F.T.C. v. Crescent Pub. Group, Inc.

• Decision Date: 24 January 2001
• Docket Number: No. 00 Civ. 6315(LAK).,00 Civ. 6315(LAK).
• Citation: 129 F.Supp.2d 311
• Parties: FEDERAL TRADE COMMISSION and the People of the State of New York, Plaintiffs, v. THE CRESCENT PUBLISHING GROUP, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

129 F.Supp.2d 311

FEDERAL TRADE COMMISSION and the People of the State of New York, Plaintiffs, v. THE CRESCENT PUBLISHING GROUP, INC., et al., Defendants.

No. 00 Civ. 6315(LAK).

United States District Court, S.D. New York.

January 24, 2001.

COPYRIGHT MATERIAL OMITTED

Douglas V. Wolfe, Steven M. Wernikoff, Federal Trade Commission, Stephen L. Kline, Assistant Attorney General, Eliot Spitzer, Attorney General of the State of New York, New York City, for Plaintiffs.

Paul R. Grand, Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., Sheldon Krantz, Richard J. Oparil, Piper, Marbury, Rudnick & Wolfe, Caroline H. Landau, New York City, for Defendants.

MEMORANDUM OPINION

KAPLAN, District Judge.

Defendants operate pornography web sites that have offered visitors "free tours" of parts of the contents. In order to take a "free tour," however, a visitor was asked to enter his or her credit card number. The visitor was assured that the card "will not be billed" during the free tour and told that the card number was necessary so that defendants could verify the user's age. Once the visitor entered a valid card number, the visitor was permitted to begin the "free tour." At some point, however, the "free" part of the tour ended and the defendants began billing the visitor's credit card.

The Federal Trade Commission ("FTC" or the "Commission") and New York's Attorney General have brought this action contending, respectively, that defendants violated Section 5(a) of the Federal Trade Commission Act¹ (the "FTCA") and New York law by falsely representing that consumers' credit cards would not be billed, failing to disclose material information and then charging credit and debit cards without authorization. The matter now is before the Court on the plaintiffs' motion for a preliminary injunction.

Facts

Defendants Bruce Chew and David Bernstein, together with an allegedly passive investor, Carl Ruderman, and their corporate entities, own and operate "adult content" web sites. The web sites have been registered to corporate defendants The Crescent Publishing Group, Inc. ("Crescent") and Multimedia Forum, Inc. ("Multimedia"). Crescent also provides payroll services, office space and accounting services for the companies while customer service is provided by another affiliate, ICSE, Inc.² All or substantially all have used the "free tour" device that is the focus of this action.

A. The Evolution of the "Free Tour" Web Sites

The practices of these web sites are a moving target. Indeed, versions of the "free tour" web sites from at least three different periods have been presented to the Court.³ The defendants distinguished pre- and post-November 1999 web pages in their papers⁴ and pointed to a new-and-allegedly-improved September 2000 version at oral argument. Defendants suggest, however, that all of the web sites have had the same basic format and have provided the same disclosures to consumers at any one time.⁵

1. "Free Tour" Material Before November 1999

The bulk of the 33 consumer declarations submitted to the Court were made in 1999, and many reflect the pre-November 1999 web pages.⁶ The stories have much in common. Most consumers reported visiting a sexually oriented Internet web site where they were offered a "free look" at sexually explicit pictures and told that they needed to enter a credit card number to verify that they were over 18.⁷ There was nothing subtle about defendants' contention that the credit card information would be used only to confirm age. A typical web page directed visitors to "Prove that you're over 18 and you can try us FREE, yes FREE. Just enter a valid credit card to show your age and we'll make your hottest dreams cum true—FREE—right now."⁸ Immediately adjacent to the box where visitors entered their credit card information was the statement that "Your card will NOT BE BILLED."⁹

A visitor who provided a credit or debit card number then could move through pages of pornography by clicking on a "CONTINUE" button on the bottom of each screen. The fifth screen was almost identical in format except that it included, intermeshed with pictures of naked women, the statement that "[y]ou are the king for just a dollar fifty a day billed monthly."¹⁰ The button at the bottom of the page was identical in format, but instead of the word "CONTINUE" it displayed the name of the web page (for example, CLIMAX). If the visitor clicked on the button on the fifth screen (e.g., clicked on CLIMAX), another screen giving the visitor a user name and password appeared, and defendants then began charging the visitor's credit or debit card a monthly fee. They contend that the "free tour" ended and that the visitor elected to begin paying the fee as a "member" of the web site when the visitor clicked on the button with the web page's name.

In many cases, it was months before consumers noticed a charge on their credit card bill or bank statement that they did not recognize. Going back to earlier statements, several consumers noticed repeated billing of the same amount under different names—all unrelated to the name of the web site. One consumer who had visited reported repeated debits of $49.99 by Romulust, Archne, and Splitback.¹¹ Consumers tried to contact the billing company by sending e-mail or telephoning. When they received a form response or no response at all, many eventually canceled their bank cards or reported their credit cards as stolen in an attempt to prevent further charges.

2. Subsequent Changes

Defendants, evidently aware of the government's investigation, made changes to their web sites in November 1999. A printout of a revised version submitted to the FTC¹² shows few changes on the first screens. The principal change was on the fifth screen, where a visitor who clicked on the CLIMAX (or other web site name) button not only received a user name and password, but was transferred to another web page containing terms and conditions. The terms and conditions page, with sexually graphic language generously interspersed, outlined the terms of membership and provided telephone numbers and e-mail addresses for customer service.¹³ Again, however, there was no explanation, at least no explicit explanation, that clicking was the equivalent of "joining." Rather, defendants contended at oral argument that consumers should have concluded that they were "making a join decision" from the proximity of the CLIMAX button to price information and to the link to terms and conditions.¹⁴

In September 2000 defendants made further changes to their web sites. The September version of at least one site¹⁵ added an address to the first screen, relabeled the "continue" button with "continue free look," and changed the button on the "joining" page from a similarly formatted button to one that included the statement "Join DANGEROUS CURVES Now!" Visitors now had the option to "Exit Free Look" by clicking on a different button. In addition to giving the monthly price, the screen broke new ground by explaining that visitors would become members by clicking the button below.

B. The History of Excessive Charge Backs

Defendants long have been identified by credit card and related companies as having strikingly high levels of "charge backs," which occur when a card issuer credits the card holder and debits the merchant or provider for an amount previously charged to the holder's credit card.

Defendants' experiences with Visa, which at least at one time accounted for more than two-thirds of Crescent's Internet sales charges,¹⁶ are illustrative. When a merchant's volume of charge backs exceeds Visa's limit of a 2.5 percent ratio of charge backs to interchange volume or 1 percent of customer dispute charge backs, the Visa Merchant Chargeback Monitoring Program begins to monitor the rates and may eventually charge fines and ultimately terminate services.¹⁷ Visa repeatedly identified Crescent and affiliated companies as having excessive charge backs.¹⁸ In October 1999, it requested that Crescent submit a plan to reduce charge back rates.¹⁹

Defendants' high level of charge backs caused related problems with Card Service International ("CSI") and Heartland Payment Systems ("HPS"), businesses that help set up merchant accounts. CSI opened several merchant accounts for Crescent and affiliates between late 1996 and mid-1998 and for a few months in 1999, both times eventually closing the accounts because of consistently high charge back rates.²⁰ Likewise, HPS processed more than $22 million in bank card transactions for eight of the Bernstein-Chew businesses in 1998, but later that year closed all eight of the accounts because of excessive charge backs.²¹

Crescent and affiliates had an average charge back rate of approximately 10.51 percent in 1999.²² High in itself, this figure does not reflect the full extent of customer dissatisfaction as it does not include the additional 28 percent of sales that the companies credited back to customers during the same period.²³ Moreover, according to Visa, while it may not be unusual for a company to be identified initially because of high charge back rates, the proportion that continues to have excessive charge backs four months later is quite small.²⁴ Defendants similarly stand out in comparison to the 0.54 percent average charge back level in 1999 that Visa estimates for e-commerce merchants.²⁵

In response to the charge back problem, Crescent in March 2000 provided Multicredit and Visa with a $27 million surety bond to guarantee the payment of future charge backs and card holder credits.²⁶ Crescent arranged also for Northfork Bank to issue a $15 million irrevocable standby letter of credit in favor of Visa International.²⁷ Nonetheless, as defendants acknowledge, Visa U.S.A., Inc. disqualified some of the corporate defendants from the Visa U.S.A. system in April 2000.²⁸

Soon thereafter defendants began processing their credit transactions out of a bank in Guatemala, where they had an...