Internet Scam or Post-Sale Bargain?

Nov. 17, 2009— -- If you shop online – and surveys show more than half of Americans do – chances are you've seen a "special offer" flash on the screen after you finished a transaction.

"A special thank you with your purchase," one might read.

Or, "Click here to get $10.00 cash back!"

Or, "Participate in the free trial and receive a free $25 gift card!"

For Linda Lindquist of Sussex, Wis., the e-offers usually seem too good to be true. But after making a purchase on the Web site Movietickets.com in July 2007, she encountered a deal that was particularly tempting.

"On the confirmation page was a coupon stating, 'Get $10 off your next purchase.' So, I clicked on the coupon because it seemed that it was a legitimate offer from Movietickets.com and I thought they were a reputable website," Lindquist told a Senate panel investigating online marketing tactics.

Little did she know, Lindquist had consented to a paid, monthly subscription to a "coupons and discounts" membership club run by a company independent of Movietickets.com.

Months later, Lindquist said, she discovered that she had unknowingly paid over $320 before catching the charges on her credit card bill and calling a customer service number for the program to complain.

"I told the representative that I had not knowingly signed up for the service and asked how they had gotten my credit card number," she said. "[The representative] stated that Movietickets.com gave them my credit card number."

Experts say the practice by familiar online retailers of automatically passing consumers' credit or debit card information to a third-party marketing firm is a relatively new and growing business practice in e-commerce. They say it often leads customers unwittingly down the path of buying something they don't want -- or even know they're getting.

The tactics have led to thousands of angry complaints from customers, scathing critiques by consumer advocates, and class action litigation.

Now, the controversial business practice has become the target of an investigation by the Senate Committee on Commerce, Science and Transportation. The committee held hearings on the matter today and is considering legislation to regulate the practice.

"For many Americans, shopping online is as familiar as shopping for milk," said committee chairman Sen. John D. Rockefeller, D.-W.Va. "But what's happening is that many online merchants have decided to betray their customers' trust. For a few extra bucks and profits, they pass their customers' billing information on to mysterious companies with histories of misleading practices."

Millions Join Online 'Clubs' Making It A Billion Dollar Industry

A preliminary report issued by the Senate Commerce Committee identifies three Connecticut-based direct marketing companies – Affinion, Vertrue and Webloyalty – who partner with hundreds of websites and online retailers in what has become a billion-dollar business of selling club memberships to shoppers in exchange for "bounties" and other payments.

Committee investigators estimate more than 35 million consumers have joined membership clubs through Affinion, Vertrue and Webloyalty since 1999.

"The sales tactics used by these three companies exploit consumers' expectations about the online 'checkout' process," the report says. They are "harming large numbers of American consumers" and "may be negatively affecting consumers' overall attitude towards online commerce."

E-commerce accounted for more than $60 billion of U.S. retail sales in the first half of 2009.

The controversial tactics have been used by 450 websites and retailers, who receive a percentage of money back from the direct marketing companies they host on their sites, resulting in millions of dollars that help their bottom lines

Sen. Rockefeller has sent letters to sixteen companies, including including household names like AirTran, Orbitz, Shutterfly and Vistaprint, requesting information about their relationships with the three firms under investigation.

"These post-transaction offers, when combined with the 'data pass' billing process," Rockefeller writes, "confuse online consumers and cause them to unknowingly and inadvertently become enrolled in membership clubs…. These consumers are then charged on a monthly basis for a service they did not want and are unaware they have."

Senate investigators allege the marketing companies are fully aware their practices prey on consumers' confusion.

According to the report, one Webloyalty employee candidly commented in an e-mail that "at least 90 percent of our members don't know anything about the membership," and one Vertrue employee estimated that "cancellation calls represent approximately 98 percent of call volume" to their customer service centers.

Marketers Say Tactics Are Fair and Beneficial

"Membership club sellers will respond that the entire transaction sequence is fully disclosed to the consumer," said University of Minnesota law professor Prentiss Cox at Tuesday's Senate hearing. "This assertion generally is true, especially on the Internet where human deviation from script is not possible."

But, Cox said, the disclosure is not clear and often results in "massive consumer confusion and extraordinary numbers of consumer complaints about unauthorized charges to financial accounts." He said the problem has "festered largely unattended for more than a decade."

"I have little doubt that this business sector would cease to exist almost overnight if it had to sell its products like every other retailer. In other words, these membership clubs could not survive if they had to get consumers to give them a credit card number to purchase the services the membership clubs are selling," Cox said.

But the marketing companies insist their practices are fair and even beneficial for consumers.

In a statement, Webloyalty CEO Rick Fernandes said his company's programs "can save consumers hundreds of dollars each year on entertainment, shopping and dining out."

Fernandes said Webloyalty has changed its enrollment process now to require consumers to enter the last four digits of their credit or debit card number to confirm they want their membership charged to that card.

Vertrue told ABC News in a statement that their marketing practices are "not only clear but its programs provide consumers with access to significant and realizable benefits."

The statement also said that the company is changing its enrollment process this week to require consumers to enter the last four digits of their payment accounts as further acknowledgement of the offer.

And, Affinion tells ABC News that it, too, is implmeneting new procedures requiring customers to provide the last four digits of their account number to secure enrollment. The company also says it is placing its 1-800 customer service number more prominently on the site.

"Affinion is proud of its long-standing history of employing the best marketing practices in the industry and how our programs provide tremendous value for millions of consumers worldwide," said Affinion vice president James Hart.

"While our marketing has always incorporated clear, prominent and unambiguous terms, we continually reevaluate our offers to make certain consumers are able to make fully informed decisions."

Still, Florencia Marotta-Wurgler, a New York University law professor, told the Senate panel Congress should impose an outright ban on the practice of automatic transfers of payment information from known vendors to post-transaction marketers.

Lawmakers To Consider New Regulations For Online Marketing

"Consumers should be asked to enter their credit card information at each transaction. This will preserve the well-established norm that financial liability in these contexts arise only after the consumers takes certain well-established steps," she said.

Marotta-Wurgler also called for regulations on how post-transaction marketers identify themselves and frame their offers. She said consumers ought to be able to cancel their transactions easily or seek refunds.

According to the Department of Justice Internet Crime Complaint Center, thousands of consumers report being victims of deceptive online tactics every year, including auction fraud, purchased items that are never delivered, and credit or debit card fraud. Consumers also complain they're exposed to spam, unsolicited e-mails, and child pornography.

The Center estimates the total dollar loss from all reported cases of fraud in 2008 was $264.6 million, with an average loss of $931 per complaint.

"Your credit card information is really one of the most valuable pieces of information you have, and it's incumbent upon a vendor to protect that information," John Breyault of the National Consumers League told ABC News. "And if they pass it on, they should put it in very clear language that they intend to do so."

Breyault urges consumers to be extra-vigilant about disclosing information online, particularly during the holidays when fraudsters tend to take advantage of increased sales activity to make money.

If you suspect you've been a victim of aggressive sales tactics or outright deception, Breyault advises consumers to take action.

He says you should dispute a fraudulent charge with your credit card company; call the company behind the charge to find out how they got your information; register a complaint with the company that passed your information on to a third party; and, also consider filing a complaint with the Federal Trade Commission, Better Business Bureau or your state attorney general's office.

ABC News' Lisa Stark contributed to this report.