Companies settle with Commission after alleged negative option mulligans

Front Nine

The Federal Trade Commission (FTC) recently announced a settlement with four individuals and six separate but interlocking companies. The agency alleged that the group participated in a number of negative option and continuity sales schemes.

The defendants operated a number of websites that sold golfing gear and kitchen products, sites with names like “Gourmet Cooking Rewards” and “Golf Online Academy.” They promoted these websites through television infomercials and mass email campaigns. Customers were assured of a 100 percent money back guarantee on all their products, as well as 30- to 60-day trial periods, and that their trial offers were risk-free.

The FTC alleges that the defendants inserted as many as 14 “upsell” pages as customers worked their way through the process of entering their shipping and billing information for a specific product. These pages pushed additional negative option offers and continuity plans.

Penalty Stroke

In its initial complaint, filed in March 2017 in the United States District Court for the Southern District of California, the Commission claimed a laundry list of infractions.

The defendant’s websites failed to mention the terms and conditions that accompanied a free product or a trial period, according to the complaint. Often the disclosures were tucked away, far from the “add to cart” button or other sales confirmation links. The complaint also alleged the disclosures were rendered unintelligible because they were festooned by dense layers of hyperlinks and tiny text surrounded by distracting graphics.

In addition, the defendants were accused of bundling offers by combining free trials with continuity plans for other products. One site offered free instructional golf DVDs, but hooked customers into a continuity plan for online golf lessons. Analogous bundled offers were made by combining coupons and discounts with cooking lessons. However, in many cases the defendants failed to obtain consumer consent for these extras and consumers were unaware they were subject to such bundled offers.

The FTC also noted that customers who viewed the offers on mobile devices were more likely to be deceived, since the devices’ smaller screen size made the disclosures even more difficult to read.

The Takeaway

The Commission charged the defendants with deceptive acts and practices under Section 5(a) of the Federal Trade Commission Act and with violations of the Restore Online Shoppers’ Confidence Act (ROSCA).

The settlement terms prohibit further misrepresentations of the cost of the defendants’ goods and services, and require defendants to disclose details about any negative option, to secure consumer consent, and to cease billing consumers who were charged before March 2016. Three of the individuals charged were hit with a combined settlement penalty of $2.5 million, backed by security interests given to the FTC in real estate and other assets. This FTC action and resulting settlement once again demonstrates the FTC’s immense power in enforcing unfair or deceptive practices, and its commitment to enforcing ROSCA.