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The Future of the Internet

October 5, 2009

There's concern throughout the Internet after the Federal Trade Commission announced today that it has the power to regulate blogs, specifically blogs that endorse commercial products. The unelected FTC - composed entirely of Bush appointees - now mandates that "bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service." This is merely a first step towards regulating the content of blogs themselves, as anyone who offers a personal testimonial about any product will be liable, under the Federal Trade Commission Act, should the FTC disagree with your personal experiences.

If you're wondering just how big a mess the FTC can make, consider a decision published just last week by D. Michael Chappell, the FTC's chief administrative law judge. Judge Chappell caught FTC prosecutors in a blatant attempt to lie their way out of a bad situation arising from yet another misguided attempt to micromanage the World Wide Web. It's a case that demonstrates the FTC's unique combination of stupidity and narcissism.

As I reported last year, the FTC has been waging war against small retailers of medicinal herbs. This rampage is directed against any website that dares to even suggest there may be some benefit to the use of herbs in treating diseases like cancer. The FTC is emphatic: No individual may speak about the health benefits of a product - even a legal product - without the express consent of the federal government. All speech not permitted is forbidden.

In this case, the FTC targeted William Isely, a retired 84-year-old engineer living in North Carolina. Since the 1970s, Isely has operated a small, home-based business selling dietary supplements. In 1993, he registered a trade name - Gemtronics - with the State of North Carolina solely for the purpose of collecting income taxes.

According to Judge Chappell's opinion*, after Isely was diagnosed with prostate cancer in 1999, "he began experimenting with using dietary supplements to help manage his symptoms and learned about the agaricus mushroom from Brazil." Isely purchased the mushroom from Takesun through its website, www.agaricus.net. Isely's contact at Takesun was George Otto, a German national living in Brazil. Starting in 2000, Isely began ordering Takesun products wholesale from Otto for distribution to Isely's existing client base. Isely remained a sole proprietor and never entered into any formal distribution agreement with Takesun or Otto.

According to Judge Chappell's opinion,

In 2001, Isely agreed to share his prostate cancer story with people who were interested and gave Otto permission to use a small synopsis of Isely's experience, including his medical condition, his use of Takesun products, and his use of vitamins. Isely prepared a short statement that Otto was to use. In addition, Isely required Otto not to use Isely's real name, but instead to use the pseudonym "Henry." Isely gave Otto factual information reflected in Isely's medical records, so Isely was not concerned about misuse for advertising purposes.

Otto did not use the pseudonym, however, but Isely did not complain. This proved to be problematic later.

From 2000 until 2002, Takesun provided Isely a free webpage to help market products. According to Judge Chappell, "Isely's Webpage was not a separate website, but was a page linked to www.agaricus.net." After the FDA contacted Otto about the website, Isely decided to establish his own, separate website at www.our-agaricus.com. According to Judge Chappell, "Isely had no understanding of the technicalities of registering websites or controlling their content," so he permitted Otto to do most of the work for him.

The principal function of Isely's website was the sale of RAAX11, a type of agaricus mushroom juice marketed as a dietary supplement. Isely's website directly competed with Otto's, even though Otto handled all of the back-end credit card transactions for both sites, since Isely lacked that capability. Most of Isely's sales of RAAX11 came via telephone order; only 2.5% came via his website. Also, Isely occasionally made "drop shipments" of RAAX11 for Otto; this meant Isely would fill an order for one of Otto's U.S. customers, with Otto receiving the payment. Again, this only constituted about 2.5% of Isely's business.

Isely did not advertise his website, relying instead on a lowest-price strategy. Otto, his supplier and retail competitor, did advertise, however, using Isely's name without his permission. Otto's website - www.agaricus.net - marketed RAAX11 as part of a protocol for the treatment of cancer. One page said individuals living in the U.S. should "just call Mr. Isely and he will explain how it works." Several pages also list Isely's phone number as a U.S. contact. Another page offered the testimonial that Isely pseudonymously gave Otto in 2001. None of these uses of Isely's name or telephone number on Otto's webpage were authorized by Isely.

This brings us to the Federal Trade Commission. In mid-2007, the Food and Drug Administration contacted Michael Liggins, an investigator in the FTC's Atlanta regional office. The FDA provided Liggins with printouts of Otto's website along with a WHOIS search that listed Isely as the registrant for the www.agaricus.net domain.

By his own admissions at trial, Liggins made no effort to investigate Otto, Takesun, or even the other U.S. distributors of RAAX11 mentioned on Otto's website. Instead, he focused all of his energies on Isely. In January 2008, Liggins conducted his own "undercover" operation, purchasing RAAX11 from Otto's website under a false name, Riece Miles. Miles - er, Liggins - was actually ordering from Takesun, not Isely. Takesun processed the credit card information Liggins provided, and Takesun received the payment. Per Otto's informal arrangement with Isely, however, Isely agreed to make a "drop shipment" to "Riece Miles" from Isely's own stock. According to Judge Chappell, the Miles order was the only drop shipment Isely made on Otto's behalf "in the preceding two years."

Based on the WHOIS registration data and the fact that Isely fulfilled Otto's order to Liggins, the FTC jumped to the conclusion that Isely was really the owner of Otto's website and that he was responsible for "disseminating" claims that RAAX11 treats cancer. Accordingly, the FTC followed its standard operating procedures. Writes Judge Chappell,

Isely's first contact from the FTC was on March 26, 2008, when he received a demand letter, draft federal district court complaint, and proposed settlement from Complaint Counsel. After he received these materials, Isely advised Complaint Counsel in a telephone conversation that he had no control over the www.agaricus.net website, and that Isely had a different website, www.ouragaricus.com. Because Complaint Counsel required financial data in order to settle the matter, and because Isely felt he could not get anyone to listen to him, Isely turned the matter over to his lawyer.

Even after Isley's attorney presented documentation that proved Isley was not the owner of www.agaricus.net, the FTC still issued a complaint and forced the case to trial before Judge Chappell. As Isely's attorney noted, "the prosecution of this case was precipitated entirely on false information that could have been corrected with a telephone call." Judge Chappell agreed:

Complaint Counsel overreaches to claim that Respondents were "willing participants" in a "profitable scheme to sell RAAX11 by deceiving consumers that the product could treat their cancer." In support of this claim, Complaint Counsel contends that the evidence shows that Respondents were (l) identified as the party "responsible" for the domain "agaricus.net"; (2) identified "as part of' that website's cancer-related advertising claims;(3) the "exclusive US sales outlet on the website" for RAAX11; and (4) "responsible for fulfilling orders" for RAAX11 placed on the www.agaricus.net website. The preponderance of the credible, reliable evidence does not support such assertions.

The FTC tried several other avenues to impose legal liability on Isely for Otto's website. Judge Chappell shut them all down, deriding the Commission for "drawing inferences from incomplete facts," "overstat[ing] the evidence," and trying to establish "guilt by association." From start to finish, FTC staff - particularly in the Atlanta office - did a shoddy job of investigation and prosecution. Lead investigator Liggins, the prosecution's only live witness aside from the defendant, testified that he did little actual investigation. He made no attempt to discover the true owner of agaricus.net, and the lead prosecutor admitted during closing arguments that, "I don't even know if Mr. Otto exists."

So, to sum up, the FTC dragged an 84-year-old small business owner through two years of litigation because a foreign website made statements about a legal product that mid-level staffers at the FTC personally disapproved of. These same staffers couldn't be bothered to ascertain the actual owner of a website before spending tens of thousands of taxpayer dollars to ruin a man who earned a few thousand dollars in a completely legal manner. These are the people who now claim the unrestricted authority to regulate every corner of the internet, including blogs, in the name of "consumer protection."

At a minimum, the FTC should end this case, but that's unlikely. Since Judge Chappell is only an "administrative" judge, his findings are subject to appeal . . . to the Federal Trade Commission itself. In previous cases, the Commissioners have a 100% reversal rate when the ALJ rules against the staff. And there's no time limit on internal appeals, so the FTC could drag Mr. Isely through another two years of administrative process before ultimately ruling against him - and establishing a binding precedent that an individual is personally liable for statements made about his product on other people's websites. Not exactly an optimistic future.

*Out of an abundance of caution, I am citing Judge Chappell's opinion verbatim when discussing the actual "claims" at the center of this case, lest the FTC accuse myself or Mises.org of disseminating false information.

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