The Federal Trade Commission (FTC) is showing no signs of backing off its aggressive enforcement of online negative option offers after filing a federal lawsuit against eight commonly-controlled companies that sell skin care products.

The lawsuit seeks an injunction against Puerto Rico-based Gopalkrishna Pai and eight companies he owns, alleging violations of the Restore Online Shoppers’ Confidence Act (ROSCA).

All About ROSCA

A negative option is an offer for goods or services in which the consumer’s silence is interpreted by the seller as an acceptance of the offer. Negative options are often seen in combination with free trial offers, in which a consumer signs up for a free trial of a product or service and then is automatically enrolled in a recurring payment plan for the product or service if the consumer fails to cancel. ROSCA prohibits online negative options unless the seller:

  1. Clearly discloses all material terms of the deal before obtaining a consumer’s billing information;
  2. Gets the consumer’s express informed consent before making the charge; and
  3. Provides a simple mechanism for stopping recurring charges.

The Alleged Violations

Pai’s companies offered online “risk-free” trials of skin care products sold in pairs. Consumers who enrolled in the 14- or 15-day free trial periods were billed for a $4.95 shipping and handling fee and if they failed to cancel after the trial period, they were enrolled in an auto-ship program with recurring charges — $90 per month or more — until they took affirmative action to cancel. On the checkout page, there was a hyperlink to “Terms and Conditions” that included information about the conversion from the trial period to recurring charges, but the FTC alleges that the link is not sufficient to place consumers on notice that they will be on the hook for recurring payments unless they take affirmative action to cancel.

Another concern for the FTC was the fact that Pai’s companies routinely tried to upsell consumers by offering them a second risk-free trial during the check-out process. By paying a second shipping and handling charge, consumers could participate in a “free trial” of additional products that would allegedly help the consumer “maximize [his or her] results.” As with the first offer, if consumers failed to cancel before the end of the trial period, they would automatically be enrolled in a second auto-ship program with recurring changes.

In addition, the FTC alleges that consumers who tried to cancel faced significant obstacles. Consumers who called to cancel found that many customer service representatives spoke only Spanish and that some of the recorded messages on the call-in line were offered only in Spanish. Consumers who did reach a representative often received only a partial refund or no refund and found that merchandise shipments continued even after trying to cancel. Finally, the FTC alleges that Pai engaged in various efforts to camouflage his business practices from payment processing entities and banks, including using fake merchant names and employer identification numbers in order to open new accounts.

Takeaway

Over the past several years, the FTC has consistently sought injunctions against companies that allegedly violate ROSCA and this case suggests that the FTC continues to closely scrutinize negative option offers in the marketplace.

Companies that offer online negative options can minimize the risk of regulatory scrutiny by carefully designing product check-out pages and making sure that all material terms of the offer are clearly and conspicuously disclosed to consumers before transactions are processed. For example, before consumers can enroll in a free trial or negative option plan, companies can require them to take an affirmative action — such as checking an unchecked box on an online check-out page — indicating that they agree to certain specified key terms of the offer. When disclosing key terms, companies should, at a minimum, disclose the length of any free trial period, how to cancel, and the amount consumers will be charged each billing cycle.