App maker accused of failing to live up to business model 

Dieter’s Dilemma

It’s an interesting approach, both to business and to healthy living: First, build a community. Next, set standards of behavior. Then, pay people who succeed at meeting those standards by penalizing people who fail to do the same.

This is the basic model behind Pact, a Seattle-based app developer that launched its flagship Pact app back in 2012. Pact would charge members between $5 and $50 when they missed a health-related activity – exercising, for instance, or hitting dietary goals. That money would fund members who did hit their goals.

The model was unique, if a bit Orwellian: A member’s success or failure would be tracked by other apps, such as MyFitnessPal, or even by GPS monitoring, which was used to monitor whether or not a member was inside a gym!

Stick Over Carrot

Trouble started brewing, however, when Pact failed to pay successful members, charged successful members even though they had completed goals and continued to charge unsuccessful members – even after the latter group asked to cancel the service. Some members who met their goals were told that their proof of success was wanting – for instance, the app failed to recognize a gym on a military base when a member of the military who used Pact tried to check in. These are among the allegations raised by the Federal Trade Commission (FTC) in its recent complaint charging Pact; its CEO, Yifan Zhang; and its CPO, Geoffrey Oberhofer, with violations of the FTC Act, including deceptive acts and practices, unfair billing practices, and violations of the Restore Online Shoppers’ Confidence Act, including failure to disclose all material terms. The Commission maintained that, at the least, “tens of thousands” of consumers had complained to Pact about the failed rewards and continuing charges. Moreover, the FTC claimed, Pact expanded its services and continued billing inappropriately even as the complaints rolled in.

The Takeaway

The complaint, filed Sept. 21, 2017, in the Western District of Washington, concluded in a settlement with the company and its co-defendant officers. They agreed to enter a consent order to cease misrepresentations about the conditions for charges or payments, to secure consent from users before charges were made and to stop offering products that include negative option billing. Pact will also disburse $940,000 in earned cash rewards and refunds.

Pact’s idiosyncratic business model and the various check-in methods that were integral to its application make this case quite interesting. However, technological faults that result in a failure to treat consumers as represented can be the basis of a deception claim, as can internal process errors and omissions. Even if Pact’s issues were unintentional, the failure to promptly remedy them in light of the multitude of complaints invited the enforcement action. Further, business models using continuity payments or negative option programs need to comply with state and federal laws regulating such practices, including disclosure requirements, and provide an easy and effective way for consumers to terminate future charges.