The Federal Trade Commission (FTC) relied on the testimony of two expert witnesses in bringing an unsuccessful claim of deceptive advertising against DIRECTV. The judge’s analysis of the expert testimony sheds light on how experts may need to design consumer surveys to satisfy federal judges.

The FTC’s Claims Against DIRECTV

The FTC sued DIRECTV to enforce two federal laws that protect consumers from unfair or deceptive advertising and marketing practices. The FTC did not contend that DIRECTV made false statements in its advertising, but federal law regards advertising as deceptive when an advertiser “hides” information that would be important to a consumer’s purchasing decision by failing to disclose it before the purchase is made. In addition, federal law requires online vendors to obtain a consumer’s informed consent before making recurring charges to the consumer’s credit card.

In the FTC’s opinion, DIRECTV violated those laws by advertising its satellite television services without disclosing that:

• the introductory price only lasts 12 months;
• the subscriber must agree to receive services for 24 months;
• a subscriber who cancels before the end of the 24 months is charged a fee of $20 per month for the remaining months of the agreement; and
• a subscriber who requests a “free” premium channel (like HBO) for 3 months must cancel the channel before the 3-month period ends to avoid further charges.

DIRECTV advertised its services on television, through internet banner ads that (if clicked) would lead consumers to its website, in circulars that were distributed in Sunday newspapers or mailed directly to consumers, and by a variety of similar advertising tactics. Much of the FTC’s case was based on the contention that when DIRECTV disclosed the terms mentioned above, it buried them in fine print or hid them behind hyperlinks.

To prove that DIRECTV violated the law, the FTC needed to establish that a reasonable consumer’s net impression of DIRECTV’s purchase terms, after reviewing DIRECTV’s advertising, would have been more favorable than the actual terms. For example, if a consumer’s net impression would be that the introductory offer could be cancelled at no charge after 12 months when, in fact, DIRECTV would charge a cancellation fee, the advertising would be misleading.

To prove that DIRECTV’s advertising would cause reasonable consumers to have an inaccurate net impression of DIRECTV’s purchase terms, the FTC relied on expert testimony. Dr. Tülin Erdem conducted an online survey that asked respondents to view a print advertisement that DIRECTV distributed in 2013. She testified that the advertisement was representative of other DIRECTV ads.

Court’s Analysis of the DIRECTV Print Ads

Before reaching the survey results, the court noted its own impression of the ad. The judge (who presumably reads ads with greater care than average consumers, particularly when the ads are introduced as trial exhibits) thought the ad sufficiently disclosed that the promotional price for a 24-month contract would only last 12 months and that a $20 per month cancellation fee would be charged if a customer cancelled the contract before it ended.

Those disclosures appear at the bottom of the ad in print that is considerably smaller than the promotional price, which is prominently advertised as lasting for 12 months. The judge nevertheless thought that consumers would read the entire ad because deciding upon a particular DIRECTV package requires consumers to consider a wealth of information. The judge cited no evidence to support his view that consumers read fine print before making complicated decisions.

The judge accepted that it was not possible for DIRECTV to disclose the price increase that consumers would face after the 12-month promotional price ended because DIRECTV had not yet decided what fee it would charge in the following year. The judge accordingly concluded that failing to disclose the price increase in advance was not deceptive. By that logic, DIRECTV could impose an outrageous price hike and consumers, having no reason to suspect that prices could increase so dramatically, would nevertheless be stuck paying a $20 per month cancellation fee for services they were no longer receiving.

Expert Testimony – Dr. Erdem

Since experts survey ordinary consumers, not federal judges who closely scrutinize exhibits offered in lawsuits, the court was required to consider Dr. Erdem’s opinion about how a consumer who received a DIRECTV ad in the mail would have understood it. Dr. Erdem presented survey participants with the original ad and with an ad that she modified to disclose the contract terms more conspicuously. She found that the modified ad increased consumer understanding of the terms.

The court concluded that the survey did not reveal whether the original ad was likely to mislead reasonable consumers based on the net impression that the ad created. The court agreed with DIRECTV that changing the ad did not test whether the original ad was misleading. The survey did not test the overall impression of consumers, which was the relevant question. The fact that the ad could have been better didn’t mean that the existing ad violated the law.

The court faulted Dr. Erdem for not doing a deception study that would have tested the overall impression that consumers draw from the ad. The court also faulted Dr. Erdem for lumping together participants who said they “did not know” the contract terms and those who “did not remember” the terms.

Because Dr. Erdem asked no follow-up questions, she could not determine whether a participant’s failure to recall the contract terms was related to the way information was presented in the ads. Nor could she determine whether participants who did not recall the terms had formed an incorrect impression of the terms after reading the ad.

Finally, the court was skeptical of the value of a web-based survey that focused on a print ad. A consumer reading the ad could view it as a whole and read the fine print by looking at the bottom of the page. A survey participant needed to scroll to reach the disclosures.

While it seems reasonable to believe that survey participants who are asked to look at an ad on a computer screen would scroll through the ad, the court thought that survey participants might not realize that it was important to read the entire ad and therefore might not do so. Of course, people who receive newspaper flyers might not realize it is important to read the fine print at the bottom of the ad, which was the point Dr. Erdem tried to make when she testified that “a majority of consumers don’t read the fine print.” The court was unimpressed by that testimony.

Expert Testimony – Dr. Patkanis

Dr. Anthony Pratkanis also testified for the FTC as an expert witness. He discussed general principles of “social influence,” including the principle that making a “lowball” offer — an initially discounted price or a free gift — will induce consumers to purchase goods or services, even if the price will later increase.

Dr. Patkanis pointed to two representative print ads that employed a lowball strategy by calling attention to the promotional price by using a large font and a brightly colored background while relegating the less favorable terms to a small black font against a white background at the bottom of the page.

Favoring his own impressions over those of Dr. Patkanis, the court concluded that the ads were not deceptive. The court gave “minimal weight” to Dr. Patkanis’ testimony because he conducted no surveys to determine whether the ads were likely to confuse consumers and because some of his testimony (such as his opinion that consumers would regard a “slashed out” price as the regular price) were not supported by empirical research.

Web-Based Ads

Given the court’s reliance on its own understanding of the advertisements and its disagreement with the analysis offered by the expert witnesses, the court ruled against the FTC and concluded that the DIRECTV print ads were unlikely to deceive ordinary consumers. The court reserved judgment, however, with regard to DIRECTV’s website.

Dr. Erdem’s consumer survey regarding the website supported her conclusion that the website created a net impression that deceived consumers. The court noted that the website conspicuously disclosed that the 12-month discounted price was offered as part of a 24-month contract, but other significant details (including the early cancellation fee) were only revealed by hovering over an “offer details” link.

Consumers had to click through other pages to make a purchase, but full details continued to be hidden behind links. While those links were labeled “additional offer details,” nothing called attention to the importance of those details. Even the shopping cart page hid critical information behind a “terms and conditions” link.

Victory for DIRECTV

The court had not yet heard DIRECTV’s evidence when it evaluated the testimony of the FTC experts. Although it was willing to dismiss the FTC’s claims regarding the print ads, it deferred its ruling regarding the website until hearing all the evidence, including the testimony of DIRECTV’s experts. At the same time, the court observed that the FTC’s evidence that various iterations of the website were misleading was “far from overwhelming.”

Probably seeing that the handwriting was on the wall, the FTC decided to dismiss the case. Since it was seeking a judgment of $4 billion, the dismissal represented a significant victory for DIRECTV, and may have provided an object lesson in how experts should design surveys that might satisfy federal judges.