Regulating Adult Websites through Consumer Protection
By: Lawrence G. Walters, Esq.
As stories of the government’s assault on the adult industry based on obscenity prosecutions and 2257 inspections fade into legend, a new legal ‘boogieman’ may be waiting in the shadows. It is known by several names including the “FTC,” state “Consumer Protection Divisions,” or the “Better Business Bureau.” But the underlying legal issue is always the same: Protecting the unwary consumer from deceptive and unfair business practices. The new era of government regulation is here, and it is rooted not in prudish moral conservatism, but in progressive consumer protection theories.
A variety of state and federal laws prohibit adult webmasters from deceiving, cheating, or scamming consumers through their advertising practices and operating procedures. Some states, such as California, have enacted laws that encourage private attorneys to sue businesses that engage in these “unfair” practices, by dangling the carrot of attorneys’ fees awards to successful plaintiffs. See, California Business and Professions Code 17200. The trick, for adult website operators, is to decipher which business practices are considered unfair or deceptive, and to stay far away from any such activity before they are targeted for enforcement. The inherent vagueness of terms such as “unfair” can plague ethical business operators who attempt to comply with the law, while remaining competitive. Unfortunately, the adoption of questionable business practices by a few rogue operators can apply significant pressure on others in the same industry to act accordingly, or surrender all their profits to the unsavory few who are willing take some legal risk.
Enforcement of unfair business practices statutes comes in many flavors, in the adult Internet industry. One of the first tussles between the FTC and the adult website industry resulted from advertising “free” trials that were not truly free, but quickly converted into recurring, paid memberships that were difficult to cancel within the free trial window. That practice quickly ended after some push back from the FTC. Then came enforcement of CAN SPAM’s prohibitions on unsolicited email, which cost some companies substantial fines, and put others out of business. While most adult businesses and affiliates have become familiar with the requirements of CAN SPAM, and the violations dwindled over the years, many affiliates and operators still do not recognize the broad scope of CAN SPAM prohibitions, including the difficulties with obtaining express consent to receive commercial messages, and the potential applicability of certain restrictions even to communications with existing customers.
While we still see sporadic spam complaints, at the state and federal levels, the FTC appears to have moved on to other concerns, such as prohibitions on paid endorsements, customer billing “data pass,” and pre-checked negative options. If any of those terms are unfamiliar to a reader who is operating or promoting an adult website, some legal advice is in order.
Most recently, the FTC turned its attention to online dating sites, and the use of “virtual profiles.” In January, 2013, an FTC representative appeared at an online dating conference, and discussed the Agency’s growing concern with the use of false profiles by dating sites to gain customers. The speaker further outlined the potential legal consequences of continuing this business practice. Given the increasing popularity of adult dating sites, and the unsettled legal issues surrounding this marketing activity, the industry is vulnerable to potential consumer enforcement actions arising from use of virtual profiles. No governmental agency has outright banned the practice, but caution and attention to legal compliance issues should be considered when doing so.
Unfortunately, the penalties associated with any FTC violation can be substantial. Often, the Agency will seek to disgorge the net proceeds of the business found in violation, during the time frame that the offending business practice was in use. This translates into forfeiture of total gross revenue, minus refunds and chargebacks. While this penalty is not always the end result of an FTC investigation, it is always a looming concern. Personal liability is also a possibility, as a corporation does not shield decision-makers from deceptive business practices claims. The FTC can also obtain injunctive relief, and other penalties. In extreme cases, the FTC has been known to obtain court orders, taking a business offline – even before a violation has been formally proved, or notice has been given to the targeted company. See; e.g., FTC v. Pricewert, LLC: http://www.ftc.gov/news-events/press-releases/2009/06/ftc-shuts-down-notorious-rogue-internet- service-provider-3fn
Many foreign operators take comfort in their overseas corporate setup or residence and presume that this will permit them to avoid confrontation with U.S. consumer protection agencies. While lack of personal jurisdiction can always be raised as a defense by a foreign company, the courts will look at the totality of the business’s contacts with the United States, including the number of consumers, advertisers and vendors residing in this country. In many cases, the FTC has established the existence of personal jurisdiction over foreign companies, despite the offshore location and makeup of the organization.
The important point is that, regardless of location, an adult website operator is much more likely to be hit with a consumer protection complaint than they are to be prosecuted for obscenity, or have their 2257 records inspected. Many more adult businesses have been affected by FTC and related state consumer protection agency complaints in the last 10 years, than were prosecuted by the DOJ for obscenity or 2257 violations. Interestingly, several civil litigants have asserted a website’s failure to comply with Section 2257 as a defense to copyright infringement, or as an affirmative “unfair competition” claim in recent years, making Section 2257 more likely to be used as in the civil context than as a criminal enforcement tool.
Despite these trends, consumer protection issues tend to receive little attention from the industry lawyers or media. Perhaps it is the mundane nature of these issues that prevents them from rising to the forefront, as compared to animated discussions of STD outbreaks, underage performers, or leftover obscenity prosecutions. But the danger of losing all corporate revenue for a substantial period of time is enough to cause any prudent business operator to pause for a moment, and take a look at their operating and promotional procedures.
Some new consumer protection issues appear to be on the horizon, and are worth mentioning. Initially, California has recently amended its state statute relating to the mandatory contents of privacy policies on websites available in California, which now require certain disclosures in connection with “do not track” requests submitted by users. Given the vagueness of some of the terms in the new law, and the uncertainty regarding how the industry will comply, the state Attorney General’s office is expected to announce some clarifications and best practices guidelines in the coming months. However, issues relating to the adoption and implementation of privacy policies has been fertile ground for consumer protection litigation not only in the U.S., but worldwide as well. The potential inconsistencies between the way the U.S. and the E.U. treat private, online user information has led to the adoption of a voluntary U.S./E.U. certification procedure regarding international privacy policies, providing a form of ‘safe harbor’ to sites that voluntarily certify compliance with certain multi-national standards in their privacy policies. However, the certification can expire if not renewed, and the FTC recently pursued 12 companies whose certifications were not kept current, for falsely claiming valid compliance with the safe harbor status. See; http://www.ftc.gov/news-events/press-releases/2014/01/ftc-settles- twelve-companies-falsely-claiming-comply
As is evident from the above, adult website operators are facing a multitude of consumer protection issues– some of which have only begun to be noticed by the enforcement authorities. In addition to these cutting edge website operation issues, website operators remain obligated to ensure that their promotions, legal agreements, and general operating procedures do not cross over into the realm of “unfair” in the eyes of some state or federal investigator (or private lawyer). A regular review of consumer protection compliance issues is routinely undertaken by the larger adult website companies, cam sites, and dating sites. Given the increased frequency with which these claims are being asserted at the state and federal levels, widespread industry attention is warranted.
Lawrence G. Walters, Esq., heads up Walters Law Group, and has advocated for the interests of the adult entertainment industry for over 20 years. His firm has substantial experience in defending consumer protection actions at both the state and federal levels. Nothing in this article should be interpreted as legal advice. Mr. Walters can be reached at firstname.lastname@example.org or 800.530.8137.