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Retail Law Advisor

Customer Loyalty Programs May Face Increased FTC Scrutiny

Posted in Compliance, Retail, Retail Sales

Customer loyalty programs are discounts and coupons provided by a retailer to its shoppers as an incentive and reward for repeat purchases. Every industry seems to have its own version, whether it be airline frequent flyer miles, entertainment park privileges, or hotel points. Retail stores are among the fastest growing users of customer loyalty programs.

Although some loyalty programs provide a generic discount on all purchases, many retailers are moving toward using targeted coupons, special offers and discounts on a shopper by shopper basis. Targeting the desires, likes and needs of individual shoppers has become a successful sales technique. For many retailers, it also generates an additional revenue stream from data mining.

Every time a shopper makes a purchase, retailers match the purchase information to the shopper’s personal information: name, address, age, income, etc. Shoppers provide their information when they register for the loyalty program. Shoppers’ purchasing data is useful to the individual retailer, but the real revenue stream is in the world of Big Data. Data aggregators purchase data from customer loyalty programs and aggregate it with data from multiple sources. Data aggregators can match entire lifestyle profiles of a particular shopper from the breadth of the data that the aggregator purchases and then sell the information to the marketplace to enable retailers, banks, credit agencies, and other service providers to target their advertising and marketing to the shoppers most likely to buy their products or services. Big Data is Big Business.

From the retailer’s perspective, all shopping data is owned by the retailer and is sellable. Yet, the FTC has brought unfair competition actions against major web based companies, such as Google and Facebook, for not complying with, fully disclosing, or acquiring consent to their data usage policies from their online users. The FTC perceives online data collection as subject to a contract (in the form of the online Privacy Policy). To avoid FTC claims of unfair competition, the contract must disclose all information collected from web site users, how it’s stored and with whom it’s shared. Users must have an opportunity to view the Privacy Policy prior to full engagement with the web site and must be able to opt-out from collection and sharing of their information. Two points are worth noting: 1) mere use of the website is deemed acceptance of the Privacy Policy terms, but 2) FTC guidelines provide that changes to the Policy must be disclosed and users must opt-in to the changes in order for previously collected information to be used under the revised practices.

Unlike online Privacy Policy disclosures, most customer loyalty programs are implemented through a retailer’s brick and mortar location with a paper application or are opened instantly by a cashier without any terms and conditions provided to the shopper. If there is an online application, the terms tend to be minimal and mirror the “in-person” application process. Many online loyalty program terms do not include any option with respect to data collection and use.

As use and sale of customer loyalty program data increases, the terms and conditions under which customer loyalty data are collected, used and sold are coming under scrutiny by the FTC. In May 2014, the FTC released its final report, “Data Brokers, A Call for Transparency and Accountability.” The FTC has turned its attention to data collection, aggregation and sale activities of the Big Data aggregators. In the process, the FTC is looking into the sources, such as customer loyalty programs, that contribute to Big Data. The FTC notes that data aggregators often enter into contracts with the data source to acquire ownership of the data and to acquire the right to resell the data, but the aggregators do not confirm that the source, itself, has those rights.

With increasing FTC scrutiny of Big Data, customer loyalty program providers, as a data source for aggregators, may find their data collection and use practices reviewed by the FTC on the same or similar basis as online service providers. Even if the FTC targets the data aggregators rather than the data source, customer loyalty programs may find they cannot provide Big Data with the assurances the FTC desires—shoppers’ grant of data ownership, permission to use and right to sell.

Given the increasing focus on Big Data and off-line data collection and selling practices, now may be the prudent time for providers of customer loyalty programs to review their program agreements with their shoppers.