they are completing the original transaction, rather than entering into 
a new, ongoing financial relationship with a membership club operated 
by Affinion, Vertrue, or Webloyalty.
    Even more misleading and confusing is the ``data pass'' process 
Affinion, Vertrue, Webloyalty, and their partners use to automatically 
transfer consumers' credit or debit card information from the familiar 
web seller to the third-party membership club. Passing consumers' 
billing information directly to Affinion, Vertrue, or Webloyalty, 
without requiring consumers to re-enter it, deprives consumers of 
notice that they are entering a new, ongoing financial relationship 
with an unfamiliar company. After a 30-day ``free trial'' period, 
Affinion, Vertrue, or Webloyalty begin charging the consumer a monthly 
fee of $10-$20 until the consumer cancels the membership.
The Senate Commerce Committee Investigation
    The Committee opened this investigation because thousands of online 
consumers have complained to state attorneys general, the Better 
Business Bureau, and other consumer advocates that the enrollment 
process described above is misleading and deceptive. These consumers 
complain that they did not consent to sharing their billing information 
with a third party membership club. They also say they only learned 
they had been enrolled in one of these membership clubs after seeing a 
``mystery charge'' on their monthly credit card or checking account 
statement months after the purchase.
    These complaints suggest that the aggressive sales tactics of 
Affinion, Vertrue, Webloyalty, and their partners are harming large 
numbers of American consumers. They also suggest that these companies' 
tactics may be negatively affecting consumers' overall attitude toward 
online commerce.
    Since opening this investigation, Committee staff has collected and 
reviewed thousands of pages of documents produced by Affinion, Vertrue, 
and Webloyalty; interviewed dozens of Internet consumers who have 
complained about unknowingly and inadvertently enrolling in the 
programs offered by the three companies; interviewed employees of e-
retailers currently and formerly in partnerships with the three 
companies; and met with numerous e-commerce experts.
    Although it is not yet complete, the key findings of the Committee 
staff's investigation thus far are the following:

   Using aggressive sales tactics to enroll consumers in 
        unwanted membership clubs is a billion-dollar business. 
        Affinion, Vertrue, Webloyalty and their e-commerce partners 
        have earned over $1.4 billion in revenue by using aggressive 
        tactics to charge Internet shoppers for club membership 
        programs. Since 1999, Internet consumers have been enrolled 
        more than 35 million times in Affinion, Vertrue, and 
        Webloyalty's membership clubs. In June 2009, there were 4 
        million Internet consumers currently enrolled in these three 
        companies' membership programs.

   Hundreds of well-known websites and online retailers have 
        earned hundreds of millions of dollars employing aggressive 
        online sales tactics. More than 450 e-commerce websites and 
        retailers have partnered with Affinion, Vertrue, and Webloyalty 
        to employ aggressive sales tactics against their online 
        customers. Of the $1.4 billion in total revenue earned through 
        using these tactics, $792 million of this total was earned by 
        Affinion, Vertrue, and Webloyalty's e-commerce partners. 
        Eighty-eight e-commerce companies have earned more than $1 
        million through using these tactics, including 19 that have 
        made more than $10 million. Classmates.com has made more than 
        $70 million using these controversial practices.

   Affinion, Vertrue, and Webloyalty have knowingly charged 
        millions of consumers for services the consumers do not use and 
        are unaware they have purchased. Internal documents reviewed by 
        Committee staff show that Affinion, Vertrue, and Webloyalty 
        know that most of the ``members'' they acquire through their 
        aggressive online sales tactics do not understand they have 
        been enrolled in a program that charges their credit or debit 
        card on a recurring basis. Most consumers enrolled in the clubs 
        cancel their memberships when they discover the monthly charge 
        and never receive any benefit from their club membership. One 
        Webloyalty employee candidly commented in an e-mail that, ``at 
        least 90 percent of our members don't know anything about the 
        membership.''

   Affinion, Vertrue, and Webloyalty's customer service centers 
        are almost entirely dedicated to handling the large volume of 
        calls from angry and confused consumers requesting 
        cancellations. Affinion, Vertrue, and Webloyalty receive 
        millions of calls every year from angry, frustrated consumers 
        canceling their membership or asking questions about the charge 
        on their credit or debit card. One Webloyalty employee 
        acknowledged in an e-mail that most of its calls were ``from 
        members who are questioning charges or want to cancel their 
        membership,'' while a Vertrue employee had estimated that 
        ``cancellation calls represent approximately 98 percent of call 
        volume.'' The companies' internal manuals train their call 
        center representatives to answer questions such as, ``what is 
        this charge?'' or ``who are you?''

   E-Commerce companies know that their customers are being 
        harmed by the aggressive sales tactics of Affinion, Vertrue, 
        and Webloyalty. The e-commerce companies partnered with 
        Affinion, Vertrue, and Webloyalty understand that more 
        aggressive sales tactics lead to higher revenue. In the words 
        of one company official, ``to generate more revenue through 
        Webloyalty, it seems we must be more aggressive (and deceptive) 
        in our marketing techniques.'' Thousands of customers have 
        contacted the companies using words like ``fraud,'' 
        ``tricked,'' ``deceptive,'' ``misleading,'' 
        ``scam,''``deceitful,'' ``dishonest,'' ``betrayed,'' and 
        ``robbed'' to describe their experiences. This ``customer 
        noise'' has led a number of e-commerce partners to request a 
        more ``conservative'' approach or to end their relationships 
        with Affinion, Vertrue, or Webloyalty.
I. Background on Aggressive Online Sales Tactics
    In the past fifteen years, the Internet has rapidly grown from an 
entertaining diversion to an integral part of the daily life of 
hundreds of millions of Americans. By 2008, more than seventy percent 
of Americans were using the Internet on a regular basis for a variety 
of purposes, including online banking and shopping, and over half of 
all American adults had either made an online purchase or an online 
travel reservation.\1\ For the first two quarters of 2009, e-commerce 
revenue accounted for more than $60 billion of U.S. retail sales.\2\
---------------------------------------------------------------------------
    \1\ Pew Internet & American Life Project, Online Shopping: Internet 
Users Like the Convenience but Worry about the Security of Their 
Financial Information (Feb. 2008). In a 2009 survey, 59 percent of 
adult Americans said they had purchased products online and 52 percent 
had used the Internet to book travel reservations. Pew Internet & 
American Life Project, The Internet and the Recession (July 2009).
    \2\ U.S. Census Bureau, Estimated Quarterly U.S. Retail Sales 
(Adjusted): Total and E-Commerce (Aug. 17, 2009) (available at http://
www.census.gov/retail/mrts/www/data/pdf/09Q2.pdf).
---------------------------------------------------------------------------
    While these figures show that American consumers are increasingly 
taking advantage of the convenience and efficiency of Internet 
shopping, they continue to express concerns about the security of their 
personal information when they are shopping online. Large percentages 
of online consumers also report that they sometimes feel frustrated, 
overwhelmed, or confused by online shopping.\3\
---------------------------------------------------------------------------
    \3\ Pew Internet & American Life Project, Online Shopping: Internet 
Users Like the Convenience but Worry about the Security of Their 
Financial Information (Feb. 2008).
---------------------------------------------------------------------------
    One of the factors contributing to consumers' lingering unease 
about online shopping is the aggressive sales tactics that many 
companies are using against their customers. The tactics the Committee 
has focused on involve offering consumers unfamiliar services from 
unfamiliar third party companies as consumers are in the process of 
purchasing familiar products offered by trusted websites. The 
unfamiliar services offered are typically discount club memberships 
which charge a monthly fee between $9 and $20. A prominent feature of 
the post-transaction offers is up-front gifts, such as ``$10 Cash Back 
on Your Next Purchase!'' which is presented to consumers as if it is 
related to the websites where they have just made purchases.
    While these club membership offers are presented to online 
consumers in different ways, they all share the following elements:

        Post-Transaction Marketing: The third party offer comes as 
        online consumers are completing their purchases on familiar 
        retailers' websites. After consumers have completed inputting 
        their billing information into a ``check out'' purchase page on 
        familiar e-retailers' sites, but before they have completed 
        confirmation of the transaction, unfamiliar third party 
        companies will attempt to enroll consumers in membership clubs 
        offering discounts or other services. Due to the positioning of 
        these offers in the purchase process, they are commonly 
        referred to as ``post-transaction'' offers.

        Data Pass: Consumers do not have to enter their billing 
        information again to be enrolled in the clubs offered by the 
        third party. Internet consumers can usually accept the third 
        party post-transaction membership club offer without having to 
        type in their credit or debit card numbers again. As a result 
        of so-called ``data pass'' or ``card-on-file'' arrangements 
        between retailers and the third party companies, online 
        consumers' credit card or debit card account numbers can be 
        automatically transferred from the websites where the consumers 
        are shopping to the third party companies.

        Free-to-Pay Conversions: Consumers enrolled in the clubs are 
        automatically charged a monthly fee after a free trial period. 
        The membership programs offered by the third parties are 
        generally free for the first 30 days. This practice is also 
        known as ``free-to-pay conversion.'' Online consumers will be 
        charged on a monthly basis after the 30-day period unless they 
        actively opt out of the program, commonly referred to as a 
        ``negative option.''

    The combination of these aggressive online sales practices has 
caused thousands of consumers to complain to state attorneys general, 
the Better Business Bureau, and other consumer advocates that 
unfamiliar companies have charged them monthly fees for services they 
did not want and were unaware they had purchased.
A. Post-Transaction Marketing
    Online consumers shopping at websites that do not use the 
controversial tactics described above typically progress through 
several standard pages as they make a purchase. Once consumers select 
their merchandise and click the ``Buy'' or ``Add to Shopping Cart'' 
button, they typically have four remaining steps: (1) proceeding to 
checkout by clicking another link usually labeled ``Proceed to 
Checkout''; (2) entering their shipping, billing, and credit card 
information in data fields on the checkout page; (3) clicking a button 
labeled, ``Accept'' or ``Confirm'' to finish the transaction; and (4) 
obtaining a receipt or order number confirming the purchase on the 
confirmation page.\4\
---------------------------------------------------------------------------
    \4\ David Pogue and J.D. Biersdorfer, The Internet: The Missing 
Manual (2006).
---------------------------------------------------------------------------
    In a manual for Internet users, the confirmation process was 
summarized for novice users in the following manner:

        Once you submit your credit card billing and shipping 
        information, the site processes the transaction just like the 
        clerk at Macy's who swipes your MasterCard at the register. In 
        a few seconds, you should see a receipt, complete with order 
        number and purchase summary. You can print this out for your 
        records.\5\
---------------------------------------------------------------------------
    \5\ Id.

    E-commerce companies engaged in aggressive third party post-
transaction marketing add additional steps to this process, making it 
much less like ``the clerk at Macy's'' referenced in the manual. They 
make it less akin to a ``brick and mortar'' purchase by using: 
``interstitial'' sales offer pages, which appear between the checkout 
page and the confirmation page; ``pop up'' windows which appear on top 
of the confirmation page; and hyperlinks or ``banners'' that are 
included directly on the confirmation page itself.
    On the ``interstitial'' page, third party e-commerce companies 
offer ``$10 Cash Back on This Purchase'' or ``$10 Cash Back on Your 
Next Purchase'' combined with an offer to purchase a club membership. 
The offer to purchase a discount club membership is secondary in 
placement to the ``$10 Cash Back on this Purchase'' and is typically 
located in the page's fine print. This ``interstitial'' page presents 
consumers with an offer they must accept or reject before they can 
reach the page that provides confirmation and the order number for the 
original purchase. (See Exhibits 1 and 2).




    For customers to reach the confirmation page, they must either 
accept the offer to join a membership club offered by the third party 
sellers (by clicking a large, colorful ``Yes'' button) or click a much 
less conspicuous ``No Thank You'' hyperlink. In general, the name of 
the familiar website with which the consumer has just completed a 
transaction is displayed on this page, making it more difficult for the 
consumer to discern that this ``interstitial'' page is actually owned 
and operated by the third party company, not the website on which the 
consumer has been shopping.
    E-commerce companies also use ``pop up'' windows that appear on top 
of, but do not totally conceal, the consumer's confirmation page. These 
pages look very similar to the enrollment offers presented via 
``interstitial'' pages, but they do not require the customer to accept 
or reject the offer in order to proceed to the confirmation page.
    A less intrusive post-transaction marketing technique also used by 
e-commerce companies is placing a hyperlink to an enrollment offer 
(``banner'') on the confirmation page, which can be accessed via 
clicking a button labeled, ``Continue.'' A ``Continue'' button is used 
despite the fact that the customer has completed the transaction at 
this point. An example of a ``Continue'' button displayed on a 
confirmation page is provided here.


B. Data Pass and ``Preacquired Account'' Marketing
    A central element of the aggressive online tactics the Committee 
staff has been investigating is that a consumer can be signed up for a 
third party membership program without entering his or her credit card 
information. Instead of requiring the consumer to enter this billing 
information a second time to confirm acceptance of the new offer, the 
retailer will pass the consumer's credit card and billing information 
to the third party once the consumer has provided information the third 
party company regards as ``proof of enrollment,'' such as an e-mail 
address.\6\
---------------------------------------------------------------------------
    \6\ In August 2009, Webloyalty's attorney informed the Committee 
that ``in response to its own analysis and testing over time, as well 
as in connection with resolution of class action litigation and 
concerns raised by the Committee's inquiry and state regulators, [that] 
. . . as of August 1, 2009 . . . current Webloyalty enrollment pages 
require that consumers re-enter the last four digits of their credit 
card or debit card before they are enrolled.'' Letter from Jane 
Sherburne to Senator John D. Rockefeller IV (Aug. 31, 2009). On 
November 13, 2009, Affinion announced that, in ``responding to concerns 
raised by the Senate Commerce Committee'', it would now be ``[r]equring 
that the consumer gives--at a minimum--the last four digits of their 
account or credit card number for every online transaction involving 
pre-acquired account information and a free to pay conversion.'' 
Affinion Group, Affinion Unveils Enhanced Online Marketing Standards 
(Nov. 13, 2009). On November 16, 2009, Vertrue also announced it ``will 
obtain from the consumer the last four digits (at a minimum) of their 
payment account as further acknowledgement of the offer'' to address 
``concerns specifically identified by the U.S. Senate Committee on 
Commerce, Science and Transportation with regard to certain post-
transaction marketing practices on the Internet.'' Adaptive Marketing 
LLC, Adaptive Marketing LLC Calls for Industry-Wide Internet Marketing 
Standards (Nov. 16, 2009).
---------------------------------------------------------------------------
    This ``data pass'' or ``card on file'' process--where a third-party 
company obtains a consumer's billing information not directly from the 
consumer, but from a website where the consumer has just made a 
purchase--is a well-known and controversial practice in the direct mail 
and telemarketing industries. In these retail channels, it is generally 
known as ``preacquired account'' marketing.
    In the telemarketing setting, ``preacquired account information'' 
has been defined by the Federal Trade Commission (FTC) as ``any 
information that enables a seller or telemarketer to cause a charge to 
be placed against a customer's or donor's account without obtaining the 
account number directly from the customer or donor during the 
telemarketing transaction pursuant to which the account will be 
charged.'' \7\
---------------------------------------------------------------------------
    \7\ Federal Trade Commission, Telemarketing Sales Rule, 68 Fed. 
Reg. 4580, 4595 (Jan. 29, 2003) (final amended rule).
---------------------------------------------------------------------------
    Preacquired account marketing conducted over the telephone, like 
``data pass'' on the Internet, has caused consumers to complain that 
they unknowingly and inadvertently enrolled in membership programs. Due 
to the problems inherent in preacquired account telemarketing, the FTC 
chose to regulate the practice in 2003 after concluding that:

        The record makes clear, in fact, that it is the very act of 
        pulling out a wallet and providing an account number that 
        consumers generally equate with consenting to make a purchase, 
        and that this is the most reliable means of ensuring that a 
        consumer has indeed consented to a transaction . . . [T]he 
        Commission still believes that whenever preacquired account 
        information enables a seller or telemarketer to cause charges 
        to be billed to a consumer's account without the necessity of 
        persuading the consumer to demonstrate his or her consent by 
        divulging his or her account number, the customary dynamic of 
        offer and acceptance is inverted.\8\
---------------------------------------------------------------------------
    \8\ Id. at 4619.
---------------------------------------------------------------------------
    In recommending regulations for preacquired account telemarketing 
to the FTC in 2000, the National Association of Attorneys General told 
the FTC that the use of preacquired account information presents 
``inherent opportunities for abuse and deception.'' \9\ Requiring a 
consumer to re-enter his or her account information ``is a readily 
recognizable means for a consumer to signal assent to a deal'' and 
gives a consumer final control over purchase decisions. The Attorneys 
General noted:
---------------------------------------------------------------------------
    \9\ Letter and Comments from the National Associations of Attorney 
Generals (NAAG) to Donald Clark, Secretary Federal Trade Commission, 
FTC File No. P994414 (May 30, 2000).

        The telemarketer with a pre-acquired account turns this process 
        on its head. The pre-acquired account telemarketer not only 
        establishes the method by which the consumer will provide 
        consent, but also decides whether the consumer actually 
        consented.\10\
---------------------------------------------------------------------------
    \10\ Id.

    The online data pass process that is the subject of the Committee's 
investigation presents exactly the same informational problems that 
concerned state and Federal officials examining the telemarketing 
industry. As Harvard Business School Professor Benjamin Edelman 
---------------------------------------------------------------------------
recently told the Committee:

        Consumers rely on the process of providing a credit card number 
        as a barrier to unexpected charges. Users rightly expect that 
        by clicking from site to site, button to button, they do not 
        incur financial obligations. This expectation is part of what 
        makes the web fun, flexible, and low-risk: Users believe they 
        cannot incur financial obligations except by typing their 
        credit card numbers, and users expect to be able to cancel an 
        unwanted transaction if a site requests a credit card number 
        that a user does not care to provide.\11\
---------------------------------------------------------------------------
    \11\ Prepared Statement of Professor Benjamin Edelman to the U.S. 
Senate Committee on Commerce, Science, and Transportation (Nov. 2009).
---------------------------------------------------------------------------
C. ``Free-to-Pay Conversions''
    The e-commerce marketing practices being examined by the Committee 
also employ a marketing technique known as ``free-to-pay'' conversion, 
which enrolls consumers in a membership program for free for a period 
of time (usually 30 days) before their credit card or checking account 
is charged. In the course of proposing amendments to the Telemarketing 
Sales Rule, the FTC explained that consumers are often ``confused about 
their obligations when a product or services is offered to them for a 
trial period at no cost.'' \12\
---------------------------------------------------------------------------
    \12\ Federal Trade Commission, Telemarketing Sales Rule, 67 Fed. 
Reg. 4494, 4501 (Jan. 30, 2002) (proposed amended rule).
---------------------------------------------------------------------------
    Citing testimony submitted by state attorneys general, the FTC 
explained that free trial offers are presented to consumers as ``low 
involvement marketing decisions.'' Because consumers often do not 
understand that the marketers already have their billing information, 
consumers ``mistakenly believe they must take some action before they 
will be charged.'' At the end of the free trial period, the marketer 
starts billing the consumer, ``even when consumers have taken no 
additional steps to assent to a purchase or authorize the charge, and 
have never provided any billing information themselves.'' \13\
---------------------------------------------------------------------------
    \13\ Id.
---------------------------------------------------------------------------
    Based upon this evidence, the FTC concluded that, ``in any 
transaction involving both preacquired account information and a ``free 
to pay conversion,' the evidence of abuse is so clear and abundant that 
comprehensive requirements for obtaining express informed consent in 
such transactions are warranted.'' \14\
---------------------------------------------------------------------------
    \14\ Federal Trade Commission, Telemarketing Sales Rule, 68 Fed. 
Reg. 4580, 4621 (Jan. 29, 2003) (final amended rule).
---------------------------------------------------------------------------
D. Consumers' Experience of Aggressive Online Sales Tactics
    Over the past few months, Committee staff has reviewed thousands of 
complaints written by consumers who claim they were unknowingly 
enrolled in membership clubs while they were shopping online. Committee 
staff has spoken with many of these consumers about their experiences. 
These consumers regularly cite the placement of the third party offers, 
the data pass process, and delayed charges as the sources of their 
confusion and dissatisfaction.
    Committee staff believes that these consumer experiences are 
typical. Most consumers, even very web savvy consumers, do not clearly 
understand the third party companies' membership club offers and do not 
understand that they can be enrolled without entering their credit card 
numbers. The cases discussed below provide several representative 
examples of how consumers experience this process.
    Kari Glennon--In May 2009, Kari Glennon, a resident of Bellingham, 
Washington, realized that she had been signed up for a membership club 
called ``Shopping Essentials'' while buying a gift certificate on the 
Restaurants.com website in October 2008. She wrote Vertrue, the 
operator of the ``Shopping Essentials'' club, to ask for a refund and 
to let them know that ``I am being charged a monthly fee of $14.95 for 
a membership that I was unaware of.'' In her letter, she describes how 
she called Vertrue and discovered she was a Shopping Essentials club 
member.

        When I called into your organization on 5/26/09 to inquire 
        about the charges to my credit card, I spoke with Sherry . . . 
        and her supervisor Jamie . . . I was told by Jamie during my 
        conversation that there was a banner on that site and that if I 
        clicked it and entered my e-mail address, I was automatically a 
        member. Becoming an on-line member to an organization seems 
        obvious when entering an e-mail address, but paying for it is 
        another matter. I did not give my credit information for the 
        purpose of signing up for a membership. I gave my credit card 
        information to Restaurants.com for a purchase of a gift 
        certificate only. If my credit card information was used for 
        more than that purpose, it was done so without my knowledge or 
        authorization.\15\
---------------------------------------------------------------------------
    \15\ Letter from Kari Glennon to Shopping Essentials (May 26, 2009) 
(Vertrue Doc. 18957).

---------------------------------------------------------------------------
    Ms. Glennon concluded her letter with the following comment:

        As someone who has been in the professional marketing field for 
        over 16 years, I find it unfortunate that situations like this 
        still arise. Whenever you have a product to market, intangible 
        or otherwise, it should be made clear to the consumer what the 
        process is and what they are purchasing. Anything else creates 
        confusion and situations like the one I am writing in 
        about.\16\
---------------------------------------------------------------------------
    \16\ Id.

    Chris Steffen--In April 2007, a frustrated consumer from Los 
Angeles, California, named Chris Steffen wrote the following complaint 
---------------------------------------------------------------------------
to Movietickets.com.

        I'm not sure how or when this happened and I'm sure part of it 
        is oversight or my own fault. But somehow through the 
        purchasing of movie tickets through your site I was signed up 
        for Reservation Rewards and charged 10 dollars a month 
        membership for multiple months. This means that when I ordered 
        tickets through your service, the cost to me was not only the 
        price of the tickets, but the inadvertent cost of being 
        enrolled in a service plan I was not aware of.\17\
---------------------------------------------------------------------------
    \17\ E-mail from Chris Steffen to Movietickets.com employee (Apr. 
11, 2007) (Webloyalty Doc. 50825-26).

    Mr. Steffen also wrote a complaint to Webloyalty, the operator of 
the Reservation Rewards club. Addressing his complaint to ``Joni,'' the 
Webloyalty representative he had communicated with, Mr. Steffen 
---------------------------------------------------------------------------
expressed his frustration.

        Imagine yourself, Joni, getting on a computer to book movie 
        tickets for the next big show and you're in a hurry because you 
        and your friends decided to go at the last minute. You want to 
        make sure you order your seats in time so you can go have 
        dinner before the show. Then, at first glance you get what 
        looks like a coupon for 10 bucks off your next purchase of 
        tickets. You don't read the fine print because you're in a 
        hurry and next thing you know you're signed up for some 
        worthless service.\18\
---------------------------------------------------------------------------
    \18\ E-mail from Chris Steffen to Webloyalty employee (Apr. 12, 
2007) (Webloyalty Doc. 50827).

    David Murray--In February 2008, a Massachusetts hospital executive 
named David Murray realized he had been enrolled in Affinion's 
``LiveWell'' membership club while shopping at 1-800-Flowers.com 
several months earlier. Mr. Murray wrote an e-mail to 1-800-Flowers.com 
expressing his concerns about the LiveWell enrollment process and 
asking the company, ``Do you really think what you did was morally 
right?'' One of his criticisms focused on the confusion surrounding the 
---------------------------------------------------------------------------
origin of the discount offer. He wrote:

        The Order Confirmation states the following: ``Your purchase is 
        complete. Click here to claim $15.00 Cash Back on this 
        purchase!'' This is not true and is deceitful. You aren't 
        offering $15.00 back unless the client signs up to this company 
        called ``LiveWell.'' And even then, you're not offering it--
        LiveWell is. Who in the hell is LiveWell? It doesn't say on the 
        e-mail. So there is no $15.00 to be had from 1800Flowers at 
        all.\19\
---------------------------------------------------------------------------
    \19\ E-mail from David Murray to 1-800-Flowers employee (Feb. 4, 
2008) (Affinion Doc. AFSE-4-5078-79).

    Mr. Murray also complained that the data pass process made it 
---------------------------------------------------------------------------
unclear that he was actually making a purchase.

        At no time, during this process, is there an opportunity to 
        keep this from happening. There is no warning, no interim 
        message telling me what I'm actually about to do. Had there 
        been that opportunity, I readily concede that it was my fault 
        for clicking. But there wasn't that opportunity. As you can 
        see, the consumer (in this case, me) is automatically enrolled 
        and you have to call to cancel within a month of the ``free 
        membership'' to keep from getting charged $11.99 per month.\20\
---------------------------------------------------------------------------
    \20\ Id.

    Finally, Mr. Murray expressed his anger that 1-800-Flowers.com, a 
company with which his earlier experiences were ``nothing but 
---------------------------------------------------------------------------
positive,'' would allow him to be enrolled in the LiveWell club.

        What I feel terrible about is that your Customer Service is 
        doing this to unsophisticated consumers who don't know what 
        steps they should take when a corporation does that to them, 
        and how many people are signed up to this company and are going 
        to get charged for something they didn't want? Worse, is this 
        really something 1800Flowers wanted to be associated with? It 
        was just a mean thing to do to someone. I have an old saying. 
        It may be legal, but is it moral? Well, I don't think it's 
        legal. And I know it wasn't moral. Don't be immoral.\21\
---------------------------------------------------------------------------
    \21\ Id.
---------------------------------------------------------------------------
II. Background on Affinion, Vertrue, and Webloyalty
    Affinion, Vertrue, and Webloyalty--the three leading companies 
engaged in the aggressive online sales tactics described above--are all 
located in or around Norwalk, Connecticut. All three companies are 
managed by executives who started their careers at CompU-Card (CUC), a 
Connecticut company that pioneered the marketing of discount membership 
clubs.
    All three companies have also been the targets of law enforcement 
investigations and private lawsuits stemming from their use of 
aggressive marketing practices. Affinion and Vertrue have used direct 
mail, telemarketing, and e-commerce channels, while Webloyalty has used 
only the e-commerce channel, to enroll members and charge their credit 
cards or checking accounts. Committee staff has compiled a list of 
nearly 100 different clubs and services these three companies sell or 
have sold to consumers (See Exhibit 3).


A. Affinion/Trilegiant/Cendant/CUC
    Affinion is a successor corporation to CUC which was started in 
1973 and sold memberships to various auto, dining, shopping and travel 
discount clubs. In 1997, CUC merged with HFS Incorporated and the new 
company rebranded itself as Cendant.\22\
---------------------------------------------------------------------------
    \22\ Affinion Group, Inc., Form 10-K Annual Report for Period 
Ending Dec. 31, 2008 (Feb. 27, 2009).
---------------------------------------------------------------------------
    Shortly after the merger, Cendant announced that CUC had falsely 
inflated the number of club memberships it had sold, thereby 
overstating its 1995-97 earnings by at least half-a-billion 
dollars.\23\ A later investigation by the Securities and Exchange 
Commission determined that CUC had been filing false financial 
statements since 1985, and that the company's misstatement of its 
income ``was of historic proportions.'' \24\ CUC's founder and former 
chief executive, Walter A. Forbes, was criminally prosecuted and 
sentenced to more than 12 years in Federal prison. CUC's former Vice 
Chairman, E. Kirk Shelton, was also prosecuted and sentenced to 10 
years in Federal prison. Both CUC executives were ordered to pay $3.2 
billion in restitution.\25\
---------------------------------------------------------------------------
    \23\ How Two Whistle-Blowers Sparked Fraud Probe That Crushed 
Cendant, Wall Street Journal (Aug. 13, 1998).
    \24\ Securities and Exchange Commission, Order Instituting Public 
Administrative Proceedings Pursuant to Section 21C of the Securities 
Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist 
Order, In the Matter of Cendant Corporation, Respondent (File No. 3-
10225) (June 14, 2000).
    \25\ U.S. Department of Justice, U.S. Attorney, District of New 
Jersey, Former Cendant Chairman Walter Forbes Sentenced to 151 Months 
in Federal Prison for Lead Role in Massive Accounting Fraud (Jan. 17, 
2007).
---------------------------------------------------------------------------
    In 2001, Cendant rebranded its membership club unit as 
``Trilegiant'' and, in 2005, sold it to Apollo Management, a New York-
based private-equity group, which in turn renamed the company 
Affinion.\26\ Trilegiant/Affinion has been the subject of numerous law 
enforcement actions and private lawsuits in connection with its 
aggressive marketing practices.
---------------------------------------------------------------------------
    \26\ Cendant Scions Navigate Credit Crunch, Wall Street Journal 
(Sept. 16, 2009).
---------------------------------------------------------------------------
    On March 18, 2005, for example, Florida Attorney General Charlie 
Crist announced that his office had reached a settlement with 
Trilegiant under which Trilegiant ``agreed to provide compensation to 
consumers wronged by the company's tactics in marketing various club 
memberships.'' Trilegiant also agreed to pay the State of Florida an 
additional $400,000.\27\
---------------------------------------------------------------------------
    \27\ State of Florida, Office of the Attorney General, Attorney 
General Reaches Settlement Over Club Memberships (Mar. 18, 2005).
---------------------------------------------------------------------------
    A few months later, California Attorney General Bill Lockyer filed 
suit against Trilegiant and Chase Bank charging that the companies 
``mislead consumers into becoming members of various membership 
programs without the consumers' knowledge or consent.'' \28\ According 
to the Attorney General, Trilegiant and Chase sent ``reward'' checks to 
consumers and did not adequately disclose that if consumers cashed the 
checks the defendants would automatically and repeatedly charge the 
consumers' bank accounts. In December 2006, California and 15 other 
state attorneys general reached a $14.5 million settlement with the two 
companies.\29\
---------------------------------------------------------------------------
    \28\ State of California, Department of Justice, Office of the 
Attorney General, Attorney General Lockyer Files Consumer Lawsuit 
Against Chase, Trilegiant in Membership Club Scheme (July 12, 2005).
    \29\ State of California, Department of Justice, Office of the 
Attorney General, Attorney General Lockyer Announces $14.5 Million, 
Multi-State Settlement with Chase Bank and Trilegiant to Resolve 
Allegations of Deceptive Practices Related to Membership Plans (Dec. 
11, 2006). The other states involved in this settlement were: Alaska, 
Connecticut, Illinois, Iowa, Maine, Michigan, Missouri, New Jersey, 
North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Vermont, and 
Washington.
---------------------------------------------------------------------------
    In July 2008, Trilegiant settled a number of class action lawsuits. 
The suits alleged that Trilegiant enrolled consumers in membership 
clubs through deceptive or unfair means. Trilegiant agreed to pay up to 
$25 million in refunds to settle the lawsuits.\30\
---------------------------------------------------------------------------
    \30\ Order of Final Approval and Judgment, (Jul. 18, 2008), 
Pederson v. Trilegiant, IL 3rd Jud. Circuit Ct. (No. 01-L-1126). For 
further information on these cases, see the information collected on 
www.Trisettlement.com.
---------------------------------------------------------------------------
B. MemberWorks/Vertrue/Adaptive Marketing
    In 1989, Gary Johnson, a former CUC vice president, founded 
Cardmember Publishing Company. In 1996, the company's shares began to 
be publicly traded under the name MemberWorks.\31\ In 2004, MemberWorks 
changed its name to Vertrue. Three years later, in 2007, Vertrue was 
de-listed and sold for approximately $800 million to a group of private 
equity investors led by One Equity Partners, the private equity arm of 
J.P. Morgan.\32\ Vertrue currently markets club memberships under the 
auspices of its subsidiary Adaptive Marketing, LLC.
---------------------------------------------------------------------------
    \31\ Fertile Sales Turf: Fee-Based Card Services; MemberWorks' Gary 
Johnson Counts the Ways He Can Sell to Cardholders, The American Banker 
(Apr. 10, 1997).
    \32\ Vertrue, Inc., Vertrue Inc. Announces Agreement to Be Acquired 
by an Investor Group Including Management for $48.50 Per Share or 
Approximately $800 Million (Mar. 22, 2007) (available at http://
investors.vertrue.com/phoenix.zhtml?c=60678&p=irol-
newsArticle&ID=976542&
highlight).
---------------------------------------------------------------------------
    The Attorneys General of Minnesota, New York, California, and Iowa 
have all sued MemberWorks/Vertrue alleging that it engaged in deceptive 
practices in connection with the aggressive sale of membership 
programs. In 1999, the Attorney General of Minnesota, Mike Hatch, filed 
suit against MemberWorks alleging that the company used deceptive and 
misleading practices to sell club memberships to Minnesota 
consumers.\33\ MemberWorks paid $75,000 to settle the Minnesota action 
and agreed to make a number of changes to its business practices.
---------------------------------------------------------------------------
    \33\ Second Amended Complaint, (Apr. 17, 2000), Hatch v. 
MemberWorks, Inc., Minn. Dist. Ct. 4th Jud. District (No. MC99-010056).
---------------------------------------------------------------------------
    In 2000, New York Attorney General Eliot Spitzer announced a 
settlement with MemberWorks as part of a ``continuing investigation of 
banks and credit card issuers that violated their cardholders' privacy 
rights by selling their personal account information to telemarketers 
in return for a substantial commission.'' \34\ According to the 
Attorney General:
---------------------------------------------------------------------------
    \34\ New York State Attorney General, National Telemarketing Firm 
to Reform Practices. Bank Privacy Investigations Result in Settlement 
on Unauthorized Credit Card Charges (Sept. 18, 2000).

        MemberWorks made wide use of negative option plans with its 
        ``risk free'' 30-day free trial membership offer. Although 
        these plans offer consumers a free period in which to consider 
        the advantages of the service, many who accepted the initial 
        free trial did not understand that MemberWorks had access to 
        their credit card numbers and would charge them if they failed 
        to cancel during the trial period.\35\
---------------------------------------------------------------------------
    \35\ Id.

    In order to settle the matter, MemberWorks agreed to, among other 
stipulations, tape every consumer's consent to ensure it was knowingly 
given. MemberWorks also paid $75,000 to cover the cost of the 
investigation.
    In 2001, MemberWorks and Sears, Roebuck and Co. agreed to pay $2 
million to settle charges made by California Attorney General Bill 
Lockyer that the companies misled and confused consumers about their 
membership programs. The suit alleged that ``consumers were not 
informed that defendants had the ability to charge their credit cards 
without the consumers providing their credit card numbers or ever 
signing anything.'' \36\
---------------------------------------------------------------------------
    \36\ State of California, Department of Justice, Office of the 
Attorney General, Attorney General, District Attorneys Settle Consumer 
Protection Complaint Against MemberWorks, Sears Over Discount Club 
Memberships (Apr. 27, 2001).
---------------------------------------------------------------------------
    In 2004, MemberWorks paid $950,000 to settle a complaint brought by 
Florida Attorney General Charlie Crist, alleging that the company had 
placed unwanted charges on Floridians' credit cards. According to the 
Attorney General:

        The company typically marketed its products in conjunction with 
        infomercial products, and consumers calling to order products 
        were told they would receive a MemberWorks membership as a 
        bonus for their purchase. The bonus actually resulted in a 
        credit card charge for MemberWorks' membership programs if the 
        consumer did not actively seek to cancel the purchase.\37\
---------------------------------------------------------------------------
    \37\ State of Florida, Office of the Attorney General, Attorney 
General Announces Settlement with MemberWorks, (Jun. 29, 2004).

    Most recently, in 2006, Iowa Attorney General Tom Miller sued 
---------------------------------------------------------------------------
MemberWorks/Vertrue and explained that:

        The suit concerns a marketing scheme in which consumers' credit 
        cards and bank accounts are charged for memberships in so-
        called discount buying programs--even though many consumers 
        don't know they are members, are not aware that they are being 
        charged yearly or monthly membership fees, and make no use 
        whatsoever of the so-called membership benefits.\38\
---------------------------------------------------------------------------
    \38\ State of Iowa, Depart of Justice, Office of the Attorney 
General, Miller Sues MemberWorks, Inc., (May 15, 2006).

    The Iowa Attorney General took the case against MemberWorks/Vertrue 
to trial earlier this month, and an opinion is likely early next year.
    Not every case against Vertrue has resulted in a negative outcome 
for Vertrue. Vertrue and its subsidiary Adaptive Marketing recently won 
a motion to dismiss a lawsuit alleging that Vertrue and the e-retailer 
V istaPrint deceived consumers into joining a rewards programs by 
offering them cash back if they completed an online survey. The Federal 
judge dismissed the case, finding that the defendants' web pages were 
not deceptive. The plaintiffs have appealed this decision to the 5th 
Circuit Court of Appeals.\39\
---------------------------------------------------------------------------
    \39\ In re VistaPrint Corp. Marketing and Sales Practices 
Litigation, No. 4:08-md-1994 (S.D. Tex.) (Aug. 31, 2009).
---------------------------------------------------------------------------
C. Webloyalty
    Webloyalty was founded in 1999 by another CUC/Cendant veteran, 
Richard Fernandes. According to press reports, Mr. Fernandes ran CUC's 
Auto Service division and then its Interactive Services division, 
``where he launched many of the Company's major Internet programs.'' 
\40\ Webloyalty is owned by the Greenwich, Connecticut private-equity 
group, General Atlantic, LLC.
---------------------------------------------------------------------------
    \40\ eLOT Appoints New Board Member, Business Wire (Mar. 7, 2000).
---------------------------------------------------------------------------
    Although Committee staff is unaware of any formal law enforcement 
actions against Webloyalty, according to media reports, Webloyalty is 
currently under investigation by Connecticut Attorney General Richard 
Blumenthal because of the high number of consumer complaints about the 
company.\41\
---------------------------------------------------------------------------
    \41\ Never Heard of Reservation Rewards? Check Your Credit Card, 
Wallet Pop Blog (Mar. 31, 2009) (available at http://www.walletpop.com/
blog/2009/03/31/never-heard-of-reservation-rewards-check-yourcredit-
card/).
---------------------------------------------------------------------------
    Earlier this year, Webloyalty agreed to settle a class action 
lawsuit, in which the plaintiffs alleged that they had been harmed by 
Webloyalty's ``Coupon Click Fraud'' scheme. According to the lawsuit:

        The scheme involved fraudulent and deceptive sale of its 
        ``Reservation Rewards' discount products to unwitting consumers 
        who make legitimate online purchases from various web 
        retailers, including Fandango, and the unauthorized transfer of 
        private credit and debit card account information by the web 
        retailer to Webloyalty.\42\
---------------------------------------------------------------------------
    \42\ Class Action Complaint, (Sept. 11, 2006), Kuefler v. 
Webloyalty.com (D. Mass.) (No. 06-cv-11620-JLT) (later consolidated 
with four similar cased by the Judicial Panel on Multidistrict 
Litigation and restyled In re: Webloyalty.com, Inc. Marketing and Sales 
Practices Litigation, MDL 07-01820).

    In order to settle the case, Webloyalty agreed to make a number of 
changes to its online offers and disclosures, and it also agreed to pay 
out up to $10 million to consumers who had inadvertently signed up for 
Webloyalty's membership clubs.\43\
---------------------------------------------------------------------------
     \43\ Id.
---------------------------------------------------------------------------
III. The Committee's Investigation
    In May 2009, the Committee opened an investigation into the use of 
aggressive sales tactics on the Internet. On May 27, 2009, Chairman 
Rockefeller sent letters to Webloyalty, Inc., and Vertrue, Inc., 
requesting information and documents related to their online business 
practices.\44\ On July 10, 2009, Chairman Rockefeller expanded the 
investigation by sending a similar information request letter to 
Affinion Group, Inc.\45\ On July 28, 2009, Chairman Rockefeller issued 
a subpoena to Vertrue to obtain documents responsive to the May 27, 
2009, requests, which were being withheld by the company.\46\ Affinion 
and Webloyalty have voluntarily cooperated with the Committee's 
requests.
---------------------------------------------------------------------------
    \44\ Letter from Sen. John D. Rockefeller IV to Mr. Gary A. Johnson 
(May 27, 2009); Letter from Sen. John D. Rockefeller IV to Mr. Richard 
J. Fernandes (May 27, 2009).
    \45\ Letter from Sen. John D. Rockefeller IV to Mr. Nathaniel 
Lipman (July 10, 2009).
    \46\ Letter from Sen. John D. Rockefeller IV to Mr. Gary A. Johnson 
(July 28, 2009).
---------------------------------------------------------------------------
    On November 6, 2009, Chairman Rockefeller sent requests for 
information to sixteen companies that are partnered with Affinion, 
Vertrue, or Webloyalty and have apparently engaged in the controversial 
online sales practices with the companies. The letters were sent to: 1-
800-Flowers.com, Inc.; AirTran Holdings, Inc.; Classmates.com, Inc.; 
Continental Airlines, Inc.; FTD, Inc.; Fandango, Inc.; Hotwi re, Inc.; 
Intelius, Inc.; MovieTickets.com, Inc.; Orbitz Worldwide, Inc.; Pizza 
Hut, Inc.; Priceline.com, Inc.; Redcats USA, Inc.; Shutterfly, Inc.; 
U.S. Airways Group, Inc.; and VistaPrint USA, Inc.\47\
---------------------------------------------------------------------------
    \47\ Senate Committee on Commerce, Science, and Transportation, 
Chairman Rockefeller Requests Information from Web Retailers in 
``Mystery Charges'' Investigation (Nov. 6, 2009).
---------------------------------------------------------------------------
    In the course of the investigation, the Committee has received over 
300,000 pages of documents from the three companies: approximately 
80,000 from Affinion, approximately 128,000 from Vertrue, and 
approximately 104,000 from Webloyalty. The documents include over 
100,000 pages of documents related to complaints from the companies' 
former customers. The companies also produced screenshots of the 
enrollment offers used by the companies on the Internet, employee 
handbooks, contracts, correspondence between the companies and their 
partners, and internal e-mails and correspondence.
    Committee staff has interviewed dozens of former customers who have 
complained to Affinion, Vertrue, and Webloyalty about their business 
practices, executives for the e-commerce companies and e-retailers that 
have partnered with the three companies, and experts in e-commerce 
marketing.
IV. Overview of the Online Post-Transaction Sales Industry
    Documents reviewed by Committee staff show that more than 450 e-
commerce companies and e-retailers have entered into ``partnership'' 
agreements with Affinion, Vertrue, and Webloyalty over the past 10 
years. Under the terms of these contracts, the ``partners'' allow the 
three companies to market membership programs to their customers, and 
Affinion, Vertrue, and Webloyalty agree to share a portion of their 
revenues with the partners.
    Financial information provided to the Committee by the companies 
shows that Affinion, Vertrue, and Webloyalty and their e-commerce 
partners have generated over $1.4 billion in revenue from Internet 
consumers who have been charged for membership programs. Of the $1.4 
billion in total revenue, $792 million went to the e-commerce companies 
that partnered with Affinion, Vertrue, and Webloyalty.
    The websites and e-retailers that have partnered with Affinion, 
Vertrue, and Webloyalty include some of the most well-known and high-
traffic e-commerce websites on the Internet. They include travel sites, 
airline sites, electronics sites, movie ticket sites, and the websites 
for popular ``brick and mortar'' companies. Eighty-eight e-retailers 
have made more than $1 million through partnering with Affinion, 
Vertrue, and Webloyalty and, of the 88, 19 companies have made more 
than $10 million (See Exhibit 4). Classmates.com, which has been 
partnered with each company at different times and has earned more than 
any other partner, generated approximately $70 million in revenue.


    Since 1999, Internet consumers have been enrolled more than 35 
million times in Affinion, Vertrue, and Webloyalty's membership clubs. 
In June 2009, there were 4 million Internet consumers currently 
enrolled in the membership programs.
A. Partnership Terms
    While the specific terms and conditions between Affinion, Vertrue, 
and Webloyalty and their e-commerce partners differ from contract to 
contract, their agreements typically give partners a financial 
incentive to expose their shoppers to aggressive third-party offers. 
Generally, the more aggressively an e-commerce company is willing to 
market Affinion, Vertrue, or Webloyalty's membership clubs to its 
customers, the more money it will earn.
    Affinion, Vetrue, and Webloyalty's e-commerce partners are paid 
based upon either the number of customers who sign up for the 
membership clubs (``joins''), or the number of customers who see the 
offer (``impressions''). In some partnerships, both payment methods are 
used to calculate a retailer's profits.
    Payments based on the number of consumers who join an Affinion, 
Vertrue, or Webloyalty club are called ``bounties.'' This payment 
system (also known as CPA, ``Cost Per Acquisition'') provides a very 
straightforward incentive to the retailer to use more aggressive sales 
tactics. Every consumer ``join'' means an additional bounty payment 
usually ranging between $10 and $30. When Webloyalty pitched its 
marketing program to Aloha Airlines in January 2006, it explained the 
method of payment and the potential partnership by stating, ``Aloha 
Airlines wins by getting . . . $$$ bounty from Webloyalty for every 
customer who elects to accept offer.'' \48\
---------------------------------------------------------------------------
    \48\ Webloyalty presentation to Aloha Airlines (Jan. 2006) 
(Webloyalty Doc. 29325).
---------------------------------------------------------------------------
    Payments based on impressions are calculated using a term known as 
CPM (Cost Per Mil). Under this system, e-commerce partners receive a 
payment for every 1,000 of their customers who view the enrollment 
offer from Affinion, Vertrue, or Webloyalty. This method can be very 
profitable for e-commerce companies with high-traffic websites because 
the enrollment offer can be shown to millions of Internet consumers. If 
the e-commerce partner is willing to show the offer to each one of its 
customers who make a purchase on its website, this can result in 
millions of ``impressions'' and millions of dollars in profit.
    Payment terms in the contracts are routinely tied to a statistic 
known as the ``conversion rate.'' This statistic measures the success 
of the enrollment offers by comparing the total number of customers who 
view the offer to the subset who actually enroll in the club. This 
statistic is tracked very closely by Affinion, Vertrue, and Webloyalty 
and each company uses it as a method to determine payments to its 
partners.
    Affinion, Vertrue, and Webloyalty typically pay higher CPMs as the 
conversion rate increases. The table below provides an example of a 
sliding scale used in a contract reviewed by Committee staff.

------------------------------------------------------------------------
               CPM                            Net Conversion
------------------------------------------------------------------------
$2,650                            9.50%
------------------------------------------------------------------------
$2,525                            9.00%-9.49%
------------------------------------------------------------------------
$2,375                            8.50%-8.99%
------------------------------------------------------------------------
$2,250                            8.00%-8.49%
------------------------------------------------------------------------
$2,100                            8.00%-8.49%
------------------------------------------------------------------------
$1,950                            7.50%-7.99%
------------------------------------------------------------------------
$1,825                            7.00%-7.49%
------------------------------------------------------------------------
$1,675                            6.50%-6.99%
------------------------------------------------------------------------
$1,550                            5.50%-5.99%
------------------------------------------------------------------------
$1,400                            5.00%-5.49%
------------------------------------------------------------------------
$1,275                            4.50%-4.99%
------------------------------------------------------------------------
$1,125                            4.00%-4.49%
------------------------------------------------------------------------
$1,000                            3.50%-3.99%
------------------------------------------------------------------------
$925                              3.30%-3.49%
------------------------------------------------------------------------
$850                              3.29%
------------------------------------------------------------------------

    To illustrate how this system works, if a company displayed the 
enrollment offer to one million visitors on its site every year, and 2 
percent of its customers joined an Affinion, Vertrue, or Webloyalty 
club, the company would receive a payment of $850,000, according to the 
rates listed in the table. But if its conversion rate were a higher 5 
percent, the company would receive $1.4 million. This sliding scale 
payment system gives retailers a strong financial incentive to allow 
Affinion, Vertrue, and Webloyalty to employ aggressive sales tactics 
that mislead customers but increase conversion rates.
    An important fact to keep in mind is that the revenue web retailers 
earn from their partnerships with Affinion, Vertrue, and Webloyalty has 
no associated costs for the web retailers and is therefore 100 percent 
profit. Revenues from these partnerships, therefore, can become very 
important to a company's overall profitability. For example, when the 
CEO of 1800Petmeds, a Webloyalty partner, requested that the 
``Continue'' button be removed from the company's offer page because it 
was misleading customers, a Webloyalty employee responded:

        We can do that, but with these changes your CEO is decimating a 
        program that delivered more than $516,000 in pure profit to you 
        in 2008. If you operate your website on a 10 percent net profit 
        margin, our payments to you represent over $5 million in sales 
        revenue.\49\
---------------------------------------------------------------------------
    \49\ E-mail from Webloyalty employee to 1800Petmeds employee (Feb. 
11, 2009) (Webloyalty Doc. 88550).
---------------------------------------------------------------------------
B. The Financial Advantages of Data Pass
    As discussed in Section I above, most companies automatically 
transfer their customers' billing information to Affinion, Vertrue, and 
Webloyalty once consumers have presented what the companies call 
``proof of enrollment,'' such as an e-mail address. Documents reviewed 
by Committee staff show that Affinion, Vertrue, and Webloyalty are well 
aware that this ``data pass'' process produces higher rates of 
``joins'' than an enrollment process that requires consumers to re-
enter their credit card information to accept a membership club offer.
    For example, a Webloyalty document tracking average conversion 
rates in 2006 and 2007 presents the following conversion information 
for consumers who join membership clubs through the data pass process 
(referred to in this document as ``card on file'') versus those who 
join by entering their credit card information (``non-card on 
file''):\50\
---------------------------------------------------------------------------
    \50\ Webloyalty document ``Average Conversion Rates Per Quarter--
All Flows'' (Jan. 10, 2008) (Webloyalty Doc. 19371).

----------------------------------------------------------------------------------------------------------------
                                          ``Card on File'' Net Conversion         ``Non-Card on File''  Net
                                                        Rate                           Conversion Rate
----------------------------------------------------------------------------------------------------------------
Q3 2006                                                              4.51%                                1.26%
----------------------------------------------------------------------------------------------------------------
Q4 2006                                                              4.54%                                0.91%
----------------------------------------------------------------------------------------------------------------
Q1 2007                                                              4.04%                                0.68%
----------------------------------------------------------------------------------------------------------------
Q2 2007                                                              3.84%                                0.89%
----------------------------------------------------------------------------------------------------------------
Q3 2007                                                              4.04%                                0.94%
----------------------------------------------------------------------------------------------------------------
Q4 2007                                                              3.91%                                1.65%
----------------------------------------------------------------------------------------------------------------

    According to these figures, consumers are about four times more 
likely to join Webloyalty's membership clubs if their credit card data 
is transferred automatically from the retailer.
    Not surprisingly, based upon statistics such as these, Affinion, 
Vertrue, and Webloyalty push their partners and potential partners to 
display offer pages that allow their customers to enroll in the 
membership programs without re-entering the credit card or debit card 
number they used for the original purchase. In a presentation to a 
potential partner, Webloyalty provided the following graphic to explain 
its point that ``non-card on file'' enrollment offers would lead to 
``Low $Revenue'', while ``card on file'' would lead to ``High 
$Revenue'' for the e-commerce company.\51\
---------------------------------------------------------------------------
    \51\ Webloyalty presentation ``Revenue Continuum'' (Webloyalty Doc. 
27485).


    In another presentation to a partner, Webloyalty bluntly stated 
that requiring the consumer to re-enter credit card information would 
hurt conversion. It noted, ``with data collection on the page [y]ou can 
expect at least a 70 percent decrease in conversion.'' \52\ In an e-
mail to a potential partner, Affinion estimated that the conversion 
rate would be four times higher if the partner used data pass than if 
the partner required its customers to re-enter their credit card number 
(``non-data pass'').\53\
---------------------------------------------------------------------------
    \52\ Webloyalty presentation ``Non-card on file'' (Webloyalty Doc. 
27691).
    \53\ Affinion document ``Products Overview'' (Feb. 19, 2009) 
(Affinion Doc. A FSE 04-736).
---------------------------------------------------------------------------
V. Evidence of Misleading Offers and Consumer Confusion
    Affinion, Vertrue, and Webloyalty understand that ``data pass'' and 
other aggressive online sales tactics drive up the rate of consumer 
``joins'' to their programs. They also know that most of the consumers 
who ``enroll'' in their membership clubs through these aggressive 
tactics do so unknowingly and inadvertently.
    Internal documents and information produced by Affinion, 
Webloyalty, and Vertrue to the Committee indicate that the three 
companies receive an overwhelming amount of negative feedback from 
consumers once the consumers learn they are paying ``members'' of clubs 
they have never heard of. The three companies' ``customer service'' 
operations are almost entirely dedicated to handling the large volume 
of calls from confused and angry consumers requesting cancellations, 
and asking how the company obtained their credit card information.
    Given that most ``members'' are unaware they were enrolled in the 
programs, information provided by Affinion, Vertrue, and Webloyalty not 
surprisingly shows that most ``members'' cancel their membership once 
they realize they are being charged on a monthly basis. It also shows 
that a very large percentage of the members never utilize the benefits 
of the programs or even take the simple step of logging into the 
companies' websites to access the benefits they are paying for each 
month.
A. Low Levels of Member Awareness
    Internal data and member surveys commissioned by Affinion, Vertrue, 
and Webloyalty clearly show that the three companies understand that 
the majority of their paying ``members'' have little or no awareness of 
their financial relationship with the companies.
    One of the documents Vertrue produced to the Committee, for 
example, is a summary of June 22, 2009, feedback from consumers who had 
visited one of its membership websites. Of the ``members'' who 
completed the survey, 43 percent indicated they were visiting ``to find 
about the charge on my credit card that I did not recognize'' and 44 
percent indicated they were visiting ``to cancel the program.'' Only 
one member indicated he or she was there ``to find out more about my 
membership benefits'' and none of the respondents were there ``to 
obtain my member ID.'' \54\ In another question, 60 percent of the 
respondents indicated they were ``extremely dissatisfied'' with the 
site. In response to Vertrue's invitation to offer a comment or explain 
why they were satisfied or dissatisfied with the website, members 
provided more than 100 highly negative comments, including:
---------------------------------------------------------------------------
    \54\ Internal Vertrue e-mail (Jun. 23, 2009) (Vertrue Doc. 118778-
84).

   ``Don't know how I got it, I don't use it, I don't want it . 
        . . you've heisted money from me for several months for 
        something that I have no idea what it is and will never use it, 
---------------------------------------------------------------------------
        so I'm cutting you off, both here and at my bank;''

   ``Because I didn't authorize this service or know how my 
        card # was gotten;''

   ``Stop tricking people into your phony service;''

   ``I never willingly joined, I want a reimbursement. I have 
        never even heard of you;'' and

   ``I have no idea why you charged me 19.95. Where did you get 
        my debit card information? I have no recollection of doing 
        business with valmax.'' \55\
---------------------------------------------------------------------------
    \55\ Id.

    Internal data tracked by Webloyalty shows that it has known for 
years that the majority of its members were unknowingly enrolling in 
the membership clubs it offered. A ``Disposition Report'' run in 
September 1, 2003, appears to show that, of the 66,922 members who 
canceled their Reservation Rewards membership in August 2003, 51,560, 
or 77 percent, had indicated ``Did Not Authorize/Was Not Aware'' as 
their reason for cancellation.\56\ ``Disposition Reports'' run in the 
following years showed similar trends and, in 2008, a Webloyalty call 
center employee, while participating in a discussion about proposed 
call center script changes, acknowledged in an e-mail message that 
``[a]t least 90 percent of our members don't know anything about the 
membership.'' \57\
---------------------------------------------------------------------------
    \56\ Webloyalty document ``Disposition Report by Product--Last Full 
Month'' (Sept. 1, 2003) (Webloyalty Doc. 97613).
    \57\ Internal Webloyalty e-mail (Oct. 21, 2008) (Webloyalty Doc. 
89166).
---------------------------------------------------------------------------
    Customer surveys commissioned by Webloyalty and its e-commerce 
partners in 2004 and 2006 further confirm that most of Webloyalty's 
members were unaware they had enrolled in the company's membership 
clubs. A July 2004 telephone poll commissioned by Webloyalty and 
conducted at the request of its partner Redcats USA, which owns brands 
such as Brylane and Jessica London, showed that few of Redcats' 
customers knew they were paying members of Reservation Rewards, a 
Webloyalty membership program. As part of the survey, 308 past or 
current members of Reservation Rewards--half of whom were described as 
``active'' members--were asked a series of questions. Among the 
findings of the survey were the following:

   234 of these members (76 percent) either did not recall 
        being offered a Reservation Rewards membership or said they had 
        declined a membership offer;

   Only 62 of the members (20 percent) remembered receiving an 
        e-mail notifying them of their Reservation Rewards membership;

   Only 5 of the members (1.6 percent) said they had received a 
        $10 cash back offer; and

   Only 4 of the members (1.3 percent) said they had used 
        Reservation Rewards discounts.\58\
---------------------------------------------------------------------------
    \58\ Webloyalty document, ``Web Loyalty & Brylane Customer 
Research. A Quantitative Assessment'' (Jul. 2004) (Webloyalty Doc. 
84776 et seq).

    In analyzing the results for Redcats USA, a marketing research firm 
noted, ``It is quite concerninq that only half (51 percent) of the 
Active segment clearly remembered signing up for the program.'' \59\ 
Customer surveys conducted for Choice Hotels International, Inc. and 
Classmates.com, both Webloyalty partners, produced similar results. For 
Choice Hotels, a marketing research firm found that ``[o]ne-half of 
guests reached on the member list did not know for sure if they are 
members of Reservation Rewards'' and, based upon the survey of members 
who enrolled through Classmates.com, Webloyalty concluded that 
``[a]wareness of WL services is low among respondents.'' \60\
---------------------------------------------------------------------------
    \59\ Id., at 804785
    \60\ Webloyalty presentation ``Choice Hotels International 
Reservations Rewards Study'' (Jan. 14, 2004) (Webloyalty Doc. 80623); 
Webloyalty document ``Webloyalty thoughts on Classmates Market Research 
Member Survey'' (May 11, 2006) (Webloyalty Doc. 84884).
---------------------------------------------------------------------------
    Although Affinion has not provided the Committee with member 
surveys, it has, at different times, tracked members' reasons for 
complaining to the Better Business Bureaus and state attorneys general. 
From January 2007 through February 2009, 85 percent, of the 1,550 
serious complaints forwarded by the Better Business Bureaus and state 
attorneys general were related to online customers ``asserting that 
they never agreed to join'' the membership programs.\61\
---------------------------------------------------------------------------
    \61\ Affinion letter, ``Additional Information Provided by Affinion 
to Senate Committee on Commerce, Science, and Transportation'' (Nov. 5, 
2009) (Affinion Doc. ASFW 05-01).
---------------------------------------------------------------------------
    From January through April 2009, Affinion also tracked ``customer 
contacts with the Affinion Support Desk, which handles customer 
requests that are not satisfied by the Customer Service Representative 
(also referred to as the Front Line Agent) and are elevated to a 
supervisor.'' \62\ The spreadsheet showed that thousands of ``customer 
contacts'' could not be handled by ``Front Line Agents'' because the 
customers were categorized as ``Unaware of Service'' or ``Disputing 
Enrollment.'' While this data is limited to escalated contacts and does 
not include the millions of consumers who likely canceled their 
Affinion membership programs once they learned their credit card was 
being charged, it further suggests that a substantial percentage of 
Affinion's members are unaware they were enrolled in Affinion's 
membership programs.
---------------------------------------------------------------------------
    \62\ Affinion letter, ``Affinion Response to Committee Follow-up 
Questions 1-3'' (Oct. 9, 2009) (Affinion Doc. ASFW 06-01).
---------------------------------------------------------------------------
    For example, from January through April 2009, Affinion's Support 
Desk received 7,649 elevated ``customer contacts'' related to 
``billing'' or ``cancellation and suppression requests'' from customers 
of 1-800-Flowers.com, AirTran Airways, Classmates.com, and Priceline 
who had been enrolled in Great Fun, an Affinion discount program.\63\ 
Of the 7,649 customer contacts, Affinion categorized a large percentage 
as ``Unaware of Service,'' ``Disputing Enrollment,'' or ``Bank 
Representative Cancelled.'' Despite placing these ``contacts'' in 
categories which suggest customer confusion and frustration, Affinion 
did not categorize these customer ``contacts'' as complaints.\64\
---------------------------------------------------------------------------
    \63\ Affinion spreadsheet, ``Reason by Service & Client'' (Aug. 21, 
2009) (Affinion Doc. ASFE 04-59-82).
    \64\ Id.

 Escalated Customer Contacts with Affinion's ``Support Desk'' Regarding
           Its ``Great Fun'' Discount Club: January-April 2009
------------------------------------------------------------------------
   Affinion    Escalated ``Customer Contacts'' Regarding ``Billing'' and
   Partner             ``Cancellations and Suppression Requests''
------------------------------------------------------------------------
1-800-Flowers                                                       618
 .com
------------------------------------------------------------------------
AirTran                                                             838
 Airways
------------------------------------------------------------------------
Classmates.co                                                       872
 m
------------------------------------------------------------------------
Priceline                                                         5,221
------------------------------------------------------------------------

B. Employee Training on Cancellations and Member Questions
    When consumers realize they are being charged for a club membership 
they did not intend to enroll in and do not use, they contact Affinion, 
Vertrue, and Webloyalty to stop the monthly charges to their credit 
card or debit card. As a result, the three companies' customer service 
centers are almost entirely dedicated to handling the large volume of 
calls from angry and confused consumers requesting cancellations and an 
explanation for the charge. As a Webloyalty employee recently 
acknowledged in an internal e-mail, the call center representatives 
spend most of their time answering calls ``from members who are 
questioning charges or want to cancel their membership.'' \65\ Affinion 
and Vertrue's internal documents show that most of their calls are also 
related to cancellations or members questioning enrollment or the 
charge on their credit card or bank statement.
---------------------------------------------------------------------------
    \65\ Internal Webloyalty employee e-mail (Feb. 16, 2009) 
(Webloyalty Doc. 88263).
---------------------------------------------------------------------------
    In a training manual, Affinion has informed its newly hired call 
center representatives that during an ``8-hour shift'' they will take 
``between 75-100 calls'' and that ``approximately 80 percent of these 
calls will be from members wishing to cancel their membership.'' \66\ 
In March 2008, Vertrue employees acknowledged a similar problem in an 
e-mail regarding a ``Call Center Optimization'' meeting.\67\ In 
discussing methods for reducing the cost associated with the call 
centers, Vertrue employees estimated that it received ``7 million 
customer calls per year'' and that ``cancellation calls represent 
approximately 98 percent of call volume.'' \68\
---------------------------------------------------------------------------
    \66\ Affinion training manual, Great Fun New Hire Training Manual 
(Oct. 2, 2006) (Affinion Doc. AFSE 04-18772).
    \67\ Internal Vertrue e-mail, ``Call Center optimization meeting'' 
(Mar. 20, 2008) (Vertrue Doc. 111093).
    \68\ Vertrue, ``Adaptive Call Center Optimization'' (Mar. 18, 2008) 
(Vertrue Doc. 111095).
---------------------------------------------------------------------------
    In addition to cancellations, the employee manuals and scripts that 
Affinion, Vertrue, and Webloyalty provide to their call center 
representatives show that each company dedicates a significant amount 
of time training their employees on how to respond when members call to 
ask questions related to how they were enrolled, what the membership 
program is, or why there is a charge on their credit card or bank 
account statement.
    A ``Quick Reference Guide'' distributed to Webloyalty employees 
explained that it was important to ask members why they were canceling 
their membership for Travel Values Plus, a membership program offered 
by Webloyalty. It stated, ``[m]any times the reason is that they had no 
idea what Travel Values Plus was and you will then have the opportunity 
to explain.'' \69\ Another page in a Webloyalty manual offered a list 
of the ``Top Ten Reasons a Member Calls'' and offered ``Cancel my 
membership'' and ``What is this charge?'' as the top two reasons.\70\ 
Other Webloyalty manuals provided call center representatives with a 
process for handling members asking the questions: ``what is this 
charge?'' or ``who are you?'' \71\
---------------------------------------------------------------------------
    \69\ Webloyalty document, Quick Reference Guide: October 2006 
(Webloyalty Doc. 26561).
    \70\ Webloyalty document, Manual/Introduction--February 2006 
(Webloyalty Doc. 56370).
    \71\ Webloyalty training manual, ``What is this Charge?/Who are 
you?:'' (Webloyalty Doc. 26055).
---------------------------------------------------------------------------
    The ``Great Fun Merged Product Script'' that Affinion has provided 
to its call center representatives also shows they are trained on how 
to handle members who are calling to question enrollment or the charge 
on their bank statement. The second heading in the manual's table of 
contents refers to a section entitled, ``If Questioning the Charge/
Enrollment,'' which instructs call center representatives to answer the 
member's question by stating, ``The charge you see posted on your 
account is the (Monthly/Annual) membership fee for (Product). We 
received a positive response online that activated your membership.'' 
\72\
---------------------------------------------------------------------------
    \72\ Affinion document, Great Fun Merged Product Script: (Sept. 18, 
2006) (Affinion Doc. AFSE 03-1810, 1813).
---------------------------------------------------------------------------
    A manual for Vertrue employees provides instructions remarkably 
similar to those provided to Affinion and Webloyalty employees. It 
provides a ``Scripted Response'' to answer the question, ``How Did I 
Get Signed Up for this???'' \73\ The provided response states:
---------------------------------------------------------------------------
    \73\ Vertrue document, Online/Internet Marketing Main Menu (May 31, 
2007) (Vertrue Doc. 82269).

        Our records indicate that you agreed to try [AM PROGRAM NAME] 
        while visiting the [Client/Partner name] website. For the order 
        to be processed, you were required to enter and confirm your e-
        mail address. Additionally, by accepting the trial membership, 
        you agreed to be enrolled using the billing source that you 
        authorized and that after the 30 day trial membership, you 
        would be billed the program fee.\74\
---------------------------------------------------------------------------
    \74\ Id.
---------------------------------------------------------------------------
C. High Rates of Cancellations and Low Rates of Usage
    Affinion, Vertrue, and Webloyalty's internal data on their members' 
rates of cancellations and their rates of usage of the programs' 
benefits provide further evidence that online consumers are not aware 
they have been enrolled in membership clubs offered by the companies. 
Overwhelmingly, consumers cancel their memberships once they realize 
they are being charged on a monthly basis and very few consumers use 
the benefits offered by the membership programs.
    Information provided by Affinion, Vertrue, and Webloyalty shows 
that the majority of the consumers the companies charge for services 
cancel their membership within 5 months of receiving the first charge 
on their credit card or checking account statement. Exhibit 5 to this 
report shows the number of members who have enrolled in Affinion, 
Vertrue, or Webloyalty's membership programs and remained members for 
at least 1 month, 6 months, 1 year, and 5 years. For the three 
companies, about a quarter of their members (26.2 percent) cancel 
during the free 30-day period, less than a third of their members (29.5 
percent) are still members after 6 months and only 13.9 percent remain 
members for more than 1 year.


    The cancellation pattern observed for these online consumers is 
similar to the one observed by the Minnesota Attorney General's office 
during its investigation into a preacquired account marketing campaign. 
In that case, where hundreds of thousands of bank customers were sold 
membership clubs or insurance policies through preacquired account 
marketing, investigators observed that most of these bank customers 
canceled not in the 30-day free trial period, but in the following 
months when they started seeing their credit card charges.\75\ 
According to Professor Prentiss Cox, who supervised the Minnesota 
Attorney General's investigation, this pattern is ``consistent with a 
large majority of the canceling customers not understanding the 
solicitation and canceling only after the charge appears on their 
accounts.'' \76\
---------------------------------------------------------------------------
    \75\ Prentiss Cox, Invisible Hand of Preacquired Account Marketing, 
forthcoming in Harvard Journal on Legislation, Vol. 47, No. 2 (2010). 
(Available at SSRN: http://ssrn.com/abstract=1460963. He explains, ``If 
all consumers understood the free trial offer . . . the temporal 
pattern of cancellations should be heavily weighted toward 
cancellations during the free trial period.'')
    \76\ Id., at 24.
---------------------------------------------------------------------------
    Information provided to the Committee by Affinion, Vertrue, and 
Webloyalty also shows that the vast majority of consumers who enroll in 
their programs never receive the ``cash back award'' or other incentive 
promised them in the enrollment offer. As discussed in Section I above, 
a prominent feature of the post-transaction offers Affinion, Vertrue, 
and Webloyalty make to consumers is an up-front gift offer such as 
``$10 Cash Back on Your Next Purchase!'', which appears to be related 
to the website where the consumer has just made a purchase.
    While the language and appearance of the offer suggests that 
clicking the ``Yes'' button automatically gives consumers a discount on 
their next purchase, the fine print informs consumers that they must 
take additional steps to receive the benefit. According to information 
provided by the three companies, of the 34,262,674 members who were 
promised automatic cash gifts or other incentives, only 3 percent 
actually received the promised enrollment benefit.
    Another indication that online consumers are unaware of their 
Affinion, Vertrue, or Webloyalty club memberships is their failure to 
log on to the clubs' websites to view and use the purported benefits 
offered by the clubs. Evidence currently available to Committee staff 
suggests that the so-called member ``usage rates'' for Affinion, 
Vertrue, and Webloyalty are very low.
    For example, Vertrue provided the Committee with the number of 
members who log in to their membership club websites. In 2006, 100,091 
members logged in to the membership clubs' websites; in 2007, 215,191 
members logged in to the membership clubs' websites; and in 2008, 
377,428 members logged in to the membership clubs' websites. While 
Vertrue has not yet explained to Committee staff whether these numbers 
include consumers attempting to cancel their membership, how many are 
multiple logins by the same consumer, or how many of these consumers 
actually received a club service after logging in, these figures, at 
best, represent only a small percentage (approximately 10-20 percent) 
of the total number of Vertrue club ``members'' in these years.
    Information Webloyalty provided to the Committee also suggests its 
clubs have very low member usage rates. A February 28, 2005, Webloyalty 
document titled, ``Product Usage Statistics,'' appears to show that the 
rate of benefit usage for members enrolled through the data pass 
process ranged between .2 percent and 11.4 percent for a 6-month period 
between 2004 and 2005.\77\ A ``Site Usage'' table presented to the 
Webloyalty Board of Directors in March 2006 reported that between 70 
percent and 80 percent of Reservation Rewards club ``members'' enrolled 
through data pass had either never visited the Reservation Rewards site 
at all or viewed only the club's home page without ever accessing 
additional pages.\78\
---------------------------------------------------------------------------
    \77\ Webloyalty document, Product Usage Statistics (Feb. 28, 2005) 
(Webloyalty Doc. 56115).
    \78\ Webloyalty document, ``Reservation Rewards: Member Site 
Usage'' (March 27, 2006) (Webloyalty Doc. 103997).
---------------------------------------------------------------------------
    In his statement to the Commerce Committee, Professor Benjamin 
Edelman cites publicly available web traffic data to reach a similar 
conclusion. He notes that while Webloyalty claims to have more than two 
million paying club members, none of the company's club web pages rank 
among the Internet's top 100,000 sites for web traffic. Professor 
Edelman concludes that, ``this gap between signups and users confirms 
that Webloyalty's marketing failed to obtain meaningful consent from 
the users who purportedly ``accepted' Webloyalty's offer.'' \79\
---------------------------------------------------------------------------
    \79\ Prepared Statement of Professor Benjamin Edelman to the U.S. 
Senate Committee on Commerce, Science, and Transportation (Nov. 2009).
---------------------------------------------------------------------------
    At this point in the investigation, Affinion, Vertrue, and 
Webloyalty have not provided the Committee with comprehensive data 
related to their rates of usage. Committee staff has reason to believe 
that this information is kept by the companies as a matter of course 
and that it would not be difficult to provide the information to the 
Committee. Consumer usage of these services is a key question because a 
low usage rate ``is highly probative to show that a practice is likely 
to mislead consumers acting reasonably under the circumstances.'' \80\
---------------------------------------------------------------------------
    \80\ FTC v. Cyberspace.com, 453 F.3d 1196, 1201 (9th Cir. 2006).
---------------------------------------------------------------------------
VI. Partner Awareness of the Problem
    Committee staff has spoken to more than a dozen e-commerce partners 
of Affinion, Vertrue, and Webloyalty and has reviewed thousands of 
pages of e-mail communications between Affinion, Vertrue, and 
Webloyalty and their e-commerce partners. The interviews and the e-mail 
communications provide abundant evidence that the e-commerce partners 
are aware that their customers are being misled by the enrollment 
offers from Affinion, Vertrue, and Webloyalty. This evidence also shows 
that e-commerce partners have repeatedly raised concerns about customer 
confusion over the data pass process and the enrollment offers. Many 
partners terminated their relationship because they determined it was 
not in the best interest of their customers.
A. ``Customer Noise''
    When e-commerce partners enter into financial partnerships with 
Affinion, Vertrue, and Webloyalty, the three companies promise to 
handle cancellations, complaints, and other ``customer service'' 
issues. As a result of this arrangement, when consumers see a 
membership club charge on their credit card or bank statements, they 
are provided only a club name and a toll free number operated by 
Affinion, Vertrue, and Webloyalty.
    The purpose of routing customer service issues through the three 
Connecticut companies is to prevent what Webloyalty promotional 
materials call ``negative impact on partner brands.'' Affinion, 
Webloyalty, and Vertrue handle dissatisfied customers in order to 
insulate the partners from their own customers' criticism, which is 
commonly described as ``customer noise'' by the companies.
    For example, in November 2008, 1-800-Flowers.com's Director of 
Third Party Marketing wrote an e-mail to her Affinion contact 
complaining that ``we have had increasingly more frequent feedback from 
our own teams that your agents are telling our customers to call us. . 
. .'' She asked for Affinion's help ``to determine . . . how we can 
reduce the negative comments from our customers back to our internal 
agents.'' \81\ Affinion's Vice President of Relationship Management 
quickly responded to this e-mail. She wrote:
---------------------------------------------------------------------------
    \81\ E-mail from 1-800-Flowers.com Director of Third Party 
Marketing to Affinion Vice President, Relationship Management (Nov. 20, 
2009) (Affinion Doc. ASFE 04-31).

        I am troubled by this report. This is a STRICT no-no in our 
        centers. We tell agents not to do it and don't give them our 
        client's phone numbers and so on. If we hear instances [of] it 
        in our monitoring/test calls, they will ``fail'' that call and 
        get dinged on their incentive payments.\82\
---------------------------------------------------------------------------
    \82\ E-mail from Affinion Vice President of Relationship Management 
to 1-800-Flowers Director of Third Party Marketing (Nov. 20, 2008) 
(Affinion Doc. ASFE 04-30).

    In spite of the elaborate precautions Affinion, Vertrue, and 
Webloyalty take to prevent negative feedback about their membership 
clubs from getting back to their partners, most, if not all, of the e-
retailers partnered with Affinion, Vertrue, and Webloyalty know that 
the companies' aggressive sales tactics make many of their customers 
dissatisfied and angry. Committee staff has reviewed thousands of pages 
of communications from angry consumers sent directly to the partners. 
Under standard procedures followed by all three companies, partners 
forward the complaints to Affinion, Vertrue, and Webloyalty for 
resolution.
    For example, in April 2009, the Manager of the Customer Relations 
Department (CRD) for AirTran Airways sent an e-mail to one of AirTran 
Airways' marketing executives stating:

        We continue to receive complaints in CRD from customers 
        regarding the Great Fun option. The complaints are mainly 
        focused around:

        Customer received a charge on their credit card for the 
        membership, however the customer claims they never authorized 
        the charge or requested the membership.

        Customers attempted to cancel the membership; but continue to 
        get charged for the monthly membership fee. They often call 
        Great Fun several times to cancel to no avail.

        In CRD we explain the process for signing up for the 
        membership. However several customers on separate occasions 
        have been adamant that they have never signed up with Great 
        Fun.\83\
---------------------------------------------------------------------------
    \83\ Internal AirTran Airways e-mail from Manager--Customer 
Relations Department (Apr. 29, 2009) (Affinion Doc. AFSE 04-3803).

    The AirTran marketing executive forwarded this e-mail to his 
contact at Affinion, requesting help in addressing what he called ``a 
growing concern about the raising [sic] complaints.'' \84\
---------------------------------------------------------------------------
    \84\ E-mail from AirTran employee to Affinion employee (May 6, 
2009) (Affinion Doc. AFSE 04-3904).
---------------------------------------------------------------------------
    In June 2009, another Affinion partner, Priceline.com, forwarded 
Affinion a ``tracker'' document detailing serious consumer complaints 
the company had received in May and June of 2009.\85\ The comments 
included in this document show that Priceline is aware that Affinion's 
club membership offers are making Priceline users extremely unhappy. A 
few examples are:
---------------------------------------------------------------------------
    \85\ E-mail from Priceline call center employee to Affinion 
employee (June 17, 2009) (Affinion Doc. AFSE 04-1653).

   Hi, I just noticed a recurring monthly charge of $11.99 on 
        my VISA bill for TLG* GREATFN. . . . I called the 800 number 
        referenced and canceled . . . I have no idea how this charge 
        got on my VISA or what it is for. I certainly didn't get 
        anything from it. They said it was through something I did on 
        Priceline. Are you guys in on this? Is this part of a scam? Is 
        Priceline an accessory to this fraud? I feel like I've been 
---------------------------------------------------------------------------
        tricked and robbed.

   A few months ago, I purchased the tickets through priceline. 
        I was not aware that in the process of purchasing tickets I was 
        somehow enrolled in an organization called Great Fun. I feel 
        that this happened very deceitfully. I just wanted you to know 
        that this will be a consideration in the future.

   How do I send a message to you regarding your product of 
        Great Fun. This company has billed me for over a year without 
        my concent [sic] or knowledge. Priceline should be more 
        responsible than to subject their customers to this sort of 
        unsuspected, unwanted solicitation! I have written the company, 
        my credit card company & the office for Consumer Protection for 
        Connecticut.\86\
---------------------------------------------------------------------------
    \86\ Id.
---------------------------------------------------------------------------
B. Concerns Raised by Partners
    In response to these ``customer noise'' issues, Affinion, Vertrue, 
and Webloyalty's partners regularly raise concerns about the companies' 
aggressive sales tactics. In some cases, partners ask the companies to 
take steps to reduce consumer complaints. In other cases, partners have 
decided to end their relationship with Affinion, Vertrue, or Webloyalty 
due to negative consumer experiences. The concerns expressed by 
partners in these communications seem to have changed very little over 
the past decade.
    In 2002, the Director of Business Development for an e-commerce 
company partnered with Webloyalty wrote directly to Rick Fernandes, the 
Chief Executive Officer of Webloyalty, stating:

        We have worked with webloyalty for about 5 weeks now and have 
        had enough time and data to make a solid assessment that the 
        execution of the program is not in our best interest. Even with 
        what we thought might be a suitable authorization process, has 
        turned out to have extremely negative consequences and we have 
        been unable to correct with the flexibility that we need to 
        address a problem of this magnitude. . . . We feel that if the 
        customer is interested in participate [sic] in this program, 
        your website should sell them without us passing their secure 
        info in the process.\87\
---------------------------------------------------------------------------
    \87\ E-mail from Webloyalty partner Director of Business 
Development to Richard Fernandes, Chief Executive Officer of Webloyalty 
(Sep. 10, 2002) (Webloyalty Doc. 75740).

    In January 2003, a Webloyalty employee described the customer 
---------------------------------------------------------------------------
complaints that another Webloyalty partner had received:

        Let me clarify that we ARE in jeopardy with this client and 
        these represent a small number of many more complaints their 
        staff insiders consider ``brutal and unprecedented''. . .\88\
---------------------------------------------------------------------------
    \88\ Internal Webloyalty e-mail (Jan. 07, 2003) (Webloyalty Doc. 
102451).

    The company later terminated the partnership in 2005 and stated, 
``This decision comes after detailed discussions with Senior 
management. They understand what this program generates and that it has 
the potential to generate even more. However, we are going through a 
re-branding mobilization in 2005 and the Webloyalty banners do not fit 
into that plan.'' \89\
---------------------------------------------------------------------------
    \89\ E-mail from Webloyalty partner Operational Vice President of 
Customer Marketing to Webloyalty employee (Nov. 5, 2004) (Webloyalty 
Doc. 74077).
---------------------------------------------------------------------------
    In August 2003, Webloyalty's Senior Vice President for Business 
Development and Account Management sent an e-mail summarizing partners' 
concerns to senior Webloyalty executives, including Rick Fernandes, the 
Chief Executive Officer, that stated:

        What clients tell us . . .

        1. Pre-bill notification is buried in pre-bill e-mail. Make it 
        more upfront.

        2. Special reward is perceived as misleading. It's not a reward 
        it's an obligation. Test special offer.

        4. [sic] The segue ``Congratulations, Thank you for your 
        purchase'' is misleading. Sounds like it's a thank you from 
        client and it's not, it's an offer from WL [Webloyalty].

        5. Continue button is misleading--customer does not have to 
        continue.

        6. Yes button is misleading, should say enroll, sign up, etc.

        7. Language about data pass is buried. Customers are unaware 
        their data is being passed.

        8. Trial and price point is buried--it's clear you get 30 days 
        free, but not clear you'll be automatically renewed if you 
        don't cancel. And then the fee is buried too.\90\
---------------------------------------------------------------------------
    \90\ Internal Webloyalty E-mail from Senior Vice President for 
Business Development and Account Management to Richard Fernandes, Chief 
Executive Officer of Webloyalty, and other Webloyalty employees (Aug. 
25, 2003) (Webloyalty Doc. 14019).

    In April 2004, the employee of a Webloyalty e-commerce partner, 
which operated a virtual shopping cart for Internet merchants, sent an 
---------------------------------------------------------------------------
e-mail to a Webloyalty employee stating the following:

        . . . I do keep hearing the same thing from our merchants who 
        are calling up wanting the program removed. They are telling us 
        their shoppers are saying:

        1. They have been tricked into buying and or signing up for 
        something.

        2. They did not know there was a cost involved with the 
        program.

        3. The cost was hidden at the bottom of the page, or not very 
        clear.

        4. They do not know who to call to get more info, so they call 
        the merchant (who gets ticked off, calls us and wants out of 
        the program).

        5. They do not know who is offering the program or who to 
        contact so again they call the merchant (who gets ticked off, 
        calls us and wants out of the program).\91\
---------------------------------------------------------------------------
    \91\ E-mail from Webloyalty partner employee to Webloyalty employee 
(Apr. 30, 2004) (Webloyalty Doc. 74483-84).

    In January 2006, Webloyalty employees discussed concerns that an e-
---------------------------------------------------------------------------
retailer partner had raised. The e-mail stated:

        He mentioned that they are getting a lot of noise with our 
        program and that people are writing blogs about . . . what a 
        scam WLI RR [Webloyalty Reservation Rewards] is . . . He's very 
        concerned . . . Bottom line is he wants to test more 
        conservative pages against the control to find a page that's 
        more clear and see what it does to his financials.\92\
---------------------------------------------------------------------------
    \92\ Internal Webloyalty e-mail (Jan. 9, 2006) (Webloyalty Doc. 
76770).

    In May 2006, an employee for Avon informed Affinion that a customer 
complaint had ``been escalated to our CEO and the customer . . . felt 
it was completely misleading.'' \93\ The Avon employee went on to state 
that ``[w]e need to discuss how we can modify the offer page to make it 
more clear to the user that their credit card info will be passed upon 
their approval, possibly by adding a check box.'' \94\ An information 
technology specialist working with Avon.com to resolve a customer 
complaint later advised:
---------------------------------------------------------------------------
    \93\ E-mail from Avon eMarketing Manager to Affinion Associate 
Client Manager (May 22, 2006) (Affinion Doc. 04-16516).
    \94\ Id.

        I think the big problem was that it was pretty misleading. It 
        wasn't clear that we were passing the customer details (cc 
        number etc) across when they clicked on the banner. I think 
        people often proceeded through out of curiosity, believing that 
        if they didn't provide they [sic] billing data that they 
        couldn't be charged, regardless of what they clicked on or 
        accepted. What they don't realise [sic] is that Great Fun did 
        have their billing details already.\95\
---------------------------------------------------------------------------
    \95\ E-mail from Avon employee to Affinion employee (Oct. 26, 2007) 
(Affinion Doc. AFSE 04-16527).

    In January 2007, an e-retailer that had partnered with Webloyalty 
sent an e-mail to Webloyalty stating that, ``. . . we have had regular 
complaints from our customers . . . [w]e simply cannot have complaints 
such as this.'' \96\ He went on to note that, ``The particularly 
cheerless concern is that to generate more revenue through Webloyalty, 
it seems we must be more aggressive (and deceptive) in our marketing 
techniques.'' \97\
---------------------------------------------------------------------------
    \96\ E-mail from Webloyalty partner employee to Webloyalty employee 
(Jan. 15, 2007) (Webloyalty Doc. 95116).
    \97\ Id.
---------------------------------------------------------------------------
    In March 2007, an employee for another e-retailer partnered with 
Webloyalty sent an e-mail expressing concerns about complaints. He 
stated, ``We are getting an unbelievable number of complaints on our 
current set-up. Customers (ours are older) are feeling tricked and many 
state they are not coming back to our sites because of it. Don't know 
if that is true, but I still want to talk about it.'' \98\
---------------------------------------------------------------------------
    \98\ E-mail from Webloyalty partner employee to Webloyalty 
employees (Mar. 02, 2007) (Webloyalty Doc. 81039).
---------------------------------------------------------------------------
    In November 2007, a 1-800-Flowers.com employee raised ``a major red 
flag'' about the company's partnership with Affinion. He cited a number 
of recent consumer complaints about the company's partnership with 
Affinion to sell the ``LiveWell'' membership club, and he noted that, 
``for every one who complains vociferously, there are dozens, even 
hundreds that do not.'' \99\ He continued:
---------------------------------------------------------------------------
    \99\ Internal 1-800-Flowers.com e-mail (Nov. 7, 2007) (Affinion 
Doc. AFSE 5-3452).

        I know that our relationship with Affinion is a huge boost to 
        our revenue; on the other hand, I am gravely concerned that for 
        every dollar we get from Live Well, we may be trading off many 
        more dollars in angry and lost customers.\100\
---------------------------------------------------------------------------
    \100\ Id.

    In February 2008, another e-retailer expressed concerns to 
---------------------------------------------------------------------------
Webloyalty in an e-mail by stating:

        We're all still very concerned about the negative impact we are 
        experiencing to our reputation online. And, we continue to get 
        enough angry callers that our call center manager . . . has to 
        personally field about 3 of the angriest callers a week. (we 
        estimate that if [our call center manager] is getting 3 our 
        call center is getting 15 and your team is probably getting 75 
        or more per week) . . . Webloyalty has been unwilling to share 
        with us any data that would help us to understand how our 
        customers are using the program--or whether they are . . . To 
        be quite candid . . . we don't have a clue how our customers 
        feel about this program. Maybe 99 percent of them love it and 1 
        percent complain. Maybe 99 percent hate it but only 1 percent 
        complain.\101\
---------------------------------------------------------------------------
    \101\ E-mail from Webloyalty partner employee to Webloyalty 
employees (Feb. 6, 2008) (Webloyalty Doc. 95894).

    Two months later, the e-retailer informed Webloyalty that ``we have 
decided to part ways because as time went by it became clear to us that 
our customers don't want this program.'' \102\
---------------------------------------------------------------------------
    \102\ E-mail from Webloyalty partner employee to Webloyalty 
employees (April 16, 2008) (Webloyalty Doc. 96060).
---------------------------------------------------------------------------
    In May 2008, an Affinion employee discussed concerns raised by 
Hotwire, an Affinion partner, in an e-mail to a colleague. She stated, 
``Hotwire is claiming that they're receiving a high volume of CS 
[customer service] noise--approx 1 out of every 6 members calls them to 
complain.'' \103\
---------------------------------------------------------------------------
    \103\ Internal Affinion e-mail (May 20, 2008) (Affinion Doc. AFSE 
06-2506).
---------------------------------------------------------------------------
    Also in May 2008, Vertrue supplied a ``New Product Questionnaire'' 
to one of its retailer partners, VistaPrint, in order to learn 
VistaPrint's thoughts about the rewards program the two companies had 
partnered on. One question asked, ``What are the top 3 likes and 
dislikes with VistaPrint Rewards?'' For dislikes, VistaPrint replied, 
``Customer Noise''; ``Ability/Difficulty to redeem benefits, including 
$10 Cash Back''; ``Clarity of the offer''; and ``20 percent off not on 
purchase of gift card but later.'' \104\
---------------------------------------------------------------------------
    \104\ Vertrue questionnaire (May 7, 2008) (Vertrue Doc. 111917).
---------------------------------------------------------------------------
    In June 2008, the Director of Client Services for Vertrue's 
Adaptive Marketing acknowledged that Restaurant.com had raised concerns 
by stating, ``we will create some mockups for ways the Restaurant.com 
marketing flow can be changed for the purpose of making the marketing 
less aggressive, in hopes of reducing customer noise and negative 
impact to the Restaurant.com brand.'' \105\ This official also admitted 
that while more ``conservative'' marketing would ``help to reduce 
consumer noise,'' it would also likely have ``some negative impact on 
conversion and revenue.'' \106\
---------------------------------------------------------------------------
    \105\ E-mail from Vertrue Director, Client Services to 
Restaurant.com employee (Jun. 9, 2008) (Vertrue Doc. 105186).
    \106\ Id.
---------------------------------------------------------------------------
VII. Conclusion
    Affinion, Vertrue and Webloyalty use aggressive sales tactics 
intentionally designed to mislead online shoppers. These three 
companies exploit shoppers' expectations about the online purchasing 
process to charge millions of consumers each year for services the 
consumers do not want and do not understand they have purchased. 
Hundreds of e-commerce merchants--including many of the best-known, 
respected websites and retailers on the Internet--allow these three 
companies to use aggressive sales tactics against their customers, and 
share in the revenues generated by these misleading tactics. While 
Congress and the Federal Trade Commission have taken steps to curb 
similar abusive practices in telemarketing, there has not yet been any 
action to protect consumers while they are shopping online.
                                 ______
                                 
               Prepared Statement of Robert M. McKenna, 
              Attorney General of the State of Washington
    Thank you to Chairman Rockefeller, Ranking Member Hutchinson, and 
the members of the Committee on Commerce, Science, and Transportation 
for inviting me to provide my written statement to the Committee.
    I am Robert M. McKenna, Attorney General of the State of 
Washington. The subject matter of this hearing is of great importance 
to the consumers of this country, and I therefore commend the Committee 
for being responsive to the increasing number of consumer complaints 
regarding the marketing and billing practices of the companies under 
investigation by the Committee.
    The Attorney General is the primary state official who responds to 
consumer complaints and enforces state laws designed to protect 
consumers from unfair and deceptive business practices. My office has 
taken the lead in enforcing those laws in the Internet marketplace with 
the creation of our High-Tech Unit over 10 years ago. As e-commerce has 
flourished, so, too, unfortunately, have deceptive practices on the 
Internet. One of the significant advantages for consumers to shopping 
online has been the convenience and efficiency of the experience. What 
might take hours in the brick and mortar world to accomplish may take 
only a few minutes online. This has not been lost on some unscrupulous 
marketers who are exploiting consumers' expectations of a quick and 
efficient transaction process. Certain sellers and marketers have been 
interrupting consumers' online transactions by making offers that 
appear to relate to the consumers' transaction, but, in fact, do not. 
The marketing offers instead involve a subscription to an unrelated 
membership program that is billed on a recurring basis. As soon as my 
office noticed a trend in complaints relating to this form of 
marketing, we opened several investigations into companies conducting 
such marketing. These investigations have been time-consuming, 
resource-intensive, and complex, but they have provided us with 
voluminous evidence of the harmful effects of these marketing practices 
on consumers.
    There are three general marketing methods that our office has 
found, when combined, deceive a substantial portion of consumers and 
result in their unknowing enrollment in membership programs. First, 
sellers offer consumers free trials for services or products that 
automatically convert to paid subscriptions unless the consumer 
affirmatively cancels during the free trial period to induce consumers 
to purchase services or products (known as ``free-to-pay conversion 
offers''). Second, sellers obtain consumers' financial account 
information from third parties so that they are able to bill consumers 
for products or services without the consumer having to provide their 
account information directly to the seller during the transaction 
process (referred to as ``preacquired account marketing'' or a ``data 
pass'' process). And third, sellers market their products and services 
during the consumer's transaction process with a third party (sometimes 
referred to as ``post-transaction marketing'' or ``interstitial 
marketing''). Unscrupulous marketers and sellers have designed 
marketing campaigns that combine each of these marketing methods in 
such a way as to deceive consumers into enrolling in membership 
programs for which consumers are billed on a recurring basis.
    A typical example of this type of marketing as it appears on the 
Internet is as follows:

        After a consumer places an order for a product or service and 
        enters his or her payment information on an ecommerce site, an 
        offer for $10 cash back for filling out a survey appears on the 
        screen. The impression left on the consumer by the Web page is 
        that he or she should fill in the survey, enter his or her e-
        mail address (sometimes twice) and click on the button to 
        complete his or her purchase and claim the $10 cash back. In 
        fact, by clicking on the button, the consumer is purportedly 
        agreeing to be enrolled in a free trial for a membership 
        program that will be charged automatically on a recurring 
        monthly (or, in some cases, annual) basis to the account the 
        consumer used to make the purchase of the product or service. 
        The fine print on the Web page discloses that by clicking on 
        the button associated with completing the purchase or 
        submitting the survey, the consumer is purportedly authorizing 
        the e-commerce site to transmit the consumer's financial 
        account information to an undisclosed third party. Despite the 
        disclosures, the offer misleads consumers into believing that 
        the offer is for $10 cash back for taking a survey, not an 
        offer for a trial in a membership program, which is the 
        ``true'' offer and is disclosed only in the fine print. In 
        general, the offers appear to be coming from the e-commerce 
        site and do not disclose the third party that is actually 
        making the offer.

    The Washington Attorney General's Office has been able to identify 
several hundred consumer complaints filed with our office in the last 2 
years alone that involve the consumer having been enrolled in a 
membership program without his or her knowledge and having been 
automatically billed for the program without his or her authorization.
    Based upon these complaints and extensive investigations, we have 
observed a number of significant problems with this form of marketing, 
including:

        1. Consumers do not expect that the financial account 
        information that they provide for one transaction will result 
        in ongoing charges placed by a third-party company;

        2. Consumers have difficulty identifying and contacting the 
        seller of the membership program to cancel or otherwise 
        terminate any ongoing or recurring obligation because the 
        sellers frequently do not identify themselves in the offers;

        3. Sellers use a variety of distractions to obscure the 
        ``true'' offer, e.g., offering cash back on the consumer's 
        primary purchase and using ``consumer surveys''; and

        4. The use of words ``free'' or ``trial offer'' to market free-
        to-pay conversions leads consumers to believe that they do not 
        have to take further action in order to avoid ongoing charges.

    More specifically, our investigations have shown that hundreds of 
thousands of consumers in Washington State alone have found themselves 
subscribed to membership programs as a result of shopping online and 
that the vast majority of enrolled members have not used the benefits 
associated with the membership programs.
    I cannot overstate the consumer injury that is occurring because of 
these marketing methods. Based upon our office's investigations, we 
estimate that well over $50 million has been deceptively obtained from 
Washington consumers over the course of the last 4 years by a 
relatively small handful of businesses conducting the type of marketing 
at issue in this Committee's investigation.
    Our investigations have gathered an extraordinary amount of 
evidence showing that companies engaging in this form of marketing are 
aware that their marketing and billing practices are deceiving 
consumers and that the vast majority of consumers enrolled in their 
membership programs never authorized the enrollment. The companies 
under investigation in Washington have received thousands of consumer 
complaints both directly from consumers and through the Better Business 
Bureaus and the offices of the state attorneys general. These companies 
have done little to nothing to stop the deception despite knowing that 
they are obtaining unauthorized enrollments. Some of these companies 
make it very difficult for the consumer to cancel the membership if and 
when the consumer discovers the charges. They add insult to injury by 
refusing to provide complete refunds to consumers unless they complain 
to an outside agency, such as an Attorney General's office.
    Many of these companies believe that the disclosures that are made 
in the marketing offers insulate them from liability, despite the 
substantial evidence in front of them that consumers are inadvertently 
enrolling in the membership programs. Our investigations have shown 
that disclosures in this kind of marketing are not sufficient to 
overcome the inherent potential for deception. Because there is such 
overwhelming and compelling evidence that this form of marketing 
deceives consumers, I have requested state legislation to regulate the 
practices at the heart of the deception. My office proposes state law 
that would require sellers using free-to-pay conversion offers to 
obtain the consumer's financial account information directly from the 
consumer during the transaction for the free-to-pay product or service. 
The proposed legislation, which did not pass when originally introduced 
in the Washington legislature last year, was opposed by some 
businesses. We expected such opposition, because our investigations 
have revealed that marketing using a free-to-pay conversion where the 
seller has preacqui red account information or uses a data pass process 
is extremely lucrative; however, these profits are the result of unfair 
and deceptive practices and belong back in the pockets of consumers.
    Of course, using preacquired account information or a data pass 
process to market products and services by means of free-to-pay 
conversion offers during the consumer's transaction with a third party 
is not a new marketing technique. A $14.5 million multistate settlement 
with Trilegiant, now known as Affinion, and Chase Bank in 2006 
attempted to curtail deceptive marketing practices involving free-to-
pay conversion offers and preacquired account marketing by imposing 
greater disclosure requirements in direct mail offers. Furthermore, 
numerous states have entered into settlements with MemberWorks, now 
known as Vertrue, to address that company's deceptive negative-option 
marketing. In fact, both the Federal Trade Commission (``FTC'') and the 
states have a decade-long history of enforcement and consumer education 
efforts to tackle the deceptive marketing of services and products 
through free trial offers and the improper transfer or misuse of 
consumers' account information. However, we have found that truthful 
disclosures are insufficient to cure the inherent potential for 
deception in preacquired account marketing or the data pass process in 
conjunction with free trial offers.
    The FTC recognized the inherent potential for consumer deception in 
sales situations in which the seller had preacquired consumer account 
information when it created the requirement in the Telemarketing Sales 
Rule (TSR), which implements the Telemarketing and Consumer Fraud and 
Abuse Prevention Act, 15 U.S.C.  6101-6108, as amended, that sellers 
must audiotape transactions involving free-to-pay conversions where the 
seller has preacquired account information of the consumer. In 
addition, the seller must obtain from the customer, at a minimum, the 
last four digits of the account number to be charged.
    The complaints we have received, along with our investigations, 
point to one conclusion: preacquired account marketing (or use of a 
data pass process) in conjunction with free-to-pay conversion offers 
has the inherent potential to deceive, despite the presence of 
disclosures. The stark fact of how many consumers have actually been 
deceived by this form of marketing--in the telemarketing, direct mail, 
and Internet channels--is overwhelmingly persuasive.
    Thank you for the opportunity to provide this statement and to 
inform the Committee of the experiences my office has had in 
investigating and combating the deceptive business practices that are 
at issue in the Committee's investigation. I would be happy to provide 
further information at the Committee's request.
                                 ______
                                 
                Prepared Statement of Benjamin Edelman, 
              Assistant Professor, Harvard Business School
    Chairman Rockefeller, Ranking Member Hutchison, members of the 
Committee:
    My name is Benjamin Edelman. I am an Assistant Professor at the 
Harvard Business School, where my research focuses on the design of 
electronic marketplaces, including designing online marketplaces to 
assure safety, reliability, and efficiency. My full biography and 
publication list are at http://www.benedelman.org/bio and http://
www.benedelman.org/publications. Relevant disclosures appear on the 
final page of my testimony.
    Today the Committee considers important questions of consumer 
protection in the context of certain online marketing offers with a 
special tendency to deceive. I apologize for my absence (the result of 
prior commitments), but I applaud the committee's efforts. My bottom 
line:

   Post-transaction marketing offers systematically reach 
        consumers in a time when consumers are particularly vulnerable. 
        Post-transaction offers feature deceptive designs that invite 
        consumers to conclude, mistakenly, that the offers comes from 
        the companies the consumers have chosen to frequent, and that 
        the offers are a required part of the checkout process.

   The automatic transfer of consumers' payment information 
        from a merchant to a post-transaction marketer runs contrary to 
        consumer expectations, and creates a heightened risk that 
        consumers will ``accept'' financial obligations they did not 
        intend to incur.

   Disclosures fail to cure the deception created by post-
        transaction offers, their timing and formatting, and their 
        automatic transfer of consumers' payment information.

   Straightforward remedies could protect consumers who have 
        suffered unwanted charges, and could prevent further consumers 
        from incurring similar charges.
Post-Transaction Marketing Generally
    It is all too easy for a consumer to stumble into a post-
transaction marketing offer. Typically, a user requests a merchant site 
to browse products and perform a purchase. Having added items to an 
electronic shopping cart, the user presses a button to check out, then 
completes a series of forms to provide a shipping address, billing 
address, payment method, shipping speed, and more. At the conclusion of 
that process, the user expects to receive a page confirming that the 
order has been accepted and will be processed. Instead, the user 
receives a ``post-transaction offer'' from an unrelated third party. If 
the user responds to that offer, the user comes to be enrolled in the 
third party's program. Typically, such programs entail recurring fees 
of $10 or more per month--charges that continue unless and until the 
user takes action to insist that the charges cease.
    An ordinary web search for the names of top post-transaction 
marketers reveals thousands of dissatisfied users. Post-transaction 
marketers have earned unsatisfactory ratings from the Better Business 
Bureau, and their practices have been subject to consumer class 
actions. In the following sections, I analyze specific practices that 
have led to consumers becoming enrolled in post-transaction recurring-
billing schemes without meaningful knowledge or consent.
The Timing, Placement, and Format of the Post-Transaction Offers 
        Deceptively Suggest that the Offers are Part of the Checkout 
        Process
    Users in an online checkout process have a reasonable expectation, 
well-grounded in standard practice at most websites, that checkout will 
consist of a series of steps, each with a button (usually in the 
bottom-right corner) required to proceed to the next step. Users 
rightly expect that a checkout process will end in a page that 
prominently reports that the transaction was successful. Post-
transaction marketing flies in the face of these expectations.
    Checkout sequence. Post-transaction marketing challenges norms for 
checkout sequencing. A post-transaction offer generally appears as a 
screen that a reasonable consumer might mistake for an intermediary 
step toward the completion of the requested purchase. The post-
transaction offer's color scheme, layout, and overall design are 
typically consistent with the prior screens in the checkout sequence, 
and there is usually no large and prominent report that the requested 
transaction has been completed. Committed to finishing the desired 
purchase, and burdened by a lengthy checkout process, a user is 
especially likely to press a button with an affirmative label without 
reading the details and without learning that the button actually 
accepts an unrelated offer. Haste is reasonable in this context: The 
many steps in an online checkout processes leave users unusually 
vulnerable to unrelated offers that, through their timing, appear to be 
a necessary part of the checkout sequence.
    Size and shape. The unusual shape and size of post-transaction 
offers further hinder consumers' efforts to recognize the offers as 
advertisements. From experience around the web, consumers recognize 
that most online ads conform to certain standard shapes and sizes. But 
post-transaction offers appear in unusual sizes--making them less 
readily recognizable as advertisements.
    Format and design elements. The format of post-transaction offers 
compounds deception. On many sites I have examined, post-transaction 
offers mimic the color scheme, fonts, and other design characteristics 
of the sites in which they appear. Post-transaction offers even present 
design elements thematically linked to the surrounding merchant's site. 
(For example, a post-transaction offer on a florist's website often 
shows flowers as part of its pitch.) These design elements further blur 
the boundary between the requested site and the post-transaction offer.
    Buttons versus links. Post-transaction offers often use a button 
for a positive option (e.g., to accept the offer), while a negative 
option is a bare hyperlink. From experience around the web, users 
naturally expect that buttons, not mere hyperlinks, advance from page 
to page in an online checkout process. By presenting the affirmative 
choice in a button but the negative option in a hyperlink, post-
transaction offers make the affirmative choice that much more 
appealing--closer to what users expect to need in order to proceed 
through checkout.
Automatic Transfer of Consumers' Payment Information Removes a Key 
        Warning that Users Are Incurring a Financial Obligation
    A distinctive characteristic of post-transaction marketing is the 
automatic transfer of users' payment information from a merchant 
website to the post-transaction marketer. As a result, a user can end 
up facing recurring credit card charges from a post-transaction 
marketing program without the consumer ever typing a credit card number 
into any site or form operated by the post-transaction marketer.
    To most users, automatic transfer of payment information is quite 
unexpected. For one, it violates widespread norms about how online 
advertising works. Clicking an ad on a newspaper's website does not 
give the advertiser the user's credit card number, even if the user is 
a paying subscriber of the newspaper. But, remarkably, clicking a 
similar post-transaction offer can indeed transfer a credit card 
number--eliminating a key warning that would otherwise alert consumers 
to the impending financial obligation.
    Consumers rely on the process of providing a credit card number as 
a barrier to unexpected charges. Users rightly expect that by clicking 
from site to site, button to button, they do not incur financial 
obligations. This expectation is part of what makes the web fun, 
flexible, and low-risk: Users believe they cannot incur financial 
obligations except by typing their credit card numbers, and users 
expect to be able to cancel an unwanted transaction if a site requests 
a credit card number that a user does not care to provide. Here too, 
post-transaction marketing defies settled norms. By obtaining a user's 
credit card number directly from an affiliated merchant, a post-
transaction marketer can charge a consumer who has not performed the 
evaluation that consumer would naturally impose before knowingly 
entering into a paid relationship.
    Credit card network rules confirm the impropriety of automatic 
transfer of users' payment information. Visa's Rules for Merchants \1\ 
say charges may occur after a ``cardholder provides the merchant with 
the account number, expiration date, billing address, and CVV2'' (page 
12). Visa's requirement is clear: the ``cardholder'' must provide the 
information; Visa does not indicate that any designee (such an 
independent website) may provide this information to a partner who will 
later charge the consumer for separate and unrelated services.
---------------------------------------------------------------------------
    \1\ http://usa.visa.com/download/merchants/
rulesXforXvisaXmerchants.pdf.
---------------------------------------------------------------------------
    In a summer 2009 change, one post-transaction marketer began to 
require that a user retype the last four digits of a credit card number 
before becoming enrolled in that company's service. Although this 
requirement may reduce some accidental enrollments, it does not address 
the core deception that yields unrequested signups. In no other context 
site can typing just four digits begin a recurring billing 
relationship; consumers rightly and reasonably expect that entering a 
paid relationship requires typing an entire card number. Indeed, Visa's 
Rules for Merchants require that the consumer provide ``the account 
number''--the entire account number, not a small portion thereof. To a 
typical consumer, a request to reenter a portion of a card number looks 
more like a verification process than authorization: Thanks to Verified 
By Visa, nonretention of customers' CVV codes, and other efforts to 
reauthenticate online purchases, consumers expect these extra requests 
in their online purchases. But typing four digits does not indicate 
that a consumer authorizes credit card charges from a company with 
which the consumer otherwise has no relationship.
Disclosures Fail to Cure the Deception of Post-Transaction Marketing 
        Practices
    Post-transaction marketers typically argue that their disclosures 
tell consumers what they're signing up for--suggesting that any 
consumer who signs up must in fact want the service. I disagree. 
Although post-transaction marketers typically do mention pricing and 
selected product details, the substance and format of these disclosures 
fail to cure the deception created by the substance and context of the 
offer.
    For one, post-transaction disclosures are typically positioned 
where they are easily overlooked. For example, consumers naturally 
begin their inspection of a web page at the top-left corner (where key 
information usually appears), and consumers naturally proceed 
diagonally toward the bottom-right (which, especially in a checkout 
page, typically contains the button to proceed to the next step). 
Following this standard pattern, a disclosure in the bottom-left corner 
is naturally overlooked. Yet the bottom-left corner is exactly where 
many post-transaction offers present key details of their service.
    Post-transaction offers also often bury mention of key terms--for 
example, the monthly charge and the fact that charges recur each 
month--within long paragraphs. In the example disclosure that post-
transaction marketer Webloyalty provided to CNET News.com in July 
2009,\2\ the first mention of Webloyalty's ``$12 per month'' charge 
appears six lines into the second paragraph of text- a location easily 
overlooked by a consumer skimming the text. Furthermore, that mention 
appears under headings labeled ``Thank you . . .'' and ``Sign up to 
claim your rewards!''--headings giving no suggestion that the paragraph 
actually discloses a charge.
---------------------------------------------------------------------------
    \2\ http://bto.cnet.com/i/bto/20090723/WEBLOYALTY.jpg.
---------------------------------------------------------------------------
    In the context of unprecedented automatic transfer of credit card 
numbers from one company to another, disclosures must be exceptionally 
effective to overcome consumers' longstanding expectation that only 
typing a credit card number can create a financial obligation. I 
suspect consumers' confusion is so fundamental that no disclosure can 
cure the problem. The confusion certainly is not cured by ordinary 
plain-type text presented within extended boilerplate below an 
irrelevant header.
Credit Card Network Rules Disallow Key Post-Transaction Marketing 
        Practices
    Credit card networks rules specifically disallow important post-
transaction marketing practices. For one, as detailed above, Visa's 
Rules for Merchants require that the ``cardholder''--not any 
intermediary or merchant--provides the card number to the company 
seeking to charge the consumer's card. To the extent that post-
transaction marketers obtain customers' card numbers in other ways, 
e.g., from other merchants that already hold consumers' card numbers, 
credit card networks should disallow such charges.
    Post-transaction marketers also appear to violate credit card 
network rules about recurring payments. Visa's Rules for Merchants 
state that ``Cardholders should be routinely notified of regular 
recurring payments . . . at least 10 days in advance'' of each such 
charge (page 57). Most recurring billing merchants comply with this 
rule; for example, I receive monthly notifications from my mobile phone 
carrier and my broadband provider. However, I understand that post-
transaction marketers do not provide such notifications. Visa's rules 
are clear, and post-transaction marketers should comply with Visa's 
requirements.
Low Service Usage Rates Support an Inference of Deception
    When consumers pay for a service but systematically fail to use 
that service, there is ample basis to conclude that consumers did not 
intend to buy the service and that the service's marketing is 
deceptive. See FTC v. Cyberspace.com, LLC, 453 F.3d 1196, 1201 (9th 
Cir. 2006), drawing an inference that solicitation was deceptive from 
the fact that less than 1 percent of consumers ever used an Internet 
service they allegedly accepted by cashing or depositing a solicitation 
check.
    The FTC's reasoning is directly on point in the context of post-
transaction marketing. A Webloyalty press release from August 2009 
claims ``over 2 million memberships.'' \3\ Yet traffic analysis service 
Alexa.com reports that neither Webloyalty
.com nor any of its product sites (Reservationrewards.com, 
Shopperdiscounts
andrewards.com, Travelvaluesplus.com, Walletshield.com, and 
Completesavings.com) appear within Alexa's top 100,000 sites. The 
difference is readily explained: Blogs, new stories, litigation 
allegations, and other sources all report systematic user complaints 
that they did not know they were enrolled in a Webloyalty program and 
that they certainly never used any Webloyalty services. As in 
Cyberspace.com, this gap between signups and users confirms that 
Webloyalty's marketing failed to obtain meaningful consent from the 
users who purportedly ``accepted'' Webloyalty's offer.
---------------------------------------------------------------------------
    \3\ `` Webloyalty Announces Relationship with Clipper Magazine.'' 
August 19, 2009.
---------------------------------------------------------------------------
Ordinary Market Mechanisms Do Not Hold Post-Transaction Marketers 
        Accountable
    The structure of post-transaction marketing impedes users' efforts 
to determine which merchants passed their payment information to a 
post-transaction marketer--preventing users from complaining to those 
merchants. As a result, the merchants that provide users' credit card 
numbers to post-transaction marketers generally escape criticism for 
supporting these practices.
    Meanwhile, users sometimes blame companies that in fact had no role 
in post-transaction marketing. For example, I have read complaints 
blaming Amazon, AOL, eBay, and Paypal for subscribing users to 
Webloyalty, when in fact not one of these companies has ever promoted 
Webloyalty.
    Competition between firms further hinders accountability. When a 
sector includes some sites that promote post-transaction offers and 
some sites that refuse to include such offers, the former group enjoys 
a revenue advantage that the latter lacks. As a result, the former can 
tout lower prices--knowing that some portion of users will see a post-
transaction offer, respond, and incur charges that make up for the 
lower up-front price. Users appreciate the low posted prices but cannot 
readily assess the costs of post-transaction marketing. As a result, 
sites that participate in post-transaction offers appear to offer lower 
prices and a better value, when in fact their revenue advantage is, for 
many users, illusory and in any event, ill-gotten.
Suggested Remedies
    I suggest seven specific remedies for deceptive post-transaction 
marketing practices:

   End automatic credit card transfer. Merchants should cease 
        providing, and post-transaction marketers should cease 
        receiving, consumers' credit card numbers. If a consumer is to 
        sign up for a post-transaction offer, the consumer should 
        retype her credit card number -just as is required for all 
        other online purchases. This additional step will help the 
        consumer understand that the post-transaction offer is separate 
        from, and additional to, the transaction the user had initially 
        requested.

   Improved disclosures. Under a clear heading (``monthly 
        fee''), separate and apart from other text, a post-transaction 
        disclosure should present the essence of the consumer's 
        obligation. Language should be clear and direct--concise 
        declarative sentences, without unnecessary complication or 
        excess detail. Formatting should be designed to draw attention 
        to these key disclosures, separating this material from 
        marketing copy.

   Monthly reminders of impending charges. Consistent with 
        credit card network rules, post-transaction marketers should 
        notify each consumer before each monthly charge.

   Disclosure of consumer signup sources. In monthly e-mails to 
        consumers, in an online account management interface, in call 
        center scripts, and/or in credit card charge details, post-
        transaction marketers should remind consumers how they signed 
        up.\4\ No consumer should be left wondering which website 
        presented a post-transaction offer.
---------------------------------------------------------------------------
    \4\ At the suggestion of the Center for Democracy and Technology, 
similar accountability was added to certain adware popups-telling 
consumers what software caused them to receive the bundled adware that 
later showed popups. Such accountability helped put an end to deceptive 
adware bundles.

   Easy reversal of unauthorized charges. Pursuant to a class 
        action settlement, Webloyalty currently agrees to refund 
        historic charges if a user completes and mails a four-page 
        affidavit. But Webloyalty was happy to enroll users with just a 
        few clicks, and cancellation of charges should be equally 
        easily--not requiring a lengthy form, signature, certification, 
        and more. Nothing in the settlement prohibits Webloyalty from 
        granting refunds more easily than the settlement requires. Nor 
        should these refunds become unavailable when the settlement 
---------------------------------------------------------------------------
        claims period comes to a close.

   Notification and easy refunds for current non-users. For 
        current subscribers of post-transaction services who have not 
        used such services recently (or at all), there is good reason 
        to doubt the efficacy of prior ``consent'' for associated 
        charges. Such users should receive individual e-mail and postal 
        notification of the programs in which they have been enrolled, 
        the duration of enrollment, and the charges they have incurred. 
        Withdrawal and refund should be as easy as possible--a single 
        hyperlink or a return postcard. All charges should be refunded 
        to the consumer's original form of payment or by check, without 
        requiring an extended refund procedure or affidavit.

   Ongoing cross-check of usage rate. If a paid service has an 
        unusually low usage rate, that is prima facie evidence that 
        users may be enrolling in the service without understanding 
        what they're getting. The FTC, state attorneys general, or this 
        committee could monitor usage rates at large post-transaction 
        marketers to confirm that large numbers of consumers are not 
        tricked into paying for services they are not using.

    Last month FBI Director Robert Mueller admitted that he nearly 
succumbed to a phishing scheme. In response, Mueller's wife banned him 
from further online banking. That's a troubling outcome--in part for 
the public's ongoing losses to phishing, but also for the costs and 
inefficiencies that will result if others follow Mueller's lead and 
abandon online banking.
    Through its current work, this committee can protect the balance of 
online commerce from the deterioration of trust currently tainting 
online banking. I seek an Internet that is safe for commerce--safe not 
just for the savvy shopper and tech expert, but also for regular users, 
including users who are busy, hurried, distracted, or even naive. 
Conversely, the Internet cannot achieve its full potential if 
convoluted schemes trick consumers into incurring charges for services 
they did not request and did not fairly accept. Trusted Internet 
commerce has no place for credit card numbers copied from merchant to 
merchant, for obfuscated disclosures, or for tricky charges disguised 
as ``savings.'' Ongoing oversight by this committee can help put an end 
to these important problems.
Disclosures
    I appear on my own behalf, not on behalf of Harvard Business School 
or anyone else.
    I serve as a consultant to a variety of companies on subjects 
unrelated to those issue here, though often generally on the subjects 
of online advertising and fair treatment of consumers. My biography, 
http://www.benedelman.org/bio, details those of my clients for which I 
have had occasion to make public disclosure.
                                 ______
                                 
                                             Webloyalty.com
                                     Norwalk, CT, November 16, 2009
Hon. John D. Rockefeller IV,
Chairman,

Hon. Kay Bailey Hutchison,
Ranking Member,
U.S. Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Mr. Chairman and Ranking Member Hutchison:

    I write in regard to the hearing that is scheduled for tomorrow, 
Tuesday, November 17, 2009, on Internet marketing practices. As you are 
aware, Webloyalty has been cooperating with the Committee's 
investigation and we agree that this is an important inquiry.
    Please know that I readily agreed to your staff's invitation to 
testify this week, but that invitation was withdrawn. Even though I 
have not been permitted the opportunity to testify today and I strongly 
disagree with some of the characterizations that your staff has used in 
promoting this week's hearing, I remain hopeful that you will afford 
Webloyalty a fair hearing on the issues surrounding point-of-sale 
marketing on the Internet.
    Our company stands ready to testify at any time and I repeat the 
offer we have made many times to your staff: we are fully prepared to 
work with the Committee in crafting industry-wide rules that protect 
consumers and allow them the benefits of what we believe are our 
valuable membership programs that provide significant advantages.
    Toward that goal, I thought it might be helpful to provide you with 
some background, elaborated in the attached Webloyalty Fact Sheet, on 
our company and how we do business. In particular, I want to address 
the concerns raised regarding consumers' awareness that they are 
joining a subscription program and the value they receive when they 
join.
    At the point of sale by one of our e-retailer partners, Webloyalty 
offers subscription programs that can save consumers hundreds of 
dollars each year on travel, entertainment, shopping and dining out. 
This type of marketing has existed for many years in the off-line 
world. We are all familiar with, for example, being offered an extended 
warranty when purchasing an appliance or personal training sessions 
when joining a gym. We have learned much about adapting this approach 
to the Internet to ensure consumers know what they are buying and how 
they are paying for it. We have made significant strides in listening 
to consumers and working with our e-retailer partners to continually 
improve the clarity of our offers and the quality of our services.
    Effective August 1, 2009, we introduced several changes to the way 
consumers join our programs and how we communicate with them once they 
become members. Most significantly, in addition to enhanced written 
disclosures, Webloyalty began requiring consumers to enter the last 4 
digits of the credit or debit card they used to pay for the purchase 
from our e-commerce partner to confirm they want to charge that card 
for their membership after a 30-day trial period. The Company stands 
ready to discuss with the Committee this and other possible solutions 
that provide assurance that consumers are affirmatively choosing to 
join our programs.
    We do not want members in our programs who are unaware they have 
joined. Our programs work best for consumers and our company when our 
members are active users of the savings and discounts we provide. 
Following enrollment we send new members at least five e-mails during 
the 30-day trial period to encourage use of the service and remind them 
about billing. We also make it easy to cancel a subscription, if a 
member so chooses. Every communication includes our toll-free customer 
service number that members can use to ask questions about program 
benefits or to cancel their membership.
    We believe the changes we have made over the years culminating in 
our most recent changes in August demonstrate our commitment to 
learning from our experience and continuously improving the way we 
engage with consumers. We believe our current practices set a new 
standard for the industry and we are gratified that others in the 
industry are now adopting the measures we implemented last August.
    We appreciate the efforts of the Committee to ensure that firms 
that engage in point-of-sale marketing on the Internet use appropriate 
consumer protection measures. Webloyalty is strongly of the view that 
our membership programs bring great value to our customers and we hope 
you will be mindful of the many changes that we have made in our 
marketing approaches in an effort to bring greater transparency and 
meaningful communication to consumers.
    We are hopeful that the changes we have adopted address many of the 
concerns raised by this Committee's inquiry. We look forward to working 
with the Committee to help you understand and continue to improve our 
industry.
    Thank you for the courtesy of receiving this communication; I 
respectfully request that this letter and the attached Webloyalty Fact 
Sheet be made a part of tomorrow's hearing record.
            Respectfully yours,
                                         Richard Fernandes,
                                                               CEO.
Cc: Members of the Committee
                                 ______
                                 
                         Webloyalty Fact Sheet
                             November 2009
Company Description
    As the leading provider of online membership subscription programs, 
Webloyalty provides easy access to dining, shopping, travel discounts 
and additional travel protection benefits. Through its ever growing 
network of benefit providers, Webloyalty offers more than 60,000 dining 
discounts, 25,000 shopping discounts and 10,000 attraction discounts 
throughout the U.S. and Canada.
    Webloyalty provides savings and offers through four membership 
programs--Reservation Rewards, Shoppers Discounts & Rewards, Travel 
Values Plus, and Complete Savings--to consumers who have already 
established relationships with an online commerce site. Our members 
typically join by responding to an offer made as they complete a 
purchase with one of our e-commerce partners. They immediately gain 
access to all the program's benefits on a 30-day trial basis at no cost 
to the consumer and for a monthly subscription fee thereafter.
    Webloyalty is dedicated to upholding the highest standards of fair 
conduct and transparent practices, as described in our Principles, 
which influence all that we do:

    Value --Webloyalty is committed to providing value to all online 
consumers who join our programs.

   Webloyalty wants customers to take full advantage of our 
        products and services to save money and access benefits they 
        may not be able to find on their own.

    Transparency--Webloyalty wants consumers to know what they are 
buying and how they are paying for it.

   The key terms of any membership offer, including cost, 
        methods of payment and opportunity for cancellation must be 
        easily identifiable and readily understood.

   The key terms of any membership offer must be provided to 
        the consumer before the consumer consents to join a program.

    Affirmative Consent--Webloyalty believes that the consumer should 
authorize every billing-related transaction with information plainly 
related to billing.
    Privacy and Security--Webloyalty meets, and seeks to exceed, the 
most stringent industry standards for protecting consumers' personal 
information.
    Customer Service--We are committed to providing the highest level 
of customer service to all consumers and addressing their concerns 
promptly and satisfactorily.
Services/Programs
    Webloyalty offers are a form of point of sale marketing, similar to 
a magazine at a supermarket checkout or receiving an offer for a car 
rental following the purchase of an airline ticket. After completing a 
sale with one of our e-commerce partners, we offer benefits that, if 
accepted, provide consumers the ability to save on their next purchase 
from the partner's site as well as access to savings on other products 
and services.
    Webloyalty offers subscription membership programs that can save 
consumers hundreds of dollars each year on entertainment, shopping and 
dining out. Some examples of our combined program benefits include but 
are not limited to:

   Discounted gift cards (typically 20 percent off) for popular 
        stores, sites and restaurants

   $5 movie tickets for national chains, including AMC 
        Entertainment; Cinemark Theatres (Cinemark, Century Theatres, 
        Cinearts and Tinseltown); Mann Theatres; National Amusements 
        Theatres and Pacific Theatres

   Coupons and values from national distributors including 
        Clipper Magazine, MoneyMailer and ValPak
Enrollment Process
    Webloyalty's practices have evolved over the years and, since 
August, the company has made a number of changes to the enrollment 
process including requiring consumers to take the additional step of 
entering the last four digits of the credit or debit card they used to 
pay for the purchase from our e-commerce partner to confirm they want 
to charge that same card for their membership following a 30-day free 
trial period. The process is as follows:

   Consumers are shown a full-page solicitation offering one of 
        Webloyalty's programs for $12 per month after a 30-day free 
        trial period and $25 cash back for trying the service. If 
        consumers wish to accept the offer to join the program, they 
        must enter an e-mail address twice and, as of August, 2009, 
        must enter the last 4 digits of their credit or debit card to 
        indicate consent to have that card billed for the membership 
        following the free trial period. The consumer then clicks the 
        ``YES! Click Here to Sign Up'' button.

    To the left of the ``YES!'' button are the ``Offer and Billing 
Details'' which explain that consumers will be billed on the credit or 
debit card used for the transaction with our e-commerce partner. The 
following information appears above the ``YES!'' button, with the 
following language:

   ``Enter the last 4 digits of your credit or debit card and 
        your e-mail address as your electronic signature to confirm 
        that you have read and agree to the Offer and Billing Details 
        and authorize  to securely transfer your name, 
        address and credit or debit card information to  for billing after your 30-day free trial.''

   After the consumer has consented, the consumer's billing 
        information is passed from the e-commerce partner to Webloyalty 
        in an encrypted format to help ensure security and protect 
        privacy.

   In sum, Webloyalty cannot and will not enroll a consumer in 
        one of our programs without that individual's express and 
        informed consent. The data transfer process works only if the 
        consumer:

    Enters the last 4 digits of his or her credit or debit 
            card and it matches the data on the card used in the 
            transaction with our e-commerce partner;

    Enters his or her e-mail address twice; and

    Clicks on the ``YES! Click Here Now to Sign Up'' 
            button.
Member Communication
    Webloyalty regularly communicates with its members by sending at 
least five e-mails in the initial 30-day trial membership period, all 
prior to consumers incurring any costs.

   All of the e-mails encourage members to use the service and 
        provide a 1-800 number for customer service;

   Two of the e-mails provide reminders that the member's 
        credit card will be charged $12 per month at the conclusion of 
        the 30-day trial period. The e-mails also provide information 
        about how to cancel the membership before billing begins. If 
        either of the two billing reminder e-mails is returned 
        undeliverable, Webloyalty sends an offline letter with the same 
        information. If that letter is returned, the membership is 
        canceled.

   Thereafter, members continue to receive regular 
        communications highlighting specific or new benefits.

   We also make it easy for members to reach out to us by 
        phone, Internet or e-mail. In addition to a voice response 
        system that is available 24 hours 7 days a week, operators are 
        available 15 hours a day, Monday through Friday, and 8 hours a 
        day on Saturday and Sunday.
Statement from Webloyalty CEO Rick Fernandes
    Webloyalty offers subscription programs that can save consumers 
hundreds of dollars each year on entertainment, shopping and dining 
out. We want consumers to know what they are buying and how they are 
paying for it, and we will listen to consumers and work with our e-
retailer partners to continually improve the clarity of our offers and 
the quality of our services. Effective August 1, 2009, we introduced a 
significant change to our enrollment process: Webloyalty now requires 
consumers to enter the last 4 digits of their credit or debit card to 
confirm they want to charge that same card for their membership.
    We believe the changes we have made over the years and continue to 
make show that we are committed to learning from our experience and 
continuously improving the way we engage with consumers. We believe our 
current practices set a new standard for the industry and address many 
of the concerns raised by the Senate Commerce Committee inquiry. We are 
glad to see that others in our industry are following our lead.

    The Chairman. And statements by members of the Committee 
who wanted to be here but were unable to be here because, as 
usual, there are many, many hearings going on.
    A final question from our experts. I guess to you, 
Professor Marotta-Wurgler. Affinion and Vertrue and Webloyalty 
have recently announced their reincarnation and they've decided 
to pull back a little bit. It's interesting, it's interesting. 
I mean, it's just like, you know, I get a letter from the CEO 
of US Airways Group, Inc., saying they're not going to do this 
any more. We haven't even had the hearing and I got it 
yesterday. Then Continental Airlines is going to check in and 
probably pull out of the whole thing. It just shows how fragile 
this whole situation is and how devastating it is and how easy 
it is to make it devastating.
    So Affinion, Vertrue, and Webloyalty have sort of pulled 
back a little bit, and what they're now going to require their 
customers, consumers, is to enter the last four digits of their 
credit card for proof of acceptance of their offer. Now, 
Vertrue announced this move just yesterday and Affinion 
announced their move on Friday of last week.
    Professor Marotta-Wurgler, I understand you recently 
enrolled in one of these programs after you purchased movie 
tickets from Fandango. Did they ask for your last four digits 
of your credit card as proof of enrollment?
    Ms. Marotta-Wurgler. Yes, Mr. Chairman, I did, on Friday 
night. I thought it would be a good experience before the 
hearing to actually enroll in this service. I was actually 
concerned about whether the confirmation e-mails disclosed 
anything.
    And yes, I did purchase a movie ticket to see ``Where the 
Wild Things Are,'' which I didn't go to. And I received a pop-
up telling me of a ``$10 reward'' everywhere, asking me to 
please claim my reward, and requested that I enter my e-mail 
address and the last four digits of my credit card number.
    I was too lazy to pick up my credit card from my wallet, 
which was far away from the chair where I was sitting. So what 
I did, given that I was at the Fandango website, I went to my 
account, where I saw my billing information, and of course 
there were little stars crossed off on my credit card number, 
except for the last four digits, which I just copied and pasted 
onto the box that requested it, and I clicked ``I Agree.''
    I don't think this is enough notice. It's clearly a little 
bit better than it used to be, but it is clearly not enough 
notice, for two main reasons. One is that these offers appeared 
to come from the original vendor. So, it seems that when one's 
dealing with the original vendor and given current business 
practices, not only online but also offline, one associate 
giving the last four digits of a credit card number as a way of 
verifying one's identity, not as a way of paying. So when you 
call your credit card company, they want to know who you are, 
and they ask for the last four digits of your credit card 
number or the last four digits of your social security number 
as a way of identifying you.
    So inserting the last four digits of my credit card number 
didn't require any extra effort. It didn't really require that 
much more attention, because I thought that Fandango was the 
one offering me $10 for being a loyal customer and that they 
were just trying to see that I was the person who I was 
claiming to be, because now they have a little legend that says 
``Limit One Per Person,'' just in case people are flooding to 
be part of these types of services.
    So yes, they give you on one side, but they take away on 
the other. So I don't believe these are enough. They're clearly 
better than the default, but they're certainly not enough.
    The Chairman. I agree, and I thank you for that.
    The great news is that Senator McCaskill is on her way over 
here at about 127 miles per hour and she wants to get in one 
round of questions before the vote. So I'll defer to her the 
moment she steps in.
    From my point, just a few closing thoughts. This 
investigation, I think, starts and ends with the American 
consumer. Everybody's taking advantage of everything they can. 
The buck is always a temptation, and when it comes up, like in 
telemarketing, we stop it. When it comes up here, we've got to 
stop it. You can argue whether it should be the FTC or 
legislation, whatever. But the point is, we have to stop it. We 
have to stop it from happening ever again and expose it for 
those who continue to do it.
    My message to consumers I guess would be, be very careful. 
Make sure your glasses are good so you can read fine print, but 
you probably will never get there on that. That's a subject 
that really makes me very, very angry, the use of fine print to 
deceive Americans at all levels on many subjects which we have 
not even covered at this hearing, the use of small print to 
hide pharmaceutical secrets--you know, does this mix with that, 
et cetera? Well, it's in the fine print. Well, you should have 
read the fine print.
    That infuriates me. So I think this is a huge problem. It's 
a Main Street problem, it's an American problem. It's sort of 
classic greed. The sad part is that, you know, these big 
companies, they're getting 10 bucks a month or $19.95 a month, 
and actually Webloyalty, et cetera, they can raise it to 
whatever they want. There's nothing stopping them, right? So 
they can raise it to whatever they want.
    As I indicated, they get to try to figure out what the very 
point is where Ms. Lindquist goes bananas because she suddenly 
realizes she's really being had, and then she closes down. So 
that fine art. Beware if you're a consumer.
    I worry about this, frankly, because the holiday shopping 
season is just beginning, and all over this country, people who 
are in economic distress will be spending what few dollars they 
have on holiday shopping because they have children and 
grandchildren and that's what parents and grandparents tend to 
do.
    That brings me to my second thought, and that is my message 
for the companies that profit from tricking consumers into 
joining their clubs, yet say over and over again that what they 
do is legal and they operate within the law. I'm not a lawyer, 
but this is what I think. Just because you say what you do is 
legal, it doesn't make it right.
    Professor Cox, I'd like you to finish my sentence.
    Mr. Cox. Amen.
    The Chairman. All right.
    We're waiting now on Senator McCaskill. Believe me, it's 
worth the wait.
    If we did this to telemarketers and stopped them cold, 
what's the big problem?
    Mr. Cox. Mr. Chairman, I don't actually agree that we've 
stopped telemarketers cold. One of the things we did--and I was 
intimately involved in the telemarketing sales rule 
promulgation. But the original rule was exactly what we're 
talking about: You just can't sell billing information and 
can't give it to a third party.
    Then somewhere in the process between the proposed rule and 
the final rule, we wound up with this very complex process that 
involved this concept of free-to-pay conversions. So actually 
companies started to circumvent all of that by just charging a 
dollar. Instead of saying it's free, they say it's a dollar to 
get your $10 coupon or whatever. So there actually are still 
problems, particularly with inbound telemarketing, where you 
just call your customer service representative at the bank and 
then when they're done talking to you they say: Oh, by the way, 
would you like to do this?
    An example of that would be Ticketmaster. You call 
Ticketmaster and when they're done, depending on the kind of 
ticket you called in for, they'll say: Are you interested in a 
free trial offer in this?
    I'm not sure that the telemarketing sales rule completely 
solved that problem. In fact, I'm almost sure it didn't. I 
think it raised the stakes just a little bit and that made it 
enough so that companies shifted most of their resources over 
the direct mail and the Internet. But the problem is if you 
push those down, maybe this becomes more attractive. I don't 
think we've completely solved that problem.
    The Chairman. You know, granted I'm waiting for Senator 
McCaskill, but the Internet is very interesting to me, because 
it was discovered by DARPA and is the source of almost 
everything that everybody does. I don't go on AOL.com; I go on 
Amazon.com for books.
    Then yet, under President George Bush and under President 
Barack Obama, there are two Directors of National Intelligence, 
who are the most powerful people in their two administrations' 
respective intelligence worlds, have both said that the number 
one national security threat is not North Korea, is not China, 
is not Iran; it is cybersecurity. That is the use of the 
Internet from any place in the world, undetectable for the most 
part, to shut down already portions of Brazilian cities. 
They've already done a lot of damage to the Pentagon, to a 
variety of--downloading endless amounts of information from 
secret U.S. Government sources.
    So the Internet is our friend and the Internet is our enemy 
and the most dangerous thing that confronts us in terms of 
surviving. They can shut down a grid, they can shut down 
hospital systems. I mean, it's a very tricky business to me, 
the Internet.
    If somebody can't tell me that Senator McCaskill is about 
here, I'm going to close the hearing.
    I'm sorry, I can't wait. If you want to, she'll pop in here 
and she'll be worth it, because she's terrific. And she's a 
prosecutor, attorney general, all this kind of stuff, and she's 
just wonderful, and aggrieved on this subject.
    I want to thank you all very, very much for taking the 
time. I think I agree with you, Professor Cox, that this will 
have, this hearing will have an effect. It already has. It may 
be $10 or $20 a month, but its a wrongful $10 or $20 and it's 
not fair to do that to the American people under any 
circumstances, and we have to stop it.
    Having said that, this hearing is adjourned.
    [Whereupon, at 4:34 p.m., the hearing was adjourned.]
                            A P P E N D I X

   Prepared Statement of Hon. Mark Pryor, U.S. Senator from Arkansas
    I'd like to thank Chairman Rockefeller for holding this hearing 
today. I welcome our expert witnesses and I thank them for being here. 
Their testimony and feedback are important to inform our discussion.
    I thank the Committee and staff for their hard work as they 
continue to investigate in this area.
    Today we examine certain Internet sales tactics and their impact on 
the American consumer.
    As the Subcommittee Chairman of jurisdiction over the Federal Trade 
Commission, I am very interested in this subject. Protecting consumers 
from unfair or deceptive acts or practices is one of the FTC's core 
missions in its base statute.
    For me, it's essential to determine whether and the extent to which 
consumers are being misled or taken advantage of in this domain. If 
consumers are being abused, this Committee will work together to 
protect them.
    I know many state Attorneys General have filed suit against the 
players under investigation by the Committee. As a former state 
Attorney General, their actions indicate to me that more scrutiny and 
light must be shed on this subject.
    If third parties are manipulating Arkansans and Americans' online 
purchasing power, this causes a decline in the integrity of e-commerce. 
Less consumers will be willing to make online purchases if they are 
being charged for membership clubs they did not know they had enrolled 
in.
    Consumers must be empowered to control their purchase decisions--
whether the exchange occurs face to face or over the Internet. The 
insertion or typing of credit card information online appears to signal 
a consumer's consent to a purchase. Without this consent or requisite 
action, I am skeptical of third parties that claim the rights to 
consumers' hard earned dollars.
    I look forward to learning more about the complex dynamics of this 
debate.
  Response to Written Questions Submitted by Hon. Claire McCaskill to 
                            Robert J. Meyer
    Question 1. These companies have a long history in the 
telemarketing business and I'm sure have utilized research to figure 
out who they want to go after. Do you know if these companies target 
certain groups with their Internet practices? Do they deliberately 
target seniors or vulnerable groups?
    Answer. The number of customers taken in by these schemes is quite 
large and cuts across age, education, and income classes. Within this 
large pool, however, some segments are inherently more vulnerable than 
others to the schemes, and the firms display evidence of exploiting 
these selective vulnerabilities. Vulnerable sub-populations include 
consumers of limited income for which the sign-up premiums would hold 
particular appeal, older consumers who have had limited experience in 
making purchases on line and may have not fully comprehend the complex 
web layouts that typically accompany the solicitations, and younger (or 
older ) consumers who are overly trusting of on-line solicitations. 
Elderly consumers are also vulnerable in cases where their monthly 
large statements are handled by third parties (e.g., a son or daughter) 
who are less likely to noticed errant charges.
    While I am not aware that these companies have an a priori goal to 
target certain consumer groups, disclosures made to the Iowa Attorney 
General's office by Vertrue, Inc. suggest they actively engage in 
experimentation with different web designs, premiums, and program 
content to discover those that maximize consumer take-up while 
minimizing pay-outs of initial premiums and the filing of benefit 
claims within the programs themselves. These experiments have yielded a 
de facto targeting strategy that maximizes revenue from the groups 
identified above. To illustrate, the schemes make use of sign-up 
premiums that are likely to hold particular appeal among budget-
conscious consumers, such as free credit reports, small discounts on 
purchases and gift cards that could be used at economy-focused 
retailers such as Walmart. Likewise, the content of many of the benefit 
programs themselves are also implicitly designed to hold special appeal 
to either lower-come and/or older consumers, such as those that are 
designed to look like health plans and financial privacy -protection 
programs.

    Question 2. Once people find out they have signed up for the 
memberships, how difficult is it to cancel? Do the companies have 
tactics they utilize to try to retain customers? How truthful or not 
are they about what programs the customer has unwittingly entered into?
    Answer. There are three parts to this question, and it is best 
answered by describing the overall business objective of these firms 
and the steps they take to achieve this objective. In essence, the 
business model of these firms is rooted in an attempt to arbitrage 
consumer ignorance; they seek to secure one or more months of un-
refunded membership payments from customers for a discount membership 
program for which consumers are unaware that they are members, or for 
which they are unable to secure any benefits.
    While the programs vary quite a bit in specific content, in almost 
all cases they are dead-loss propositions as viewed by the firm, in the 
sense that the monetary value of the advertised benefits typically 
exceeds the cost of providing those benefits. For example, a primary 
feature of several of the shopping programs offered by Vertrue, Inc. is 
the ability to secure gift cards to a variety of merchants at less than 
face value--e.g., $25 Target Gift cards for $20. Because the programs 
offer consumers no benefits other than the ability to obtain such 
discounts, a consumer would rationally agree to pay for membership only 
if the realized savings exceeds the monthly membership charge. 
Disclosures made to the Iowa Attorney General's office, however, 
indicated that in most cases the cost to the firms of securing the gift 
cards is close to (and in some cases fully) face value. Hence, the 
firms have a financial incentive to insure that consumer make little or 
no use of the programs that they are unrolled it---that is, that 
consumers pay more each month for membership than they get back in 
discounts.
    Because few consumers would likely voluntarily enter into such an 
exchange, the firms are economically viable only if they are successful 
in deception. Specifically, the firms seek to maximize the difference 
between monthly membership payments from consumers and benefits paid 
out by:

        1. Making consumers unaware that that they are members of the 
        program to begin with and;

        2. Constructing transaction costs that are not revealed at the 
        time of enrollment that make it unlikely that consumers who are 
        aware of their memberships will file claims.

    The firms involved are fully aware that as soon as consumers 
discover that they are members and/or discover the transaction costs 
involved in securing benefits they will cancel. Hence, the goal is 
``keep them on the line'' as long as possible, securing at least 2-3 
months of payments from each before cancelation. While the firms have 
become increasingly compliant in allowing consumers to cancel when they 
discover that they are members, disclosures made to the Iowa Attorney 
General's office by Vertrue suggest that the firms have written 
policies designed to make it difficult for consumers to recoup 
unintended past monthly payments. Such restitution is typically only 
made if the consumer takes such actions as file formal claims with a 
Better Business Bureau, or threatens to contact a lawyer or law 
enforcement.
    Once hooked, the firms use a number of means to insure that they 
secure from consumers at least a few months' membership payments. These 
include:

        1. Monthly billing amounts that maximize the chance that the 
        charge will fall `'under the radar'' of consumers'';

        2. Lengthy procedures for recurring sign-up premiums that, in 
        essence, require that the consumer makes 1-2 months of payments 
        before they can realize the sign-up benefit (which will be less 
        than the monthly payments); and

        3. Initial descriptions of the programs that conceal the 
        transaction costs required to secure benefits.

    To illustrate point (2), some programs offered by Vertrue lure 
consumers with a promise of a ``free'' $25 gift card for use at certain 
retailers (such as Walmart), in exchange for agreeing to a 30-day 
``risk-free'' trial membership in a discount program. Not revealed at 
the time of the solicitation, however, is the fact that to receive this 
premium consumers must fill out two waves for forms which are sent back 
to the company, with the total time between the initial sign-up and the 
receipt of the premium being up to 3 months. Because of an ``active 
membership'' requirement, the firm thus insures that it has received 
$30-$45 from the customer (based on a $15/month fee) before the $25 
premium is awarded.
    To illustrate point (3), similar transaction costs are also imposed 
on consumers who attempt to claim benefits within the programs. For 
example, the initial solicitation does not inform consumers that while 
indeed they can get $25 gift cards for $20, they are required to first 
pay the firm (e.g., Vertrue) full price for the card, file for a 
rebate, and finally receive the $5 benefit several month later. In 
addition, each claim requires the consumer to submit a separate round 
of paperwork. It is not surprising that the imposition of such costs 
has had the effect of reducing usage rates of the programs to near 
zero.

    Question 3. The disclosure and full details of the offer is buried 
in small print on the example page that I have here. Most people won't 
see this because they will want get to the purchase fast and think they 
are getting a discount. Moreover, seniors will often miss details like 
this when purchasing items. In your view, what level or type of 
disclosure is needed to make these practices fair for consumers?
    Answer. The most fundamental fix is to prohibit the agreement that 
is contained within the fine print---current provisions that allow one 
seller to pass credit-card information obtained from a consumer to 
another seller. If consumers--of any age--had to fully re-enter their 
credit and address information when exposed to the new solicitation 
they would: (1) realize that this a new transaction, not a continuation 
of the previous one; and (2) have a greater motivation to carefully 
examine the details of the offer they were agreeing to. Other--and 
perhaps legally more viable--options include:

        1. Prohibiting automatic re-enrollment in ``trial membership'' 
        programs. If a firm offers a consumer the chance to examine a 
        program for 30 days so they can see the benefits, the default 
        action has to be non-enrollment, not enrollment. This would 
        bring on-line practices in congruence with norms in most other 
        areas in commerce where ``free trial'' does not come with an 
        implicit agreement to purchase.

        2. Prohibiting masking the identity of the seller promoting a 
        given web page. One of the reasons consumers are often 
        unwittingly drawn in to these schemes--and overlook fine 
        print--is that they are led to believe that the solicitation is 
        being made by the company with whom they made their primary 
        purchase, and for whom they hold trust.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Claire McCaskill to 
                       Florencia Marotta-Wurgler
    Question 1. These companies have a long history in the 
telemarketing business and I'm sure have utilized research to figure 
out who they want to go after. Do you know if these companies target 
certain groups with their Internet practices? Do they deliberately 
target seniors or vulnerable groups?
    Answer. It's quite apparent that post-transaction marketers employ 
tactics to deceive consumers by highlighting the reward part of their 
offers while effectively concealing in fine print the financial 
obligations that are attached to them. In my view, their approach is to 
deceive as many people as possible, without really focusing on a 
particular group. Given that consumers are not required to enter their 
credit card information to sign up, even the savviest consumers can be 
easily tricked into these memberships. But there are indeed groups of 
individuals who are especially vulnerable. Seniors who are less 
acquainted with online commerce and who might be less inclined to 
peruse the fine print are especially vulnerable. The same applies to 
individuals whose first language is not English and who might be unable 
to understand the terms of the offer.

    Question 2. Once people find out they have signed up for the 
memberships, how difficult is it to cancel? Do the companies have 
tactics they utilize to try to retain customers? How truthful or not 
are they about what programs the customer has unwittingly entered into?
    Answer. Even though the terms of these offers often list a number 
where consumers can call to cancel their memberships, most consumers 
only find out about their subscription after having spotted the post-
transaction marketers' charges in their credit card statements months 
(or years) later. As a result, many simply don't know whom to call to 
cancel. Some companies list an 800 number as a reference where 
consumers can call in and cancel their services, but this number is 
often obscured in the fine print. Consumers' success in canceling has 
been mixed.\1\ Some call many times and are unable to cancel. I've had 
limited personal experience with this issue when I purposely signed up 
for Reservation Rewards after purchasing movie tickets at Fandango.com 
and soon after tried to cancel. Unlike most consumers who want to 
cancel, I had obviously read the terms of the offer and was thus aware 
of the company providing the service as well as the number I was 
supposed to call. Once I called the number I was asked if I wanted to 
cancel. After indicated that I did, I was asked again where I indeed 
wanted to cancel and was prompted to press the number 1 if I wanted to 
stay and the number 2 if I wanted to cancel. These additional steps are 
likely set up to confuse consumers into not canceling. That being said, 
after pressing the right number, I received an e-mail notifying me of 
the effective cancellation.
---------------------------------------------------------------------------
    \1\ See, e.g., ``Aggressive Sales Tactics on the Internet and Their 
Impact on American Consumers, Staff Report for Chairman Rockefeller'' 
[hereinafter Staff Report] (November 16, 2009) at pg. 26, outlining 
some customer experiences in attempting to cancel.
---------------------------------------------------------------------------
    Not only do these companies deceive consumers into registering for 
(and subsequently canceling) their services, they are also deceitful in 
their description of the proffered benefits offered to consumers. For 
instance, most companies offer consumers rewards that would appear to 
become effective immediately after the consumer signs up to the 
service. This is almost never the case. Soon after registering, text in 
fine print reveals that consumers must take many additional steps to 
claim their rewards. It thus shouldn't be surprising that few consumers 
do. Moreover, in order to enjoy the benefits of the membership, 
consumers must be aware of the service and log on to their page to 
become informed about the benefits. Given that most consumers are 
unaware that they are enrolled, they are unlikely to participate. Data 
confirms that usage rates of these services are extremely low.\2\
---------------------------------------------------------------------------
    \2\ See Staff Report, id., at page 23.

    Question 3. The disclosure and full details of the offer is buried 
in small print on the example page that I have here. Most people won't 
see this because they will want get to the purchase fast and think they 
are getting a discount. Moreover, seniors will often miss details like 
this when purchasing items. In your view, what level or type of 
disclosure is needed to make these practices fair for consumers?
    Answer. In my view, the existing fine print disclosures do not 
effectively communicate the terms the relevant terms of the offer. My 
first suggestion would be to require these companies to ask consumers 
to enter their payment information before registering. Even if 
consumers don't read the terms, regardless of how prominent they are, 
the act of entering payment information should provide them sufficient 
notice about the nature of the transaction. Second, these companies 
should identify themselves prominently as distinct from the selected 
vendor. This also will reduce consumer confusion. Third, these 
companies should improve the quality of their disclosures by framing 
their offers in a manner that is not deceptive, e.g., by clearly and 
prominently explaining fees and services, following disclosure norms of 
the typical online transactions. These disclosures should be followed 
up with regular e-mail updates informing consumers of the monthly 
charges, their usage rates, and cancellation procedures. All 
disclosures should be written in clear, short, and plain language with 
no distracting features.
                                 ______
                                 
 Response to Written Question Submitted by Hon. John D. Rockefeller IV 
                                  to 
                         Professor Prentiss Cox
    Question. In response to the Senate Commerce Committee's 
investigation into their business practices, Affinion, Vertrue, and 
Webloyalty recently announced that they have changed their policies for 
establishing whether a consumer has consented to their post-transaction 
offers. Under their old policies, the companies assumed they had 
obtained a consumer's consent to their offers when the consumer typed 
in an e-mail address or other personalized ``proof of enrollment.'' 
Under the new announced policies, the companies will assume they have 
obtained consent when the consumer types in the last four digits of his 
or her 16-digit credit or debit card number. In your opinion, does this 
policy change sufficiently protect consumers against accidentally or 
inadvertently signing up for the companies' offers?
    Answer. No. This change almost surely will not prevent the problem 
of unknown and unwanted account charges. The answer to this question 
requires a focus on the core problem at issue here.
1. A Focus on the Real Problem Shows This Is an Inadequate Solution
    Preacquired account marketing is an unfair business practice 
because it sorts out consumers for account charges of which they are 
unaware for services they do not want to purchase. The evidence 
available indicates that very close to 100 percent of the millions of 
consumers charged each year for membership clubs \1\ through 
preacquired account marketing do not know of the charge or want the 
service. It achieves this remarkably unfair result by a combination of 
two techniques: (1) the sale of account number or account access by the 
referring retailer so that the consumer can be charged without 
providing his or her account number; and (2) the layering of a series 
of sales practices with deceptive potential (free trials, negative 
options and automatic renewal).
---------------------------------------------------------------------------
    \1\ I use ``membership clubs'' in this response because that has 
been the focus of the Committee's inquiry, but it is worth noting that 
these same companies, and other companies, also sell insurance and 
other programs through preacquired account marketing.
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    The collection of four digits of a 16 digit account number does 
nothing to change either of these practices, and thus is highly 
unlikely to eliminate the problems with preacquired account marketing. 
Collecting four digits likely will ameliorate some of the concerns 
created by the first problem identified above. Some consumers, perhaps 
even many, will no doubt refuse to enter even the first four digit of 
their account number because it will trigger some concern for them that 
their account may be charged. This probably will result in a decrease 
in the number of consumers confused by the practice. While that is a 
good result, it is not a solution to the problem because it helps some 
of the consumers who have money taken from their account and leaves 
others in the same undesirable situation.
    There are reasons to believe that many consumers will continue to 
be deceived about the terms of the offer, including the fact that four 
digit collection is used as a short-hand to confirm consumer identity 
in commerce rather than as confirmation of an account charge. If 
nothing else, this proposed solution leaves wholly unaffected the 
problem of the layering of problematic sales techniques. The ultimate 
question, however, is not whether it increases consumer awareness 
during the moment of the post-transaction solicitation, but whether it 
radically alters the percentage of consumers who are charged for a 
service they do not want to purchase. The very limited public data on 
the impact of the use of four digit collection is not supportive of the 
argument that the collection of four digits resolves this fundamental 
problem with preacquired account marketing.\2\ Some membership club 
sellers have previously used this method with some retailer partners or 
other account access sellers, and there is no indication that the 
result meaningfully improves the percentage of consumers who are aware 
of or desire the account charge.
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    \2\ See, e.g., section 3D below discussing Iowa Attorney General 
Tom Miller's consumer protection lawsuit against Vertrue.
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2. A Focus on the Real Solution Shows This Is an Inadequate Solution
    Another way to look at this problem is to ask why the membership 
club sellers don't take the obvious step to avoid the first part of the 
preacquired marketing problem entirely. In other words, why don't the 
membership club sellers have the consumer enter his or her account 
number just like the retailer that obtained the account number from the 
consumer and sold it to the membership club seller (and just like every 
other legitimate retailer in the market)? Obtaining the whole account 
number would not stop the layering of problematic sales practices, but 
it would be a simple and virtually cost-free solution to the practice 
of membership clubs buying, or preacquiring, the consumer's account 
number.
    As with the devilishly clever preacquired marketing system itself, 
this proposed four digit ``solution'' is shrewd because it has 
superficial appeal. Collecting four digits mimics the appearance of 
legitimate consumer protection regulation. Smart regulation for most 
consumer protection problems requires carefully separating legitimate 
commerce from deceptive or abusive transaction. The solution often 
results in an approach that leaves sellers with as much flexibility as 
possible while prescribing limits that protect as many consumers as 
possible from transactions that mislead or take unfair advantage.
    The difference here is that there is almost no legitimate commerce 
to protect. We don't need to permit a half-way measure because there is 
no evidence that any substantial number of consumers charged for these 
purported services wants to buy them. Even if there are a few such 
consumers, they will want to enter their full account number to obtain 
the service.
    Requiring the entry of the consumer's entire account number solves 
the first core problem of preacquired marketing while protecting the 
right of all consumers and sellers to enter legitimately desired 
transactions. The proposal to collect four digits, on the other hand, 
perpetuates abusive transactions while no better protecting the 
possibility of legitimate commerce. Limiting pickpockets to operating 
on weekdays only is better than 7 days a week of pickpocketing. But it 
is not a solution to the problem of such theft.
    The promise by membership club sellers to police themselves by 
collecting four digits of the account number also is illusory for two 
other reasons. First, it is a voluntary measure adopted in response to 
attention focused on this problem by this Senate Committee. As quickly 
as it appeared, it can disappear. Second, these companies are expert at 
manipulating consumer impressions. The four digit collection system can 
be ensconced in distracting details or circumvented entirely. For an 
example of the latter, consider the third and final section of my 
response to your question.
3. The Meaning of the 2003 Telemarketing Sales Rule Amendments
    There appears to be some perception that the four digit collection 
requirement in the 2003 Amedments to the Telemarketing Sales Rule 
solved the problem of preacquired account marketing in the 
telemarketing context. This is a gross misreading of the 2003 TSR 
Amendments and its aftermath.
A. The 2003 TSR Amendment.
    The amendments to the TSR published for comment by the FTC on 
January 30, 2002, expressly prohibited the use of preacquired marketing 
in telemarketing and declared it an abusive practice. The final rule 
adopted a year later required that telemarketers using preacquired 
account information in combination with a ``free-to-pay conversion'' 
must obtain from the consumer the last four digits of the consumer's 
account number to be charged.\3\ The free-to-pay conversion concept was 
intended to capture the use of free trial offers.\4\ The FTC Statement 
on the rule summarized the intended effect as forcing the consumer ``to 
reach into his or her wallet, and provide at least a portion of the 
account number to be charged.'' \5\
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    \3\ 16 C.F.R.  310.4(a)(6). 68 Fed. Reg. at 4621-22.
    \4\ 16 C.F.R.  310.2(o). The FTC also added a definition for 
negative option as part of its implementation of this requirement. 16 
C.F.R.  310.2(t).
    \5\ TSR Statement, 68 Fed. Reg. at 4622.
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    Despite retreating from the broader prohibition in its final rule, 
the FTC Statement on the Final Rule roundly criticized the practice and 
found almost no benefit from allowing it to continue.\6\ The FTC seems 
to have found one industry argument persuasive--that there are some 
situations where ``the consumer makes the decision to supply the 
billing information to the seller, and understands and expects that the 
information will be retained and reused for an additional purchase, 
should the consumer consent to that purchase.'' \7\ The FTC provided 
examples of this situation like the use of previously provided account 
numbers with a standing order for merchandise at a regular interval, 
such as quarterly orders for contact lenses. This appears to have been 
the basis for the FTC promulgating the four digit requirement rather 
than retaining the proposed prohibition on selling account access.
---------------------------------------------------------------------------
    \6\ See, e.g., 68 Fed. Reg. at 4617.
    \7\ TSR Statement, 68 Fed. Reg. at 4621.
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    The FTC was the first and remains the only Federal agency that has 
attempted to tackle the problem of preacquired account marketing.\8\ In 
revising the Rule from the original proposal, however, the FTC made two 
analytical mistakes or omissions. First, and most importantly, it 
failed to distinguish between a retailer or financial institution 
selling access to consumer accounts to a third party and the retailer 
or financial institution re-using an account number it earlier obtained 
from the consumer. This latter problem of seller-retained account 
numbers presents a different, if related, concern from the clear abuse 
of retailers or financial institutions selling account numbers to third 
party membership club sellers. Second, the FTC provided no 
justification or explanation as to why requiring only four digits was a 
sufficient solution to the problem.
---------------------------------------------------------------------------
    \8\ The FTC's recognition of the problem with preacquired account 
marketing and attempt to control it stands in contrast to the approach 
of the Office of the Comptroller of the Currency. The OCC facilitated 
national bank involvement in preacquired account marketing by issuing 
rulings defining agreements with membership club sellers as an 
ancillary banking activity; specifically, as a finder's fee. When 
Congress passed the Gramm Leach Bliley Act in 1999, it included a 
provision that appeared to prohibit financial institutions from selling 
access to their customers' accounts in this manner. 15 U.S.C.  
6802(d). The OCC and other Federal banking regulators, with FTC 
approval, then issued regulations completely neutering the effect of 
the law. See, e.g., 12 C.F.R.  40.12. When Minnesota Attorney General 
Mike Hatch later sued the mortgage subsidiary of Fleet National Bank 
for preacquired marketing, he presented evidence that Fleet's own 
customer service agents overwhelmingly objected to these charges, 
calling them ``unethical,'' ``a scam,'' and ``a fraud.'' The OCC's 
response was to file an amicus brief on behalf of Fleet.
---------------------------------------------------------------------------
B. Preacquired Marketing Industry Response to the 2003 TSR Amendments
    Preacquired account marketing through telemarketing nonetheless 
plummeted after the adoption of the 2003 TSR amendments. It is 
difficult to separate the effect of the preacquired account marketing 
restrictions, including the four digit collection requirement, from the 
other major change to the TSR in the 2003 amendments, which was the 
adoption of the national do-not-call list. The do-not-call list proved 
highly popular and resulted in a tremendous contraction of the 
telemarketing industry. It is clear that the preacquired marketing 
companies developed at least two strategies to cope with the new TSR 
requirements: (1) it substituted other forms of direct marketing; and 
(2) it developed new methods of solicitation that circumvented the TSR 
requirements.
    The preacquired marketing companies substituted other forms of 
direct marketing for telemarketing. They shifted resources into direct 
mail solicitations as well as the Internet marketing techniques that 
are the primary focus of this inquiry.
    The nature of this shift can be tracked in the public securities 
filings of the companies. In its 2001 annual 10-K filing with the SEC 
just before the TSR amendment process began, Memberworks (Vertrue's 
predecessor entity) reported that, ``An important factor in the 
Company's ability to develop innovative programs is its emphasis on 
telemarketing.'' By its late 2003 10-K filing, the company reported 
that telemarketing new member acquisitions through telemarketing had 
decreased to 20 percent of new enrollments. In its 2004 10-K filing, 
Memberworks reported the following: ``The Company has been able to 
effectively diversify its distribution channels since its initial 
public offering in 1996, at which time the Company's primary method of 
solicitation was outbound telemarketing. For the year ended June 30, 
2004, outbound telemarketing was the source for approximately 10 
percent of the Company's new member enrollments.''
    Another of the largest preacquired account marketing companies, 
Affinion, the largest membership club seller, stated the following in 
its 2009 10-K filing: ``We have developed considerable expertise in 
direct mail marketing, which remains our largest marketing medium in 
terms of new member acquisition, accounting for 45 percent of new joins 
globally in 2008. Our direct mail operations incorporate a variety of 
mailing types, including solo direct mail, detachable inserts, credit 
card inserts, statement inserts, promotion inserts, and other printed 
media. Additionally, we continually test variations of direct mail 
solicitations to drive higher customer response rates.''
    A change in the pattern of public enforcement actions against 
preacquired marketing suggests it may have worked to reduce preacquired 
telemarketing. Prior to the promulgation of the rule, public actions 
focused on telemarketing, while later cases focused more on direct mail 
and other forms of preacquired solicitation.
    The second industry response to the TSR was to develop or increase 
use of techniques that fell outside the scope of the TSR. One clear 
effort to circumvent the TSR was to change the solicitation from a 
``free trial offer'' to charging $1 for the trial period. Because of 
the narrow definition of ``free-to-pay conversions,'' this change 
allowed evasion of the new requirements for preacquired account 
marketing. The companies also relied on ``wholesale'' programs for 
telemarketing. Under this arrangement, the retailers or financial 
institution is responsible for the marketing and billing and the 
preacquired marketing company obtains fees for establishing the program 
and operating some or most aspects of the program. Because the biling 
for the membership club service is made by the retailer or financial 
institution, this process evades the TSR preacquired account marketing 
requirements.
C. The Lack of Record Supporting The Effectiveness of Four Digit 
        Collection
    The net result of the TSR preacquired account marketing rule, 
therefore, is unclear. We know that telemarketing declined in general 
and the companies adapted to the TSR by shifting to other forms of 
direct marketing and solicitation. We do not know if the 2003 TSR 
requirements, when complied with by the preacquired marketing 
companies, actually resulted in consumers becoming of aware of charges 
to their accounts for membership clubs to which they want to belong.
    Some anecdotal evidence on the matter should be available soon. 
Iowa Attorney General Tom Miller's consumer protection lawsuit against 
Vertrue included data and other allegations that Vertrue members were 
almost universally unaware that they were members or did not authorize 
the charge, and one of the methods of solicitation for these members 
was telemarketing. To the extent that the telemarketing was subject to 
and conducted in accord with the Telemarketing Sales Rule, these 
members would have had to supply the last four digits of the account 
number. Although the Iowa case was tried recently, Vertrue argued that 
certain evidence presented at trial constituted trade secret and should 
be sealed. The court has yet to issue an order which identifies the 
trial exhibits to be sealed.
                                 ______
                                 
  Response to Written Question Submitted by Hon. Claire McCaskill to 
                         Professor Prentiss Cox
    Question. You stated in your testimony that seniors could be 
especially vulnerable to these tactics. Can you elaborate more on your 
reasoning as to why seniors would be adversely affected? I realize that 
some of this may be anecdotal but do you have evidence or data that 
shows whether and how many seniors are buying into these memberships?
    Answer. The elderly are more vulnerable to deception with this type 
of marketing. It is well-established that the elderly generally are 
more susceptible to unfair or deceptive sales practices. Yet in a 
typical solicitation, the seller still has to overcome the burden of 
having the elderly consumer take the affirmative act of providing 
account access information. The preacquired seller skips this step. 
Getting an elderly consumer to pull out and read her financial account 
number is a very different proposition from getting an Alzheimer's 
patient to give you her birth date as purported evidence of 
understanding and consenting to the mechanics of a complicated, 
attenuated free trial offer with negative option.
    The evidence that is publicly available right now on this point is 
anecdotal. For example, the above-mentioned suit by Iowa Attorney 
General Tom Miller contains surveys of various Iowa citizens victimized 
by preacquired account marketing. Appendix A to this response is an 
excerpt fromt hat lawsuit describing a survey conducted of supposedly 
active members of a Vertrue club whose accounts were being charged. 
Attached to this response is a file with three of those completed 
surveys by elderly consumers. Further release of public data from this 
lawsuit also may provide data about the impact of preacquired account 
marketing on the elderly. As noted above, Vertrue is resisting the 
release of such data, and the judge in the lawsuit is considering 
whether to seal this information from the public.
    Other examples of elderly consumers who have had their accounts 
drained through abusive preacquired account marketing practices are 
contained in Appendix B to this response, which is an excerpt from a 
Complaint filed against Memberworks by Minnesota Attorney General Mike 
Hatch against Memberworks. It describes numerous elderly consumer 
victimized by this type of marketing. Attached to this response is a 
file showing the transcripts from the purported ``verification'' tapes 
with each such consumer. One of those a transcripts, for instance, is 
the taped portion of a telemarketing call to Robert Steele, an 85-year-
old man with advanced Alzheimer's disease charged for a membership 
club. In order to ``verify'' the sale, the telemarketer has to ask for 
his birth date five times. The telemarketer mentions that his age, 85 
years, ``is not a very long time.'' Mr. Steele replies, ``It is if you 
stand on your head.''
    Finally, your question raises the importance of looking at the 
problem of preacquired account marketing beyond the internet. Because 
the elderly are less likely to make purchases through the internet, 
attacking only the manifestations of preacquired account marketing on 
the web would ignore the channels more likely to victimize the elderly. 
As noted in response to Senator Rockefeller's question, one of the 
largest preacquired marketing companies reports that direct mail 
solicitation are its most important marketing channel for obtaining new 
members, accounting for nearly half of new members. Direct mail and 
telemarketing are more likely to ensnare elderly consumers and thus 
should be included in any response of the U.S. Senate Commerce 
Committee to the abuses disclosed with preacquired account marketing.
                                 ______
                                 
                               Appendix A
Iowa Attorney General Survey Description (excerpt from Complaint in 
        Iowa ex rel. Miller v. Vertrue, Inc., No. EQ53486 (IA Dist. Ct. 
        for Polk Co. May 15, 2006))
    ``26. In order to determine how rare or common it was for consumers 
to find themselves making payments for memberships they were not aware 
they were paying for, the Consumer Protection Division contacted a 
sampling of Iowa customers of Defendant who had not complained, and who 
might therefore be expected to be satisfied members, contentedly taking 
advantage of the membership services for which they were being charged.
    27. In December of 2004 the Consumer Protection Division sent 
written surveys to Iowans who were listed in company records as having 
become members of one of four Vertrue programs after April 1, 2003. The 
programs in question were HomeWorks Plus, Simple Escapes, Connections, 
and Essentials. For each program, the survey was sent to each of about 
100 randomly-selected consumers who had become members after April 1, 
2003. A copy of the cover letter that accompanied the survey appears as 
Attachment 9, and Attachments 10 through 12 are the survey responses of 
a 71 year old Dubuque resident, a 76 year old Coggon resident, and a 69 
year old Panora resident, respectively, each of whom repeatedly paid 
membership fees that appeared on their credit card bills before 
discovering the irregularity and obtaining at least a partial refund.
















                                 ______
                                 
                               Appendix B
Description of Charges to Elderly Consumer through Preacquried Account 
        Telemarketing (excerpt from Complaint in Minnesota ex rel. 
        Hatch v. Fleet Mortgage Corp., No. 01-48 (D.Minn. 2001).
                       Sigurd Anderson Transcript
    T. With your permission, I would like to tape record the 
confirmation of your trial 1membership and your mailing address so 
there is no chance of any clerical mistakes on my part, OK? Now, I show 
the spelling of your last name as A-N-D-E-R-S-O-N.
    C. That's right.
    T. Your first name is S-I-G-U-R-D?
    C. Yes.
    T. And middle initial's A. I have your address as Rural Route 1, 
Box 171A. That's Lake City, Minnesota?
    C. Yes.
    T. 55041. Is that correct, sir?
    C. That's correct.
    T. OK. Now, again, and again, Mr. Anderson, your membership 
materials will arrive shortly. After 30 days, unless we hear from you, 
the low introductory annual fee of $59.95, which works out to less than 
$5.00 per month, would be automatically billed to your [credit card 
name redacted] card account. For annual renewals we'll bill your 
account at the then annual fee. However, if you decide not to continue 
you just give our toll-free number a call. And finally, Mr. Anderson, 
just a quick survey question. Which one of these benefits sounds the 
best to you? Discounts on your music CDs and cassettes, discounts on 
videos, discounts on movie tickets, discounts on name brand items for 
your home? If you have no preference, I'll just put down that you . . .
    C. It doesn't appeal too much anyway.
    T. Yes. What I'll do is just say that you had no preference and 
when you get your materials, just look over all of it and see which one 
you can use and best benefit from and, again, my name is Patricia 
Hunley and I'd like to thank you for uh--for trying Connections and if 
you have any questions, call one of our Connections service 
representatives and that number is 1-800, let me see what that number 
is. Hold on, I've got that number right here. OK, it's 1-800-568-2386. 
And this number is also included in your membership kit. And you have a 
very nice day. Thank you. Goodbye.
                       Joseph R. Gwin Transcript
    T. . . . your trial membership and your mailing address so there is 
no chance of any clerical mistakes on my part, OK? OK?
    C. What?
    T. OK, sir, now with your permis--permission I would like to tape 
record the confirmation of your trial membership and your mailing 
address so there is no chance of any clerical mistakes on my part, OK?
    C. Yup.
    T. OK. Sir, I show the spelling of your last name as Gwin, that's 
G-W-I-N, first name is Joseph. That's J-O-S-E-P-H. Is that correct?
    C. (inaudible)
    T. OK, sir. And I have your address as 3455 173rd Lane Northwest. 
And that's in Andover, Minnesota 55304. Is that correct?
    C. Yes.
    T. OK, sir. And again, Mr. Gwin, your membership materials will 
arrive shortly and after 30 days, unless we hear from you, the low 
introductory annual fee of $59.95 which works out to less than $5.00 
per month would be automatically billed to your [credit card name 
redacted] card account. For annual renewals we'll bill your account at 
the then current annual fee. However, sir, if you decide not to 
continue just give our toll-free number a call. Now finally, Mr. Gwin, 
just a quick survey question. Which one of these benefits sounds the 
best to you? A discount on music CDs and cassettes, a discount on 
videos, a discount on movie tickets, or a discount on name brand items 
for the home? Or if you just like all the benefits. Do you have a 
preference, sir?
    C. Not really.
    T. OK. Well, we'll note that. Sir, I really think you'll get a lot 
of use from your Connections membership. And sir, to help you get 
started when you receive your membership kit just go ahead and look 
through all of it to see how you can use all these great benefits. And 
again, sir, my name is Chris Sharborough. I'd like to thank you for 
trying Connections. And if you have any questions, sir, please give one 
of our Connections service reps a call at 1-800-568-2386. And sir, this 
number is also included in your membership kit. I thank you so much 
again, Mr. Gwin, and you have a great day. Thank you, sir, goodbye.
                      Robert E. Steele Transcript
    T. . . . tape scrambled . . . I need to verify a little bit of 
information to make sure we're sending it to the right place. With your 
permission, sir, I would like to tape record the confirmation of your 
trial membership and your mailing address so there is no chance of any 
clerical mistakes on my part. Is that OK Mr. Steele?
    C. That sounds alright.
    T. OK. I show the spelling of your last name as S-T-E-E-L-E and 
first name as Robert. R-O-B-E-R-T. Middle initial E. Is that correct?
    C. Yes.
    T. OK. You live at 1309 River Wood Drive, Little Falls, Minnesota 
56345. Is that correct?
    C. Yea.
    T. OK. Now, just so we are clear Mr. Steele, your membership 
materials will arrive shortly in a white envelope. After 30 days, 
unless we hear from you, the low introductory annual fee of $59.95, 
which works out to less than $5.00 per month, will be billed 
automatically to your [bank name redacted] Bank account. Now, for 
annual renewals we'll bill your account at the then current annual fee. 
However, as I said Mr. Steele, if you decide not to continue with the 
program, then just give our toll-free number a call. And just to verify 
that I have your approval to process your trial membership and that you 
understand how it will be charged, I need the month, day and year of 
your birth. And what would that be Mr. Steele?
    C. What?
    T. The month, day and year of your birth?
    C. That's (inaudible)
    T. Unh? Mr. Steele?
    C. Yea.
    T. Could I have the month, day and year of your birth sir?
    C. The month and day of my birth?
    T. Yea. Your birthday?
    C. Well, my birthday is July 21. 7-21.
    T. OK. And the year?
    C. 13.
    T. OK. 1913. Alright. Mr. Smith . . .
    C. Long time ago.
    T. That's not so long ago, Mr. Steele. (Laughing).
    C. I'm 85.
    T. Yea but (inaudible). That's not very long ago.
    C. No. No. I'm still running.
    T. That's good. That's good.
    T. Well, I study Biology and to me 85 years Mr. Steele is not a 
very long time.
    C. It is if you stand on your head.
    T. (Laughing) Well, I am sure Mr. Steele when I'm 85 I'll probably 
think it's a long time, but you still have time.
    C. If you go the right road.
    T. That's--That's right. That's exactly right. Mr. Steele, I'd 
first of all I just want to ask you which one of the benefits of our 
package sounds best to you? I'm going to read you a list of four. And 
this is just a survey question. First of all, 20 percent cash rebates 
for all your purchases at any of your favorite retailers. Or 20 percent 
cash rebates for the best selling video game system and video games. Or 
20 percent cash rebates on photographic and communications equipment. 
Or 40 percent savings off local (inaudible) prices on items for your 
home. Which one of those appeals to you the most Mr. Steele?
    C. Probably the first one.
    T. The first one. OK. I'll make a note of . . .
    C. ah . . . no . . . and the
    [Tape Ends]
                       Gustav Rakowsky Transcript
    T. OK. With your permission, Mr. Rakowsky, I would just like to 
tape record the confirmation of your trial membership and your mailing 
address so there is no chance of any clerical mistakes on my part, OK?
    C. OK.
    T. Great. With your per, now with your permission, I have begun 
taping, all right?
    C. OK.
    T. OK. I have, today's date is August the 17th, 1998, and I show 
the spelling of your last name as Rakowsky, R-A-K-O-W-S-K-Y?
    C. Right.
    T. And your first name is Gustav.
    C. Right.
    T. G-U-S-T-A-V.
    C. Right.
    T. Middle initial A.
    C. Right.
    T. And I have your address as 222 East Second Street, Apartment 
406?
    C. Right.
    T. That's in Duluth, 55805.
    C. Right.
    T. OK, Mr. Rakowsky, just so that we're clear, your membership 
materials will arrive shortly in a green and white envelope. Now, 
there's three very important points that I just need to get your verbal 
acknowledgment on, OK?
    C. OK.
    T. Well, first you will have a full 30 days to try Health Trends 
without a charge. After that, $8.25 a month will be drafted from your 
[bank name redacted] Bank checking account, OK?
    Well, I can pay my own bills. I don't need nobody to pay my check 
for me.
    T I understand that, Mr. Rakowsky. That's just how they charge for 
this. If you would decide to continue with it, that's how they would do 
the billing, OK?
    C. OK.
    T. Now, second, with your tape recorded verbal authorization, you 
give [bank name redacted] Bank the permission to process the monthly 
membership fees through your checking account. There's no signature is 
required, OK?
    C. Right.
    T. And third . . .
    C. And the banks'll soon own us anyhow, I guess.
    T. I sometimes I get the feeling of that, yes.
    C. We get our numbers on the back of our hands.
    T. That's, or across our forehead.
    C. Yes.
    T. Sir, it's important to note that if you have any questions about 
the program or would like to cancel your membership, you should contact 
the customer service number provided in your membership kit, OK?
    C. OK.
    T. And just to verify that I have your approval to process your 
trial membership and you know how it would be billed, I need the month, 
day and year of your birth. What would that be, please?
    C. Well, well, I'm not giving out all my history! (emphatically)
    T. Just your birth date?
    C. Yes, my birthday.
    T. OK. Well, I can understand, Mr. Rakowsky. You know, we only ask 
for your date of birth for your protection and to verify that we have 
your permission.
    C. Well, I don't . . .
    T. That's fine, Mr. Rakowsky. I can take your mother's maiden name, 
OK. This is just for our purposes to know that you are aware of 
everything that I said to you. That's all. This just proves to us that 
I did speak with you and you, and not, like a neighbor or if a neighbor 
answered the phone or whatever. That's all.
    C. Oh, I ain't worrying about that because, they're sticking their 
nose in everything we got.
    T. Pardon me?
    C. I say that the business houses and the government is sticking 
their hands right in the, into your pocket.
    T. I understand that, Mr. Rakowsky.
    C. Yes, and I'm too old to fall for these little catchy tricks that 
they got. `Cause I've seen them work and I've seen them go right down 
the drain.
    T. What little catchy tricks?
    C. Well, next there'll become a credit card with my number on it.
    T. Oh, no, no, no, no, no, no.
    C. and all kinds of stuff like that.
    T. Oh, no. No, no. Nothing that drastic. Nothing like that. No. 
This is just, you know, it proves that I did talk to you. It verifies 
that I have your approval to process your trial membership and, you 
know, you do understand how it would be billed if you decided to 
continue with it after the 30 days, that's all. Could I have your 
mother's maiden name?
    C. Anna.
    T. A-N-N-A?
    C. Right.
    T. OK. Very good. Mr.--Gustav, one real quick survey question. 
Which of these benefits sounds the best to you? The savings on the 
medication, the savings on eyewear, the savings on chiropractic 
services or on the doctor hotline?
    C. The one be on the medicines a little bit.
    T. The medicines. OK, great. I'll note down . . .
    C. `Cause the drugstores are robbing us blind anyhow because they 
make about 300 percent on everything you buy.
    T. I know. Just like the hospitals.
    C. Yes.
    T. OK. Well, I really think you'll get a lot of use from your 
Health Trends membership. And to help you get started, be sure to turn 
to page 5 when you receive your membership kit to see exactly how you 
can use and benefit from the prescription medication. And again, my 
name is Fran Megly. I'd like to thank you for agreeing to try Health 
Trends. If you have any questions, Mr. Rakowsky, please give one of our 
Health Trends service representatives a call . . .
    C. Yes, OK.
    T. . . . at 1-800-544-3291. Now, that number will be included in 
your membership kit, but would you like to write that down?
    C. No.
    T. OK.
    C. No, I'm not in that much of a hurry.
    T. Oh, OK. Well, Mr. Rakowsky, again, my name is Fran Megly and I 
thank you so very much. You have a great day.
    C. Yes, you too.
    T. Thank you.
    C. All right.
    T. Bye-bye.
    C. Yes, bye.
                     Dorothy Christensen Transcript
    T. And now with your permission I would just like to tape record 
the, confirmation of your trial membership and your mailing address so 
there is no chance of any clerical mistakes on my part, OK?
    C. OK.
    T. OK. I show the spelling of your last name C-H-R-I-S-T-E-N-S-E-N?
    C. Right.
    T. And your first name is Dorothy?
    C. Right.
    T. And I have your address as 4400 36th Avenue North, Apartment 201 
. . .
    C. Right.
    T. Minneapolis, Minnesota 55422?
    C. Yes. Are you calling from [bank name redacted] you said?
    T. We're calling [bank name redacted] cardholders on behalf of 
Smart Source.
    C. OK.
    T. Anyhow, just so we're clear, Mrs. Christensen, your annual 
membership materials will arrive shortly in a white envelope after 30 
days unless we hear from you, for the introductory annual fee of $59.95 
which works out to less than $5.00 per month will be billed 
automatically to your [bank name redacted] Bank VISA MasterCard 
account. For annual renewals we will bill your account at the then 
current annual fee. However, if you decide not to continue then just 
give our toll-free number a call. And remember, Mrs. Christensen, you 
can receive this gift of two free roundtrip tickets by simply 
completing and returning the business reply card in your membership 
kit. And just to verify that I have your approval to process your trial 
membership, and that you understand how you will be charged, can I get 
your birthday, what would that be, please?
    C. And what else?
    T. I need your birthdate.
    C. 10-9-8
    T. Pardon me?
    C. 10-9-8.
    T. 10-9-8. OK, that's just to verify that I have your approval to 
process your trial membership. And you understand how you will be 
charged. And Mrs. Christensen, just a quick survey question. Which one 
of these benefits sounds the best to you at this time? A 20 percent 
cash rebates for all your purchases at any of your favorite retailers, 
a 20 percent cash rebates for the best selling video games and video 
game systems, a 20 percent cash rebates on photographic and communic--
communications equipment, or up to 40 percent savings on local prices 
on items for the home.
    C. I, I can't remember all that, you'd have to show it to me, or I 
can't--I think we just better quit this.
    T. Well ma'am, if after reviewing the membership materials if you 
found our program to be cost-effective and beneficial for you, would 
you decide to keep it?
    C. Keep what?
    T. If after reviewing this program, if you found our program to be 
cost-effective and beneficial for you, would you decide to keep it?
    C. Well, I'll see, I don't know yet.
    T. Alright, I'll note that. I really think you'll get a lot out of 
your membership. Also remember to return the business reply card in 
your membership kit to receive your two free airline tickets. Please 
note travelers are required to spend a minimum number of nights in one 
of the hotels in the program at the hotel's regular published rate.
    C. This sounds like a scam to me.
    T. Pardon me?
    C. This sounds like some kind of a scam.
    T. (incomprehensible) trial membership for the SmartSource program, 
ma'am?
    C. (incomprehensible) You want to send me this and then I don't 
have to pay anything until I read it over.
    T. If you should find that this is (incomprehensible) there's 
absolutely no cost during the 30-day trial membership . . .
    C. OK.
    T. . . . you receive a month to review and use it and if you should 
find that it's not for you during the month, all we ask is that you 
give us a call at our toll-free number during the month and let us know 
and you're not even billed.
    C. OK.
    T. Again, my name is Sherry, and I'd like to thank you for agreeing 
to try the program. If you have any questions, please give one of our 
service representatives a call at 1-800-211-9746. And this number is 
also included in your membership kit.
    C. OK.
    T. Thank you and have a good day.
    C. You too.
    T. Bye bye.
    C. Bye.