The U.S. Federal Trade Commission (the “FTC”) is the federal agency that is charged with enforcing laws to protect consumers against fraudulent, deceptive, and unfair business practices.  We recently reported on actions taken by the FTC to protect children’s online personal information, as well as “Operation Full Disclosure,” which is an effort by the FTC to improve the effectiveness of disclosures in advertising.

Following this trend, just last week the FTC announced a settlement with educational services company WordSmart Corporation for its alleged violations in advertising, including through telemarketing.  Companies engaged in advertising and telemarketing in the US should take note of these FTC actions, and need to be aware of the various laws and regulations revolving around advertising, telemarketing and consumer protection.  Be sure to read our tips on the lessons to be learned from this action, at the end of this post!

The Complaint

On October 9, 2014, the FTC announced a settlement with educational services company WordSmart Corporation and its president, who were both named as defendants in a federal court action in California filed on October 6, 2014. The complaint asserted that WordSmart deceptively claimed that its products, sold primarily online and through telemarketing for $15-300 each, would improve students’ grades, test scores, IQ, reading speed and comprehension, and guaranteed concrete results.  The FTC also claimed that WordSmart had violated the FTC’s Telemarketing Sales Rule (TSR) by, among other things, repeatedly calling consumers whose phone numbers are listed on the National Do Not Call Registry. Finally, the FTC claimed that WordSmart violated Section 5 of the FTC Act by engaging in unfair and deceptive acts and practices.

More specifically, according to the FTC’s complaint, WordSmart:

  1. Falsely stated during telemarketing calls that individually-named students had expressed interested in the WordSmart products.
  2. Falsely claimed that WordSmart was affiliated with local schools or national standardized testing companies.
  3. Failed to honor its 100% money-back 30-day guarantee.
  4. Failed to have substantiation for its advertising claims about the benefits and effectiveness of its educational products.
  5. Falsely claimed that using WordSmart for 20 hours would result in improving letter grades by at least one GPA point, increasing SAT scores by at least 200 points and ACT scores by at least four points.
  6. Repeatedly called consumers whose phone numbers are on the National Do Not Call Registry, failed to honor requests to stop calling, and failed to connect the calls to a sales representative in the time prescribed by the FTC’s TSR.

The Settlement

The stipulated final order first prohibits the defendants from continuing its alleged deceptive practices and violations.  Specifically, the order prohibits the defendants from misrepresenting the benefits, performance, or efficacy of their educational goods or services, including claims that the products will help students learn faster, improve reading speed, or increase grades, IQ scores, or test scores. It also bars them from misrepresenting the terms of their refund policy and violating the TSR’s Do Not Call rules. It also prohibits them from taking any action to collect payment from consumers who ordered goods prior to October 6, 2014, or from selling or benefitting from consumers’ personal information.

The court order also comes with a hefty fine – it imposes an $18.7 million judgment. However, due to the company’s financial condition, the financial part of the judgment will be suspended after the defendants pay $147,400. The balance will be due immediately if defendants are later found to have misrepresented their financial condition. The FTC intends to use the funds to provide consumer redress and refunds to persons who had purchased WordSmart products.

The Lesson

Companies that advertise in the US should take note of the lessons to be learned from this recent action.  Specifically, before making any objective claims about products, companies should make sure they have appropriate proof and substantiation of those claims readily available. Companies that advertise via telemarketing need to make sure to consult the National Do Not Call Registry, as well as update their own Do Not Call lists upon individual request by consumers.  Finally, before offering money-back guarantees, companies need to be prepared to deliver on those guarantees, and should avoid making the guarantee subject to complicated or undisclosed conditions.