At a time when Classmates.com and parent company United Online are already mixed up in a congressional investigation, Classmates.com is attempting to settle a lawsuit that accuses the company of sending e-mails that duped users into believing the messages had come from old high school chums.
E-mail recipients only learned the truth after paying for upgrades to their membership, according to court documents. In a court filing, Classmates.com has agreed to pay $9.5 million to settle the suit but did not admit any wrongdoing. The blog Techflash.com broke the story.
According to Wired.com, Classmates.com is also being sued separately for making user profiles public in a bid to compete with Facebook. A Classmates.com spokesman did not respond to an interview request.
By all appearances, Classmates.com is a company that should be triggering plenty of questions among regulators and lawmakers. The U.S. Senate Commerce committee is the most likely body to look into the matter.
Led by Sen. John "Jay" Rockefeller (D-W.V.), the Commerce committee last fall launched an investigation into post-transaction marketing firms, Vertrue, Webloyalty, and Affinion. These companies would pay retailers, such as Classmates.com, Priceline, Continental Airlines, for the ability to "market" to their customers.
When a buyer was nearing the end of a transaction, the marketing company presented pop-up ads that the government said misled consumers into signing up for membership programs as the full terms were obscured in fine print within the ads. These companies then charged the users' credit cards each month. Many people have complained that they didn't notice the charges on their statements for months.
No retailer profited more from these practices than Classmates.com, according to the Senate committee. The Seattle-based social network banked $70 million, Rockefeller said. In the wake of government scrutiny, the marketers have said they have instituted measures that will prevent customers from mistakenly signing up to the membership programs. Some experts don't believe these measures go far enough.
The Senate committee, which said last year it would consider holding more hearings into post-transaction marketing--and many consumers who claimed of being duped had hoped the government would call the retailers involved to testify before the committee--hasn't made a peep on this issue in 2010. The committee's spokeswoman didn't respond to an interview request.
Meanwhile, the question raised by the most recent Classmates.com allegations is why haven't any of the retailers or marketers mixed up in the post-transaction scandal been made to answer for their alleged actions? And have these companies now been encouraged to try more aggressive marketing tactics?
The good news is that in United Online's fourth-quarter earnings report issued last month, the company said it "recently terminated its domestic post-transaction marketing contracts." The company added that "those contracts generated $26.5 million in advertising revenues in 2009, including $6.6 million during the fourth quarter of 2009." As a result, United told Wall Street to expect $5 million less advertising revenue in the first quarter of this year.
The bad news, for consumers anyway, is that United Online reported fourth quarter net earnings of $16.5 million on revenue of $249 million. If United Online generated $6.6 million in the quarter from post-transaction marketing deals, (which government officials and marketing experts say is almost pure profit for the retailer), it appears that 40 percent of United Online's profits came from tactics the government and thousands of consumers have called a "scam" and "theft."