FTC Says Companies Have a Fat Chance of Getting Away With Deceptive Online Marketing in First ROSCA Case

by Amy Mudge, Matthew R. Farley and Shahin O. Rothermel on Nov 5, 2014 3:58:00 PM

diet-pillsA free trial of a weight loss pill is the best of both worlds, right?  Not according to the FTC, which recently brought its first Restore Online Shoppers’ Confidence Act (ROSCA) case against a group of marketers who advertised exactly that.

Weight loss substantiation is old territory for the Commission.  ROSCA, however, is not.  The FTC’s first ROSCA case, filed in Nevada district court, alleges that health companies made unsubstantiated claims that their dietary supplements would lead to weight loss, muscle building, virility, and improved skin.  More significantly, however, are the allegations surrounding the marketers’ “free trial” and “buy-one-get-one free” offers.  According to the FTC, the companies collected customers’ debit and credit card information in order to enroll customers in a negative option (subscription) program.  While there is certainly nothing wrong with subscription programs on their face, the FTC alleges that the companies here inadequately disclosed the nature of the program – they never clearly told customers their accounts would be charged each month.  ROSCA prohibits marketers from charging customers in an Internet transaction unless the marketer has clearly disclosed all of the material terms of the transaction and obtained customers’ express informed consent. In this case, according to the FTC, the marketers did not provide the required disclosures for a negative-option program before accepting payment; failed to disclose material facts about their refund and cancellation policy, among other facts; and didn’t give customers a simple, effective way to stop the automatic charges.

ROSCA in large part echoes Section 5 guidance for online negative option marketers.  However, ROSCA affords the FTC a renewed opportunity to develop more nuanced standards, and it carries a big stick – Congress authorized civil penalties of $16,000 per violation.  In addition, States are authorized to use ROSCA, and some states have filed cases alleging ROSCA violations.  And so, while it may have taken a few years (ROSCA passed in 2010), state and federal regulators are warming up to ROSCA.

What can be done to avoid scrutiny from these agencies and regulators?

For starters, get back to basics. Weed out potential false or misleading advertising statements, with particular focus on full and conspicuous disclosure of material terms of any negative option offers.  Fine print buried in the gutter of a webpage is risky, to say the least.

Take a close look at the online order path progression and disclosures made during enrollment and ordering to verify that all appropriate disclosures are made to satisfy ROSCA’s pre-transaction “express informed consent” requirement.  All material features of the offer should be disclosed, including (but not limited to) the manner and means of cancelling, the billing descriptor that will be used, and the exact cost and duration of the offer.

Finally, cancellation or alteration of services must be simple and easy.  Online cancellation is one possibility.  If a call center is used, it should be easy to connect, and high-pressure or back-handed sales tactics are sure to draw attention.

Failure to get educated on ROSCA can have serious consequences.  The judge in the weight loss pill case has entered a temporary restraining order against the companies.  We will wait to see whether the FTC wins its battle to permanently stop the defendants’ conduct, but the bigger implications of the case are clear:  if you are selling products online, you’d better watch what you say – and what you don’t.

The FTC’s Complaint in FTC v. Health Formulas, LLC, No. 2:14-cv-01649-JAD-GWF (D. Nev. filed Oct. 7, 2014), can be found here and the Court’s Order granting the FTC’s Motion for Temporary Restraining Order is here.

In Second ROSCA Case, FTC Finds Dating Site Too Clingy

Most of us are familiar with the pleasant experience of an arranged date or a blind date: dining under the romantic glow of the Golden Arches, learning about a day in the life of Muffin, her pure-bred Persian, or perhaps “going Dutch” on the check when all the fun finally ends.  Add to the mix online dating sites—virtual exchanges of love interests, complete with lists of mostly aspirational hobbies, and yes, user photos from ten years and twenty pounds ago.  When you sign up for an online dating service, you expect these subtle (or not so subtle) misrepresentations from other users.  What you don’t expect is the dating service doing the same—for example, by sending flirtatious notes from made up profiles.  That’s exactly what the FTC alleged last week in its second Restore Online Shopper’s Confidence Act (“ROSCA”) case ever, in which the FTC settled with a dating site for posting fake user profiles in an effort to persuade customers to sign up for premium services.

The FTC settlement with JDI Dating prohibits the site from convincing users to upgrade to paid memberships with made-up profiles called “Virtual Cupids.”  The FTC’s takes issue with these “Virtual Cupids” because they seem like real profiles, but it is not clear to consumers that they are actually advertisements.  If the recipient of one of these steamy messages is able to tear their eyes off their new suitor’s photo, they would notice a “VC” symbol in the corner.  As you may have guessed, this stands for “Virtual Cupid,” which was explained to the consumer in the Terms of Service that the Commission alleged users never read.  The overall message, according to the FTC, misrepresented to consumers that the message was from Mr. or Miss Right, rather than an advertising message from the dating service.  The Commission found this to be a violation of Section 5, which prohibits “unfair or deceptive acts or practices.”

Additionally, and more interestingly, the FTC again honed in on ROSCA, a 2010 law that has been gaining traction in recent months.  Among other things, the FTC alleged that, much like users leave out certain details in their dating profiles, the defendants did not affirmatively tell subscribers that their memberships would be renewed automatically and they would continue to be charged until they cancelled.  According to the FTC, learning about the automatic renewal feature was harder to uncover than learning the well-hidden secrets of some dating site users, because the auto-renewal information was buried deep in multiple pages of text that customers could only see by clicking on a Terms and Conditions hyperlink (which we all know is a no-no in the FTC’s book).  And even though it’s common etiquette to give advanced notice before canceling a date, the FTC called foul on JDI’s similar requirement of subscribers:  the site required members to cancel at least 48 hours before their subscriptions ended in order to avoid being charged for the next month.  These practices run afoul of ROSCA, the FTC said in its Complaint, which prohibits online marketers from using a negative option billing arrangement unless they clearly and conspicuously disclose the material terms of any offer, obtain express, informed consent from consumers prior to enrolling, and provide a simple way to stop recurring charges.

The settlement order requires JDI to clearly disclose to potential members that they will receive communications from virtual profiles who are not real people. The order also requires that, before obtaining consumers’ billing information for a product with a negative-option feature, the defendants must clearly disclose a laundry list of information—the name of the seller, a product description and cost, the length of any trial period, the fact that charges will continue unless the consumer cancels, the deadline for canceling, and the mechanism to stop recurring charges. The order also imposes restrictions on refund and cancellation policies, and requires a cancellation mechanism that mirrors a consumer’s method of enrolling in the service (e.g., online enrollees must be afforded an online cancellation option).

Although the settlement has implications for dating sites, it sheds much more light on the future of the Commission’s enforcement of ROSCA violations.  This is the second ROSCA case that the FTC has brought in one month, despite the statute being in effect since 2010.  The FTC is clearly interested in developing ROSCA’s negative option provision, and we are betting on more ROSCA cases in the near future.  As we mentioned before, ROSCA carries with it a broader range of remedial options than Section 5(a).  In this case, the FTC has added meat to the proverbial bones of ROSCA by way of a settlement, which arguably provides the FTC an opportunity to passively regulate whole industries in ways it might not otherwise be able to.  For example, ROSCA does not require a cancellation mechanism that mirrors the consumer’s method of enrolling in a negative option program.  Such a requirement was considered and rejected in Congress.  Yet here it is, in the JDI order; this may be the first step to it becoming a gold standard for online marketers if FTC entrenches the requirement in consent orders, phases it into guidance, and then takes the position that it’s the law.

For now, the message is clear:  if online retailers want to avoid being dumped, make sure you clearly disclose all essential terms of negative-option plans, obtain express informed consent before charging consumers, and provide a simple way to stop recurring charges.

By Amy Mudge, Matthew R. Farley and Shahin O. Rothermel

Amy Mudge, Matthew R. Farley and Shahin O. Rothermel's blog
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