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THE DOWNLOAD DEVELOPMENTS IN E-COMMERCE, PRIVACY, MARKETING, AND INFORMATION SERVICES LAW AND POLICY VOLUME 2, NUMBER JANUARY 10, 2007 1 Editors In this issue: Alisa M. Bergman 202-344-4611 [email protected] • Task Force Seeks Comments on I.D. Theft Issues (page 1) Emilio W. Cividanes • FTC Issues Staff Opinion on Word-of-Mouth Marketing Regarding Disclosure of Paid Relationships (page 4) • FTC to Host One-Day Workshop Analyzing Negative Option Marketing (page 6) 202-344-4414 [email protected] Stuart P. Ingis 202-344-4613 [email protected] Task Force Seeks Comments on I.D. Theft Issues Washington, D.C. 575 7th Street, NW Washington, DC 20004-1601 (202) 344-4000 BALTIMORE Two Hopkins Plaza Baltimore, MD 21201 (410) 244-7400 rockville One Church Street Fifth Floor Rockville, MD 20850 (301) 217-5600 Towson 210 Allegheny Avenue Towson, MD 21204 (410) 494-6200 Tysons 8010 Towers Crescent Drive Vienna, VA 22182 (703) 760-1600 NEW YORK 405 Lexington Avenue New York, NY 10174 (212) 307-5500 Los Angeles 2049 Century Park East Los Angeles, CA 90067 (310) 229-9900 The Federal Identity Theft Task Force (Task Force), chaired by Attorney General Gonzales and co-chaired by Federal Trade Commission (FTC) Chairman Majoras, is seeking public comment on ways to improve the effectiveness and efficiency of federal government efforts to reduce instances of identity theft. Policymakers are likely to rely upon these recommendations as guidance in developing legislation and regulations for the private sector. Comments are due Friday, January 19, 2007. See http://www.ftc.gov/speeches/majoras/061221PublicNoticeFinal.pdf. By way of background, this Task Force was created by an Executive Order signed by the President on May 10, 2006 to strengthen efforts to combat identity theft. Comprised of 17 federal agencies and departments, its purposes are to improve the federal government’s protection of personal data, improve public outreach to educate the public about identity theft, consider the development of appropriate safeguards for the private sector, and encourage more aggressive law enforcement action against perpetrators of identity theft. The Task Force was to provide to the President by November 10, 2006 a coordinated strategic plan for improving the federal government’s activities in identity theft awareness, prevention, detection, and prosecution. By further Executive Order, this time frame was amended to require submission of the strategic plan no later than February 9, 2007. On September 19, 2006, the Task Force published interim recommendations. Although there is no requirement to formally solicit public comment, the Task Force has decided to do so to obtain the benefit of additional research, analysis, and recommendations on these issues. The request for public comment notes that it is not expected that the Task Force will respond directly to particular suggestions or comments. Rather, it will use the information to supplement its work. V A L U E A D D E D , V A L U E S D R I V E N.SM THE DOWNLOAD JANUARY 10, 2007 The work of the Task Force has been focused in the following four areas: I. II. III. IV. Enhanced security and consumer education to help keep sensitive data out of the hands of identity thieves; Preventing misuse of consumer data—making it more difficult for identity thieves to use information to steal identities; Victim recovery; and Law Enforcement: greater ID theft deterrence through more aggressive prosecution and punishment. The recommendations under consideration that would have the greatest impact on the private sector are consideration of a national data security standard and breach notification requirement; issues related to both government and private sector uses of social security numbers (SSNs), including a request for comment on alternative identifiers for SSNs; and public private partnerships efforts to combat identity theft. Following is a summary of the key issues and questions on which the Task Force is inviting comments: I. Maintaining Security of Consumer Data Building on the interim recommendation that called for an examination by federal agencies of their collection and use of SSNs, the Task Force is considering whether the following types of additional measures should be taken as well as comments on the following issues: • Government Use of SSNs o Ways to achieve reduced reliance on SSNs by federal, state and local government, including steps to eliminate unnecessary use and display of SSNs o Comments on any available substitutes for SSNs • Private Sector Use of SSN o Whether to recommend an investigation into and analysis of how SSNs are currently used in the private sector • National Data Security Standards for Commercial Entities o Whether to recommend national data security requirements for all commercial entities that maintain sensitive consumer information Comments on essential elements of such a requirement, variations for small businesses, costs associated with such a requirement • Breach Notification Requirement for Private Sector o Whether to recommend a national breach notification requirement o Deficiencies in current protocols regarding breach notification o Comments on essential elements of such a requirement • Education of private sector and consumers regarding data safeguards V A L U E A D D E D , V A L U E S D R I V E N.SM 2 THE DOWNLOAD JANUARY 10, 2007 II. Preventing Misuse of Consumer Data Building on the interim recommendation to hold a workshop or series of workshops on authentication issues (which will begin in early 2007) to develop and promote more reliable methods of authentication to make it harder for identity thieves to open new accounts or access existing ones, the Task Force is seeking comment on any additional measures to prevent the misuse of consumer data. III. IV. Victim Recovery • Improving victim assistance (e.g., educational materials for first responders, law enforcement training, victim statement of rights) • Developing a national identification document for authentication purposes • Gathering data on effectiveness of victim recovery efforts (e.g., FTC surveys, assessment of state credit freeze laws) Law Enforcement To further the Executive Order's policy of increased aggressive law enforcement, among other measures, the Task Force is considering: • Establishing a National I.D. Theft Law Enforcement Center • Enhancing law enforcement's ability to receive information from private sector o DOJ discussions with private sector to increase awareness by victims of rights to receive I.D. theft-related documents o DOJ discussions with credit reporting agencies regarding possible measures to make it more difficult for identity thieves to obtain credit base on access to a victim's credit report o Investigation of I.D. thieves resident in foreign countries • Amendments to federal statutes and guidelines used to prosecute identity theft-related offenses o Amending 18 U.S.C. § 1030 by eliminating current requirement that key-logging or malicious spyware actions must cause damage to computers, and that the loss caused must exceed $5,000 o Enacting legislation that would make it a felony for data brokers and telephone company employees to knowingly and intentionally sell or transfer customer information without prior written authorization from the customer, with exceptions for law enforcement V A L U E A D D E D , V A L U E S D R I V E N.SM 3 THE DOWNLOAD JANUARY 10, 2007 FTC Issues Staff Opinion on Word-of-Mouth Marketing Regarding Disclosure of Paid Relationships The Federal Trade Commission (FTC) actively has been monitoring the evolution of new marketing techniques, including word-of-mouth or “buzz” marketing, product placement, and marketing via cell phone as outlined among the priorities in remarks by Lydia Parnes, Director of the Bureau of Consumer Protection, in January at the 2006 Annual Advertising Law & Business Conference of Association of National Advertisers. In a recent staff opinion letter, the FTC has now addressed the issue of word-of-mouth marketing—the practice of marketing by encouraging consumers to endorse a product among other consumers. As the Commission indicates that it will start to bring enforcement actions against word-of-mouth marketing that it considers deceptive, any such campaign should be reviewed carefully prior to execution. In particular, word-of-mouth marketing involving payment to the consumer in return for product endorsements should include a disclosure of this relationship. With respect to non-monetary compensation (such as free samples, reward points, swag, etc.), marketers should consult the FTC guidelines on Endorsement, as well as the industry best practices set forth in the Word-of-Mouth Marketing Association (WOMMA) ethics code, which requires disclosure regardless of payment. In addition, special attention should be focused on any campaigns targeted at children, particularly those that take place online and that are directed to children under the age of 13, given the children’s privacy requirements that may be triggered. I. The Opinion Letter The FTC issued its December 7, 2006 letter in response to an October 18, 2005 petition submitted by the consumer group Commercial Alert. Commercial Alert had requested that the Commission issue guidelines to govern word-of-mouth marketing and bring enforcement actions against marketers who use it deceptively. The Commission declined to issue guidelines, stating that existing standards concerning deceptive advertising would be sufficient. The Commission stated, however, that it would bring enforcement actions on a case-by-case basis against those who use deceptive word-of-mouth marketing. II. Standards Described in the Letter According to the letter, Commission staff believe that it would be deceptive for a marketer to pay consumers to endorse the marketer’s product without disclosing this relationship. The letter suggests that consumers are likely to place more credence in another consumer’s endorsement of a product based on the appearance that he or she is independent of the seller. If the endorsing consumer is not actually independent, the letter explains, this mistaken enhancement of trust renders the practice deceptive. Commercial Action’s petition raised specific concerns about word-of-mouth marketing to children. In response, the Commission noted that it already takes steps to protect children from deceptive advertising, evaluating deceptiveness from the standpoint of an ordinary child. The Commission agreed with the petitioner that marketers also must comply with the Children’s Online Privacy Protection Act 1 (COPPA). 1 Related to this, the Children’s Advertising Review Unit (CARU) has issued guidelines regarding the use of endorsements with respect to children’s advertising, which also are instructive. See http://www.caru.org/guidelines/index.asp. V A L U E A D D E D , V A L U E S D R I V E N.SM 4 THE DOWNLOAD JANUARY 10, 2007 III. Types of Compensation Covered by the Letter The FTC letter focuses primarily on payments of money in return for endorsements, which it condemns as deceptive when there is no disclosure of the connection between consumer endorser and marketer. However, the letter also notes that some marketers “provide consumers with product samples, coupons, ‘inside’ information about new products, the ability to influence marketing campaigns, or similar incentives.” Commission staff do not state definitively that they consider such incentives to be equivalent to monetary payments for purposes of the policy announced in the letter. Instead, they emphasize the standard set out in the Commission’s Endorsement Guides, considering “whether the connection between the seller and the endorser is likely to have a material effect on the weight or credibility of the endorsement.” See 16 C.F.R. § 255.5. Under the relevant guideline, a material connection is defined as one that is not reasonably expected by the audience. To illustrate this standard, the letter cites cases in which endorsers were presented as being independent, but in fact were business associates or relatives of the marketer. Thus, the deciding factor for the FTC in evaluating deceptiveness will be whether the incentive undermines the independence that the consumer appears to possess. Even a non-monetary incentive that has this effect presumably would be considered deceptive. IV. Conclusion The opinion letter establishes that the Commission is likely to take enforcement action against marketers who pay consumers to endorse their products without disclosing this fact. Accordingly, where the proposed marketing activity involves the payment of money to a consumer in return for his or her endorsement, this relationship should be disclosed. The opinion letter is less clear with respect to other types of incentives— discounts, coupons, product samples, and similar compensation—given to consumers in return for endorsements, but the letter implies that the Commission will pay close attention to these consumer relationships as well. If the Commission believes that other consumers trust the word-of-mouth endorsement due to a perception of independence, and that the incentive given to the endorsing consumer makes this perception inaccurate, the Commission considers the practice to be deceptive. For this reason, when providing non-monetary incentives to consumers in return for their endorsements, these activities also should be reviewed carefully and the safest course of action would be to disclose these relationships as well. Venable attorney Chris Diamond contributed to this article. V A L U E A D D E D , V A L U E S D R I V E N.SM 5 THE DOWNLOAD JANUARY 10, 2007 FTC to Host One-Day Workshop Analyzing Negative Option Marketing The FTC has announced that it will hold a workshop on January 25, 2007 focusing on "negative option offers" over the Internet. According to the FTC notice announcing the workshop, negative option offers are the offer by a business of a product or an initial provision of services, coupled with the continuing option to receive the product or services in the future if the customer does not cancel such further receipt. The key factor that makes an offer a "negative option," according to the FTC notice, is the fact that the customer's silence or failure to take an affirmative action to reject goods or services or cancel the agreement is treated as acceptance of the offer. The workshop will analyze three types of negative option offers: • Prenotification Negative Option Plans—Plans where businesses send notices to customers regarding products or services that the customer will receive unless the customer tells the business within a set amount of time that they do not want to receive the product or service. • Continuity Plans—Plans where customers regularly receive products or services until they cancel the agreement. • Trial Conversions—Plans where customers agree ahead of time to receive products or services for a trial period and, unless the customer cancels after the trial period, the delivery of the product or service will continue. These are often "free to pay" conversions where the customer is not charged for the trial offer and begins to be charged after the trial period. The FTC has indicated that it will explore the following questions at the workshop: 1. What are the pros and cons of negative option marketing? 2. How do consumers behave when viewing and responding to marketing offers online? 3. How can marketers meet the clear and conspicuous standard for advertising disclosures when making negative option offers online? 4. How can advertisers make negative option offers with effective disclosures that are compatible with the advertising message? One area that is expected to receive significant discussion is the interplay between contract law and the FTC's clear and conspicuous standards. The workshop is open to the public and will be held in Washington, DC. The FTC will also accept written comments until February 26, 2007. V A L U E A D D E D , V A L U E S D R I V E N.SM 6 THE DOWNLOAD JANUARY 10, 2007 THE DOWNLOAD is published by the privacy team at the law firm of Venable LLP. Internet address: http://www.venable.com. It is not intended to provide legal advice or opinion. Such advice may only be given when related to specific fact situations. Copyright Venable LLP 2007. Issue Editor: Stuart P. Ingis Associate Editor: Katharine A. Pauley Questions and comments concerning information in this newsletter should be directed to Stuart Ingis at [email protected]. Please direct requests to be added to the distribution list or address changes to Kay Pauley at [email protected]. You are receiving this communication because you are a valued client or friend of Venable LLP. To unsubscribe from this mailing list, reply to this message with REMOVE in the subject line. V A L U E A D D E D , V A L U E S D R I V E N.SM 7