FTC Sues Over Negative Option, ‘Free Trial’ Plans

Advertising Law

Adding to a series of actions challenging online “free trial” offers that involve negative option plans, the Federal Trade Commission announced a new lawsuit against a Puerto Rico-based defendant and his companies.

The agency filed suit against Gopalkrishna Pai and eight companies he owns and operates, alleging violations of the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA) in the marketing and sale of skin care products from February 2016 through August 2017.

Advertisements for products such as Aura Youth Cream and Derma Vibrance touted a nominal shipping and handling charge (typically $4.99 or less) with claims such as “CLAIM YOUR FREE TRIAL” and “RUSH MY FREE TRIAL.”

But the defendants neglected to disclose that consumers would automatically be charged the full price for the selected products (often $97.81) and for monthly auto shipments of additional items (at more than $90 each), unless they canceled their order within 14-15 days, according to the FTC’s federal court complaint.

“Defendants frequently charged consumers for additional products and enrolled them in autoship programs related to these additional products without consumers’ knowledge or consent,” the FTC alleged. “Defendants brought in tens of millions of dollars through their deceptive trial offers and payment processing scheme.”

The defendants’ attempt to disclose their terms was ineffectual at best, according to the agency. Toward the end of the checkout page—away from the prominent “COMPLETE CHECKOUT” button—two sentences in small, light-gray font against a white background stated: “Initially just pay $4.95 for S&H today to fully evaluate Vita Luminance Cream for fourteen (14) days. We know that you’ll love your smooth, wrinkle free skin. You will receive your product within 5 business days.”

Underneath, a “TERMS AND CONDITIONS” hyperlink appeared (again, in difficult-to-read font and away from the prominent text and graphics on the page). Only after clicking on the link and then scrolling through a pop-up window could consumers learn that defendants planned to charge them the full price of the product at the end of the trial period and enroll them in the autoship program until they canceled, the FTC said.

The defendants also “frequently” charged consumers for additional trial products without their consent and employed restrictive cancellation and refund practices that made it difficult for consumers who tried to cancel their autoship program enrollment. In some instances, even when consumers canceled during the trial period, the defendants still charged them the full product price. Other consumers were told they could receive only a partial credit or were charged despite confirmation of their cancelation.

In an effort to evade detection from consumers, financial institutions, and law enforcement, the defendants used more than 100 shell companies with straw owners to obtain merchant processing accounts, according to the agency.

The complaint seeks a permanent injunction, rescission or reformation of contracts, restitution, refunds and disgorgement.

To read the complaint in Federal Trade Commission v. F9 Advertising, LLC, click here.

Why it matters: The FTC alleged that the defendants engaged in a host of actions to avoid detection of their FTC Act and ROSCA violations, including using more than 100 merchant accounts with false names, showing a product name in the billing descriptor on credit card statements different than what consumers ordered, and selling each of the skin care products for a short time, usually three to four months. “By the time many consumers discovered the fraud and hidden charges related to their trial products and alerted their credit card companies or regulators, Defendants’ websites for those products were often no longer operational and Defendants had moved on to selling another product using another shell company,” according to the complaint.