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Negative Option Remains Prime Enforcement Target at Trump FTC

19 Sep, 2017 By: William I. Rothbard


When Acting Federal Trade Commission (FTC) Chair Maureen Ohlhausen – who nine months into the Trump administration perhaps can claim the title of de facto permanent chair – took over the reins of the agency, she announced that after years of hyper-regulation by the Obama FTC, she would be returning the Commission to its core mission of traditional, bipartisan fraud enforcement, with actual consumer harm to serve as a prime guidepost in case selection. Included in the types of “fraud” (loosely defined since standard fraud elements, such as intent to deceive and actual reliance, don’t have to be proven by the FTC) she could be expected to target would be negative option offers, which are deceptive when they induce consumers through a “free trial” or low-cost initial fee to make a “continuity” purchase without being told there will be recurring charges unless they cancel.

So far, she has been true to her word.

Since Ohlhausen’s tenure began in January, the FTC has filed 18 new consumer protection enforcement actions (not counting settlements of cases predating her tenure). Of these, all but three fit neatly into the “fraud” box. The alleged violations range from invention promotion schemes to abusive debt collection, tech support scams, fantastic weight-loss claims, fake product reviews, phony loans, credit card laundering, telemarketing ripoffs, and overhyped work-at-home opportunities. Three involve continuity, or negative option, plans – one filed in March and the other two last month.

Negative option marketing has been a major FTC target for years now The new cases filed so far this year indicate that no letup of enforcement in this so-called “fraud” category is in sight.

The first, FTC v. AAFE Products Corp. et al., charged a group of online marketers and their principals with violating Section 5 of the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA) – the federal negative option marketing statute – by deceptively luring consumers with free trials for golf equipment (including the popular Medicus Golf training aids), cooking gadgets, and related online subscription services without disclosing that they would start charging consumers if they did not cancel the trial. They also allegedly misrepresented their return, refund, and cancellation policies, burying them in hyperlinked fine print terms and conditions. Granting defendants a reprieve from its normal punitive practice in negative option cases (perhaps because they were selling “mainstream” goods rather than health items like dietary supplements), the FTC filed this action without asking for a temporary restraining order (TRO), asset freeze, and receiver.

Nevertheless, in a settlement reached this month, the principals behind the scheme, Brian and Joshua Bernheim and Robert Koch, have collectively agreed to pay more than $2.5 million in consumer redress in installments over one year, secured by real estate. They also agreed to the usual injunctive remedial provisions to ensure that the terms of future free trial and negative option offers will be clearly and conspicuously disclosed before sale, confirmed after sale, and accepted only with the express informed consent of consumers.

The next case, FTC v. RevMountain LLC et al., charged a group of companies and their principals, including not only merchant entities but also their backend service providers, with Section 5 and ROSCA violations involving free-trial continuity offers for tooth whiteners. The FTC did seek and obtain a TRO with an asset freeze and receiver, which has now been converted into a preliminary injunction. The service providers, including the well-regarded customer service innovator RevGuard, have moved to dismiss on the grounds that the complaint fails to state any facts linking them to the free trial offers and doesn’t meet heightened pleading requirements for claims, like deceptive billing, that “sound in fraud.” (Among other things, the complaint acknowledges that the negative option terms were disclosed before checkout and doesn’t show how consumers were unaware they were enrolling in a continuity plan).

The last continuity case, FTC v. Hornbeam Special Situations LLC, also was brought under ROSCA as well as Section 5. It didn’t involve a free trial but rather a “bait and switch” in which defendants, after offering payday and cash advance loans and obtaining consumers’ bank account information, instead enrolled them in discount clubs with initial and monthly fees and debited their accounts without their knowledge. Even though hundreds of thousands of consumers were victimized, virtually no consumers got any discounts, and the ringleaders were facing contempt charges for violating an earlier FTC consent order in another debiting scam, the FTC did not shut down the operation or freeze assets and no receiver has been appointed to preserve any of the more than $40 million that was swiped from consumers’ bank accounts.

These cases are an early warning signal that it is business as usual at the FTC in enforcement of Section 5 and ROSCA against negative option marketing – as well as in the seeming arbitrariness with which the FTC decides who gets hammered with a draconian TRO and asset freeze. Continuity advertisers, especially of health products, are still playing a game of Russian roulette with the FTC, even in the supposedly more “business friendly” Trump administration. Who will be next? Don’t be surprised if it’s an internet seller of controversial, cannibis-derived CBD, offers of which are exploding online and were the talk of the show at Affiliate Summit last month.

William I. Rothbard is a former FTC attorney and practices in Los Angeles, specializing in advertising and marketing law. He can be reached at (310) 453-8713, [email protected], and www.ftcadlaw.com.


About the Author: William I. Rothbard


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