Markets Wired

Two dietary supplement marketers that lured consumers on the Internet with allegedly deceptive weight-loss claims and bogus “free” sample offers, and then debited their bank accounts or charged their credit cards for continuing shipments without their consent, have agreed to settle Federal Trade Commission charges that they violated federal law. With the increase in Internet marketing, the FTC staff has issued a report providing guidance for marketers to help them avoid deception in making online “negative option” offers. (With negative option marketing, a company takes a consumer’s silence or failure to cancel as acceptance of the offer and permission to bill them.)

In one FTC law enforcement action, the defendants claimed their products – LeanLife PM, Burn Fat 2, Hoodia 66, Hoodia Thin, HoodiaGordonii, and RxZyte – would help consumers lose weight or improve male sexual function. To obtain a “free” sample, consumers provided their account number to pay a shipping and handling fee, unaware that they would be enrolled in a “negative option” continuity program and billed about $100 every few months for recurring shipments of the products unless they cancelled. In the other case, consumers who ordered a “free” sample of Woman’s UltraSlim were asked to provide their credit or debit card account number to pay a shipping and handling fee, unaware that they would be enrolled in a continuity program and charged a monthly fee of almost $30 until they cancelled their enrollment.

All of the defendants were charged with violations of the FTC Act:

• Making false or unsubstantiated weight-loss and related claims;
• Failing to disclose adequately that consumers who order a “free” sample are enrolled in a continuity program, that their accounts will be debited or charged to pay for the program, that they must cancel to avoid extra shipments and debits and charges, and how and when they must cancel to avoid the debits or charges; and
• Debiting or charging accounts of consumers who cancelled or tried to cancel, or those who were not adequately informed of the negative option features or terms and conditions, and therefore did not provide express informed consent for the debits or charges.

The defendants also were charged with violating the Electronic Fund Transfer Act and Regulation E by debiting consumers’ accounts on a recurring basis without obtaining the required written authorization.

Under the settlements, regarding the marketing of any dietary supplement, food, drug, device, or health-related program or service, or of any product or service by means of a negative option feature, the defendants are barred from misrepresentations, including that a product or service is “free” or without obligation if a charge will be assessed unless the consumer cancels. Other prohibited misrepresentations include the amount that will be charged, that a consumer will not be charged, the timing or manner of any charge, the length of any trial period before a charge will be made, and that a consumer has authorized a purchase.

The defendants also are required to clearly and conspicuously disclose, before asking for money or billing information, all costs, all conditions regarding a product or service, and all terms and conditions of any offer with a negative option feature. They also are prohibited from using billing information to obtain payment for any product or service without a consumer’s express informed consent, from failing to obtain consumers’ written authorization for pre-authorized electronic debiting, and from failing to maintain procedures reasonably adapted to avoid an unintentional failure to obtain written authorization.

In addition, the defendants are barred from failing to clearly and conspicuously disclose, before asking for money or billing information: if a representation is made about a refund or cancellation policy, all of its material terms and conditions, or the fact that there is a policy against refunds or cancellations if such a policy applies. They also are barred from failing to honor any request for a refund or cancellation if they’ve told consumers they have such a policy, and from misrepresenting the policy’s terms and conditions.

The settlements also bar the defendants from making product claims unless they are true, not misleading, and supported by reliable scientific evidence. The settlements also prohibit them from debiting or charging consumers’ accounts for orders made before the settlement orders were entered by the court, unless they have obtained consumers’ express informed consent, and from disclosing personal information about anyone who was a client before the court orders were entered.

The settlement with marketers JAB Ventures, LLC and Jason Brailow imposes a $7,803,425 judgment, all but $610,000 of which is suspended based on their inability to pay. The settlement with Woman’s UltraSlim marketers Complete Weightloss Center, Inc., Terry Guthmiller, and David Guthmiller imposes a $2,532,014 judgment, all but $3,000 of which is suspended due to their inability to pay. In each case, the full judgment will be imposed if the defendants are found to have misrepresented their financial condition. The settlements contain standard record-keeping provisions to allow the FTC to monitor compliance with its orders.

The Commission vote to authorize the staff to file the complaint and stipulated final order was 4-0 in each case. The documents were filed in the U.S. District Court for the Central District of California and the U.S. District Court for the District of North Dakota, Southwestern Division, respectively.

In a similar matter involving a bogus weight-loss product and a continuity program, in December 2008 Ultralife Fitness, Inc., Tru Genix, LLC, Neil P. Wardle, Pace Mannion, and Christopher J. Wardle agreed to pay $150,000 and to injunctive relief as part of a settlement with the FTC.

Report on Online Negative Option Marketing

Negative option marketing can pose serious financial risks to consumers if appropriate disclosures are not made and consumers are billed for goods or services without their consent. The FTC staff has issued a report presenting five marketing principles for avoiding deception in negative option offers on the Internet, which poses unique issues not present in print or telephone marketing. In “Negative Options: An FTC Workshop Analyzing Negative Option Marketing,” the agency’s Division of Enforcement presents principles compiled from Commission law enforcement actions and a 2007 workshop where industry and consumer representatives and academics discussed consumer behavior and how to make online negative option disclosures clear and conspicuous.

The five principles address:

• Disclosing material terms in an understandable manner, without making them unnecessarily long or inconsistent;
• Making the disclosures clear and conspicuous by placing them where consumers are likely to look on Web pages, by labeling disclosures (and links to them) to indicate their importance and relevance, and by using easy-to-read fonts and colors;
• Disclosing the offer’s material terms before the consumer incurs a financial obligation;
• Obtaining consumers’ affirmative consent to the offer by, for example, having them click “I Agree” and without relying on pre-checked boxes; and
• Not impeding the effective operation of promised cancellation procedures and honoring cancellation requests that comply with such procedures.

The FTC vote approving the report was 4-0. (FTC File No. P064202. The staff contact is Melinda Claybaugh, Bureau of Consumer Protection, 202-326-2203.) Copies of the report can be found as a link to this press release on the Commission’s Web site.

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendants have actually violated the law. The case will be decided by the court. A stipulated final order is for settlement purposes only and does not constitute an admission by the defendants of law violations. A stipulated final order requires approval by the court and has the force of law when signed by the judge.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.

(FTC File No. X080031, X080055)