The Florida Attorney General has settled its lawsuit against World Avenue USA, LLC, (formerly NiuTech), d/b/a TheUseful, and the company’s chairman for allegations relating to the deceptive use of the word “free.” The Attorney General challenged World Avenue’s use of the term for its failure to clearly and conspicuously disclose the terms and conditions for receiving certain promotional items.

World Avenue is an online lead generation company that offers products in exchange for customer data. It uses banner ads, landing pages, and sponsored search links to drive traffic to its offers.

Under the terms of the settlement, those ads must conspicuously disclose the terms of any “incentive promotion offers” (e.g., offers to earn a gift in exchange for providing personally identifiable information) and phone-billed offers. World Avenue also must make a $1 million contribution to The Department of Florida Legal Affairs’ Revolving Trust Fund to assist with future efforts in developing industry-wide standards and best practices for online advertising.

This settlement is similar to at least one other settlement the Attorney General reached with another provider (Azoogle) in connection with its lead generation activities. The Attorney General also has announced civil investigations into Think Partnership, Intermark Media, Traffix and others, for allegedly deceptive lead generation practices.

The FTC has conducted and is conducting similar inquiries into this type of online activity and has entered into settlement agreements with some parties. Most recently, on January 30, 2008, the FTC reached a settlement with Member Source Media LLC and its principal for sending “free” offers without disclosing material facts, including that consumers had to pay money or provide some other consideration to obtain their “free” product. According to the FTC allegations, Member Source Media’s Web sites required consumers to navigate numerous hurdles, “optional” offers, and engage in such activities such as purchasing third-party products, subscribing to satellite television service, or applying for multiple credit cards before qualifying for the free offer.

The FTC challenged this activity as deceptive under the FTC and maintained that the company violated CAN-SPAM by using deceptive subject lines. Under the settlement, Member Source Media must clearly and conspicuously disclose in its ads and on its Web sites that consumers have to spend money or incur other obligations to qualify for a free product or service and provide a list of the obligations a consumer is likely to incur to qualify for their chosen item. Member Source Media and Sommer must also pay a $200,000 civil penalty.

Similarly, on November 28, 2007, the FTC announced a settlement with Adteractive, Inc., a large online advertiser that drove traffic to its Web sites with e-mails advertising “free” gifts. The FTC charged that Adteractive’s failure to disclose material facts, such as that consumers must purchase products, take out a car loan, subscribe to a service, or apply for credit cards, in order to receive the “free” gift, was deceptive in violation of the FTC Act. In addition, the FTC charged that the subject lines used by the company in its e-mails were deceptive in violation of the CANSPAM Act. The settlement required that Adteractive pay $650,000 in fines under CAN-SPAM and include robust disclosure (in the same font size) of any material terms affecting “free” products. Commissioner Jon Leibowitz filed a dissenting statement, noting that the civil penalty Adteractive was required to pay was “a downward departure” from other CAN-SPAM cases and was “not adequate to deter violations in the future.”

Clearly, companies using the word “free” in promotional materials must take care to clearly and conspicuously disclose applicable terms up front.