The court granted the FTC summary judgment on liability for violation of §5 and the Telemarketing Sales Rule with respect to three “wealth-creation” products sold via infomercials, the John Beck system (promising real estate riches), the John Alexander system (ditto), and Jeff Paul’s Shortcuts to Internet Millions (guess what). The FTC successfully held the named originators, their companies, and related companies liable.
The John Beck system claimed to help consumers make money by buying real estate at tax foreclosure sales by paying the delinquent back taxes. The relevant defendants falsely represented that consumers could quickly and easily earn lots of money by buying homes in their area “free and clear” for “pennies on the dollar,” then reselling them for full market value or renting them for a profit. The informercials also claimed that buyers would get a free 30-day membership to “John Beck’s Property Vault,” but failed to disclose that it was a continuity plan that subsequently charged them $39.95/month, in violation of the Telemarketing Sales Rule.
The “John Alexander's Real Estate Riches in 14 days” infomercial touted Alexander's “inverse ownership system” of acquiring real estate, supposedly allowing consumers to put together real estate transactions and get “the cash out at closing” without using any of their own money or credit, within 14 days. “John's Club” was the same type of continuity plan.
“Jeff Paul's Shortcuts to Internet Millions” infomercials marketed materials on “proven, turnkey internet businesses,” allegedly “so simple that consumers do not need any prior experience with internet business to make it work.” The “Big League” or “Internet Millionaires Club” was the same type of continuity plan.
Defendants challenged the FTC’s survey, which was conducted by Dr. Conrey. The survey “measured the earnings and profit experienced by consumers who had purchased one of the three products. [It] also investigated whether investment in coaching services or investment of time was related to consumers' earnings or profit.” Using the list of people from customer databases of the three products, the surveyor took a sample. Each person in the sample was mailed a Prenotification Letter, which read in part:
The Federal Trade Commission needs your help. Since 1914, the Federal Trade Commission (the FTC) has protected American consumers by monitoring and regulating businesses. In order to fulfill this responsibility, it periodically conducts research into the experiences of customers who have purchased certain types of products and services. As part of a current research study, the FTC has enlisted the help of ICF Macro, an independent research firm, to learn about customers' experiences with [PRODUCT NAME]. A few days from now, you will receive a phone call from an ICF Macro interviewer who will ask for your assistance in this important research effort....
Dr. Conrey confirmed that the final survey was consistent with best practices in survey design. Defendants argued that the prenotification letter tainted the pool by positioning the FTC as the “good guy.” Dr. Conrey explained that there was no feasible alternative to a letter with this kind of disclosure, given respondents’ privacy and legitimacy concerns; the notification gave the survey credibility and legitimacy and avoided confusion or suspicion about the sponsor. The court held that this satisfied the requirements for admissibility.
The court readily found Section 5 violations. The claims were material and were false and unsubstantiated at the time they were made. Just looking at the John Beck system, the claims that consumers could “purchase” homes for “pennies on the dollar”; buy homes in their own area, regardless of where they lived; make money “easily” and with little financial investment; and make money “free and clear of all mortgages” were disproved by the kit materials themselves. Buying tax liens doesn’t mean you get a deed, only a right to collect delinquent taxes, which only ends up with title and right to possess or sell in exceptional circumstances. Tax sales are held only once a year and bidding typically starts at a very high percentage of fair market value.
Beck’s deposition testimony also showed the falsity of the infomercials; while he expressly claimed to have bought “thousands” of properties with his system, at deposition he admitted that he did so “very infrequently”—only 10 times. Beck claimed that his daughter had bought over 90 properties using his system, but admitted that he knew of only 4 “students” who’d been able to get title to homes like those shown in the infomercial, and those instances required several years of waiting, including a court trip to foreclose on the right of redemption. Purchasing property at tax sales is elaborate and time-consuming.
Dozens of consumer witnesses further confirmed this falsity. They testified that it was difficult or impossible to find tax sales in their area, and difficult or impossible to earn substantial money using the Beck system. Success, if any, would require significant monetary investment. The Conrey survey showed that less than 2% of consumers made any revenues at all, and less than 0.2% made any profits. Only 1.9% of those who bought coaching materials made any revenues. Even among consumers who spent ten or more hours per week using the product, only 3.5% of them made any revenues.
Defendants argued that their representations weren’t false, in that the houses featured in the infomercial did in fact sell for the displayed prices. Plus, the Beck system also encouraged purchases of raw land and house sites. And, even if a consumer does not live in a non-tax lien state, she can use the Internet to buy properties elsewhere. None of this matters: the overall net impression of the ads communicated that a typical consumer could easily purchase high-value properties for pennies on the dollar and quickly earn tens if not hundreds of thousands of dollars. What the kit “encouraged” was immaterial, because the visuals of the infomercials themselves focused heavily on large homes and vacation properties. And even if the featured houses did sell for the displayed prices, the net impression was still false: that nice homes such as those shown were easily available in all 50 states, and that one could easily obtain deeds to them for pennies on the dollar. The same defect applied to defendants’ argument that the exact phrase “quick and easy” never appeared: “quick,” “easy,” and similar concepts were used repeatedly. Defendants’ own copy test showed that the number of respondents who received the challenged claims exceeded 10.5%, which was sufficient to count as deceptive. No reasonable trier of fact could concluded that these representations weren’t likely to deceive consumers acting reasonably under the circumstances.
The same story, with variations only as to the misrepresentations, held for the other infomercials. The court dismissed small print disclaimers that endorsers’ experiences were unique. “The prints are so tiny that, under the circumstances, consumers are unlikely to read them while watching and listening to the testimonials of the endorsers.” Nor did defendants possess any substantiation for their exaggerated claims of easy financial success. Infomercials that gave the overall impression that a typical buyer could “easily, quickly, and ‘magically’ earn thousands of dollars per week simply by purchasing and using the Jeff Paul System” were deceptive.
Likewise, failure to disclose that buyers would be automatically enrolled in continuity programs when they bought the front-end kits was material and deceptive under Section 5 (and violated the TSR).
Further, defendants misrepresented that consumers who bought their coaching programs would quickly and easily earn back the coaching costs or more, falsely claiming that personal coaches would hold consumers’ hands and walk them “step by step” through the system; some telemarketers even suggested that consumers would certainly fail without coaching. Conrey’s survey showed that almost all who bought coaching programs lost money, and more than 17% lost at least $10,000. Only 1.7% of those who bought coaching services made any profit at all. And the coaches failed to answer questions or walk consumers step by step through the system. Defendants argued that they had a quality assurance program and took steps to rein in rogue staff. Nonetheless, their telemarketers made false and unsubstantiated representations; there was no evidence showing that defendants’ recording of calls reduced or eliminated the false claims. And in any event, the basic express claim that the coaching program would help consumers was completely unsubstantiated.
The continuity charges violated the TSR because defendants didn’t disclose their existence before customers handed over their credit card information. Defendants argued that they explained the negative option program at the time of the purchase, and also did so in the invoice and package shipped with the product, as well as in post card disclosures, phoned expiration notice disclosures, and coaching disclosures. Those were all too late: disclosure was required before a consumer divulges credit card or bank account information.
In addition, defendants violated the do not call rule. They failed to set up a meaningful compliance program, lacked written procedures, and didn’t train staff. They allowed paper leads to pile up on “boiler room” floors before marking them as do not call in their database. They also used “lead recycling,” ensuring that consumers, including people who asked not to be called, would be called multiple times. Defendants argued that these were isolated incidents and that the violations didn’t fall outside the 30-day grace period for putting customers on the company’s internal do not call list. But without written policies and procedures for do not call complaints, these defenses were unavailing.
The FTC asked for injunctive relief and monetary relief of over $300 million. The defendants were all liable, including the individual “gurus” who knew that their claims were false and unsubstantiated. The court requested further briefing on whether certain defendants should be subjected to a lifetime ban on telemarketing, given prior lawsuits. Likewise, the court sought further briefing on monetary relief in the form of disgorgement under Section 13(b); defendants were liable, but there was more to learn about the amount because the FTC’s numbers didn’t exclude consumers who benefited; it might be equitable to subtract from the disgorgement the amount actually earned by consumers who used the products.