FTC Secures Multi-Million Dollar Judgment Against Business Opportunities Marketer

Operating AgreementIn a settlement order filed on Monday in an Oregon federal court, the Federal Trade Commission (FTC) banned a company from using deceptive marketing practices in connection with offering consumers work-at-home business opportunities.  The company, Smart Tools LLC and its officers, Kristin Hegg and Curtis Dawn, agreed to pay a $7.4 million judgment for violating the FTC’s amended Business Opportunities Rule.  This is one of the first business opportunities cases in which the FTC has imposed penalties since July.

Business Opportunities Generally

A business opportunity (or bizopp) typically involves a company or individual who contacts a consumer offering to sell or lease a product or service that will enable the consumer to begin a business, usually from home. The seller of a business opportunity usually claims that through use of its products, consumers will secure a consistent and reliable customer-base to whom sales may be made with little effort.

Business Opportunities Crackdown

In recent years, the FTC has engaged in a program that it calls “Operation Lost Opportunity,” the aim of which is to crackdown on increasingly prevalent advertisements targeted at underemployed and/or unemployed individuals.  The FTC has brought several actions against marketers under its recently updated Business Opportunity Rule, which requires business opportunity sellers to provide specific information to help consumers evaluate a business opportunity. The purpose behind the rule is to protect consumers from making bad investments and business decisions stemming from declining economic conditions experienced around the country.

Specifics of the Smart Tools Business Opportunities Case

In November 2012, the FTC charged Smart Tools LLC and its officers with deceptively selling home-based business opportunities that promised consumers a salary of nearly $40,000 per year simply by contacting people on a list provided to them by Smart Tools LLC.  The people on the list were purportedly eligible for refunds on their mortgage loan insurance premiums and the consumers who purchased the business opportunity were led to believe that they could charge people on the list a fee for teaching them how to obtain their refunds.  Consumers who participated in Smart Tools’ business opportunity incurred a recurring monthly charge of $29.99 for access to the list of people eligible for refunds. Unbeknownst to the consumers, the Department of Housing and Urban Development offers the same lists that Smart Tools does for free online.

Smart Tools Settlement

In addition to the $7+ million judgment levied against it, the settlement order requires Smart Tools to make specified disclosures to consumers at least seven (7) days prior to entering into a contract with or accepting payment from those consumers. The requisite disclosures include, but are not limited to, the seller’s name, address, phone number, the salesperson’s name, any earnings claims, the start and end dates when the earnings were made, and the number and percentage of people who bought the business opportunity and earned at least that amount.

In addition, the order requires the defendants to provide the FTC with a list of all of their customers, beginning as early as January 1, 2009, that are still being charged for the “services” of the company. Smart Tools is required to notify those customers of the settlement order, immediately cancel their subscriptions, and stop charging them unless the consumers notify Smart Tools, in writing, that they wish to continue their subscriptions with Smart Tools, and agree to pay the ongoing credit or debit card charges.

If you are interested in learning more about this topic, or need to review your marketing practices based on the FTC’s amended Business Opportunities Rule, please e-mail us at info@kleinmoynihan.com, or call us at (212) 246-0900.

The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney.  Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.

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David Klein

David Klein is one of the most recognized attorneys in the technology, Internet marketing, sweepstakes, and telecommunications fields. Skilled at counseling clients on a broad range of technology-related matters, David Klein has substantial experience in negotiating and drafting complex licensing, marketing and Internet agreements.

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