When news of the settlement between Alyon Technologies Inc. and the U.S. Federal Trade Commission broke in November 2004, attention naturally focused on the most spectacular aspects of the announcement: that Alyon would be able to continue operating as a gateway billing services provider and that the FTC, under threat of judicial sanction, had apologized formally to the New Jersey-based company for some of the agency's actions during the 20-month legal battle.
Below the surface of U.S. District Judge Richard W. Story's ruling, however, lurk two significant implications for those who sell Adult content on the Web. The first, and possibly most significant legally, is that online billing companies can devise identity- and age-checking mechanisms that meet U.S. federal standards. Alyon's trademarked and patent-pending Express Verifiable Authorization scheme is one such mechanism, and as long as the company sticks to the conditions outlined in the 22-page Stipulated Final Judgment and Agreed Order that resulted from Federal Trade Commission v. Alyon Technologies Inc., et al (Civil Action No. 1:03-CV-1297-RWS), it will be operating within the bounds of current U.S. law. For purposes of the settlement, the FTC has agreed, tacitly, that Alyon's system stands a good chance of not pinning bills on the innocent and keeping minors away from pay-to-play porn.
The second implication is financial, and if observers are correct, it eventually could point the way to increased revenue collection for online content purveyors of all types. The Agreed Order also outlines specific conditions under which Alyon must forgive consumer debt, and the measures consumers must take to dispute bills from Alyon and its subsidiaries are nowhere near as simple as calling a credit-card issuer and saying, "I didn't buy that."
Past Imperfect
Alyon leapt to the forefront of the Adult industry's consciousness in May 2003, when the company not only signed a binding legal agreement called an Assurance of Voluntary Compliance with the State of Pennsylvania, but within days also found itself the defendant in a civil lawsuit brought against it by the FTC. Both cases were based on complaints from consumers about what they perceived as unfair billing practices associated with a dialer owned by Barcelona-based Electronic Group Interactive S.L.. The dialer used Alyon's billing gateway to process payments. Dialers are software programs that disconnect users from their usual Internet link and reconnect them to an alternative pathway at a per-minute fee. As an Internet payment model, they have a notoriously shady history in the U.S., and in fact hadn't been used since late 2000, when a federal court in New York issued an injunction against the continued operation of dialer-biller Verity International Inc. and ordered large-scale restitution to consumers the FTC said the company scammed (Federal Trade Commission v. Verity International Ltd., et al).
Alyon and its attorneys felt all of the FTC's concerns about its billing model were answered by the Pennsylvania AVC, which among other things, required Alyon to:
- Make restitution to consumers who claimed they'd been billed in error.
- Require any Website for which it processed funds to post bold notices regarding access, authorization, and rates for services.
- Bar clients from distributing eGroup's dialer stealthily.
- Implement more substantial pre-subscription agreements and additional verification systems to ensure the party whose phone number was being billed was the same individual who agreed to the terms of the service at the time of purchase.
Alyon also agreed to code an "auto-disconnect" feature into its software that would block log-ons from users who failed to enter valid identifying information after three attempts and to automatically block purchases from consumers who had asked to have their phone numbers blocked or who had repeatedly denied purchases made using their unique identification information.
Despite that and Alyon's offer to enter into a similar binding agreement on a nationwide level, the FTC insisted its request for an injunction against the company's continued operation go forward. In July 2003, Judge Story declined to grant the injunction. What followed was 18 months of legal posturing and wrangling involving misleading FTC press releases and other FTC-to-consumer communication the agency later admitted was mistakenly worded in such a way as to indicate Alyon had been prohibited from collecting any outstanding debt. The commission was reprimanded by Story and warned that it might be in the FTC's best interest to settle the case amicably before any more "mistakes" occurred. Among the potential repercussions, it was noted at the time, were the very real possibility that the court would sanction the FTC for its behavior and the looming specter of an Alyon-initiated lawsuit against the commission for violations of the Equal Access to Justice Act.
On November 19, 2004, Story's final decision was filed in the U.S. District Court for the Northern District of Georgia, Atlanta Division. It incorporated language very similar to that in the Pennsylvania AVC, which is what Alyon chief executive Stephane Touboul says his company wanted all along. Alyon considered the outcome a win, or at least a non-loss. In return, Alyon gave up any legal action against the FTC to which it might have been entitled. Since then, the company has settled with 23 other states that filed suit against it; all of the settlements are substantively the same as the Pennsylvania AVC and the subsequent federal Agreed Order.
Who Are You?
Although the protracted legal battle cost his company what Touboul describes as "a fortune" in legal bills, lost man hours, and potential mainstream contracts, and may yet cost it as much as $39 million in consumer restitution, Touboul says he sees bright days ahead. In addition to providing a payment-processing gateway for dialers, Alyon hopes to become an alternative payment option on its own, working through Internet payment service providers (IPSPs, or so-called "third-party processors") and directly with Webmasters to offer a payment scheme for potential customers who can't or won't use credit cards or checks online. The Adult industry, in particular, needs another payment option, Touboul says, especially one like Alyon's that incorporates age and identity verification that are "totally reliable."
How does Alyon go about proving a person's identity and age in a realm that trades on the passion its customers have for anonymity? The company has developed an intricate series of algorithms that match bits and pieces of personally identifiable information – primarily telephone number and the sum of the last four digits of the user's Social Security number – with data contained in respected consumer databases like those maintained by credit bureaus and telephone companies. The addition of the Social Security number component allows Alyon to get around the FTC's and consumers' primary complaint about previous similar billing systems: The Automated Number Identification databases maintained by giant telcos often contained errors leading to cases of mistaken identity. Touboul says the extra step prevents consumers from claiming "I no longer have that telephone number" unless they really don't.
Already available to mainstream companies at PostPayIt.net, the system was scheduled to be available to the Adult industry in late March or early April at ChargeMeLater.com. Consumers can sign up for the service at any time and be ready to enter membership-based sites that accept Alyon's form of payment within two clicks, or they can join on-the-fly when they bump up against one of those "gotta-get-in-but-my-credit-card's-maxed" experiences. ChargeMeLater bills are mailed to users within two to five days of the incurrence of debt, and are due about 20 days later. Touboul says he expects the incidence of chargebacks and consumer fraud to be virtually nonexistent. In addition, because of the Social Security number component, it is highly unlikely that minors will be able to wiggle through any cracks in the system.
"Kids may use their parents' credit cards," he notes, "but how many of them know Mom's or Dad's Social Security number? Even if the kid has his own phone line, his Social Security number will tell us that he's a minor."
All in all, Touboul and his associates are pretty darn proud of Express Verifiable Authorization. "We now have the only process that is fully federally recognized, approved, and endorsed by the FTC and 24 state attorneys general to provide this kind of transaction," Touboul says. "Anybody who wants to use an alternative billing mechanism in the U.S. has found one, and they don't have to worry about the feds coming after them for fraud or allowing minors to access Adult materials."
"Federally endorsed" may be a bit of an overstatement, according to at least one attorney familiar with the case. While it might be nice to believe that the Agreed Order put a stamp of approval on Alyon's system, what it really means is that "[Alyon] is now appropriately complying with the Pay-Per-Call Rule [in U.S. communications law] as long as they meet all of the terms of the settlement agreement," according to Eric M. Bernstein, of New Jersey law firm Eric M. Bernstein & Associates LLC. Bernstein's clients include governmental agencies and Adult industry entrepreneurs. In other words, Alyon won't come under additional federal scrutiny if it adheres to the Agreed Order, but Bernstein says that's hardly an endorsement.
Still, Bernstein says Alyon's Express Verified Authorization "has the potential to address minor access." Although credit cards are acceptable as evidence of majority under current U.S. law, they provide flimsy age verification at best. Credit card companies admit they issue cards to minors with parental consent, and it's not uncommon for parents to "loan" their cards to their offspring, although they probably don't intend for them to be used to pay for online porn. "[Express Verified Authorization] in addition to credit cards might be a good thing to look at," Bernstein says, "but it's going to create mountains of records."
Pay Up, Deadbeat
Of more interest to Alyon, and potentially to Adult Webmasters as well, is that the company views its Express Verified Authorization as a system that makes debts infinitely collectible. According to the Agreed Order, consumers who wish to dispute an Alyon bill must submit a written, signed affidavit affirming the charges either were incurred by a minor or were not authorized by the owner of the telephone number used as a verification reference. The affidavits have the force of law behind them, and consumers who file them fraudulently can be pursued for perjury, according to the Agreed Order. Touboul says he expects few people to take that risk.
"ChargeMeLater provides a transaction tracking mechanism that's similar to a FedEx delivery receipt," he says. "The court said it's a crime to file a false affidavit, and people can go to jail or be fined if they do it. Do you think they're going to do that?
"One part of [the Adult online business] that was shocking to me when I started was the stigmatization that we don't have the right to collect what is owed to us, simply because what was bought was Adult content. It's still a contract to buy, whether it's for digital or physical goods. Webmasters are owed that money, they have expenses associated with creating it and making it available, and they should be able to collect. Now they can, within a federally specified framework."
One receivables management company agrees, and it signed on early to act as the debt-collection arm for Alyon's mainstream and Adult receivables: Chicago-based 1st Credit of America LLC, a two-year-old collection agency founded by mortgage industry professional Elie Mellul. 1st Credit's bread-and-butter income, right now, is from collections in the medical, financial, and telecommunications industries, but Mellul expects the company's Adult collections department to grow exponentially as ChargeMeLater becomes a force in the industry.
Mellul, who serves as 1st Credit's chairman, says he was both amazed and appalled at the estimated amount of debt that goes uncollected in the Adult industry. "Two industries drive the traffic on the Web: Adult and gambling. That leads to money," Mellul says. "It's a financial business; it has nothing to do with Adult. It doesn't matter what the content is: Porn, Adult, it's irrelevant. The consumer needs to pay for electronic content. Purchasing Adult content on the Web is really no different than purchasing the Wall Street Journal online. If you buy it, you've got to pay for it."
After thoroughly reviewing Alyon's Express Verified Authorization system, Mellul says it made good business sense to him to partner with the then-beleaguered billing facilitator. "The integrity of the data [the "paper trail" proving the debt] is the most critical part of the collection process," he says. "[With Alyon's system], the proof of the debt is irrefutable. Express Verified Authorization provides an excellent 'electronic signature.' Because of that, we are able to communicate pleasantly with the consumer who hasn't paid, because he knows he incurred the debt and he knows we can show him proof of the time, dates, access points, and other specifics of the bill. We have a very high success rate with this."
If for some reason the consumer still declines to pay a legitimate debt after being contacted by 1st Credit, there's always the threat the bill will show up as a black mark on the debtor's credit report, and Mellul and Touboul say that last-resort step can be a powerful motivator. "It's not only people with bad credit who use [ChargeMeLater]," Mellul notes, "and it's not only people with bad credit who try to avoid paying bills for Qdult content. We've also seen that people with good credit will try not to pay for Adult. Those people worry about their credit reports."
Mellul clearly sees no difference between the types of content purchased on the Net: All of them require a "contract for purchase," and a contract is a contract, he says. It's time the Adult industry stopped viewing its financial transactions as somehow "second class," he states determinedly.
"If a company – any company – cannot control delinquent receivables, over time it will put itself out of business," he says. "[Adult is] one of the few industries that can't say what the true size of the market sector is. That tells you it's growing, and it's difficult to control delinquent receivables. People get out of the [Adult] industry for exactly that reason. In the mainstream, on the other hand, delinquent receivables portfolios get securitized on Wall Street. They're bought and sold just like any other financial commodity. The recovery period on delinquent debts is up to seven years in some states, so at some point at least a portion of the portfolio represents real money in the owner's hands. Within the next three to five years, I expect to see the liquidation rate of Adult delinquent receivables gain a track record like it has in the mainstream."
What that means to Adult Webmasters, Mellul says, is "the smart Webmaster who wants to take his company to higher levels needs to show he can control delinquent receivables. He needs to have a mechanism in place," and ChargeMeLater is a mechanism that has the hallmarks of one that will work.
