The practice is known as ‘negative option’ marketing – debiting consumer bank accounts when they fail to cancel an offer after the free period has expired.
In one case – JAB Ventures along with Jason Brailow were fined $7,803,425, but ordered to pay only $610,000 due to a lack of cash. Complete Weightloss Center, the marketers of a product called Woman’s UltraSlim, was hit with a $2,532,014 judgment, but ordered to pay only $3,000 now.
The FTC noted that full judgment would be imposed if the defendants are found to have misrepresented their financial condition.
Wrongdoing
All of the defendants were charged with violations of the FTC Act:
· Making false or unsubstantiated weight-loss and related claims
· Failing to disclose adequately that consumers who order a “free” sample are enrolled in a continuity program, that their accounts will be debited or charged to pay for the program, that they must cancel to avoid extra shipments and debits and charges, and how and when they must cancel to avoid the debits or charges
· Debiting or charging accounts of consumers who cancelled or tried to cancel, or those who were not adequately informed of the negative option features or terms and conditions, and therefore did not provide express informed consent for the debits or charges.
Some of the brands owned by the two companies include LeanLife PM, Burn Fat 2, Hoodia 66, Hoodia Thin, HoodiaGordonii, and RxZyte.
The typical scheme involved customers being billed about $100 every few months for unwanted products after their free trial ended. They were forced to give credit card details to gain the free trial and pay for shipping and handling.
For this the defendents were charged with violating the Electronic Fund Transfer Act and Regulation E for improperly debiting consumers’ accounts.
The FTC noted that companies are required by law to, “clearly and conspicuously disclose, before asking for money or billing information, all costs, all conditions regarding a product or service, and all terms and conditions of any offer with a negative option feature.”
FDA actions
The FTC works with the FDA and other bodies to police how dietary supplements are sold and marketed.
The crack-down comes at the same time as increased FDA activity in the weight loss area – it recently produced a list of transgressors that stretched to almost 70 products and included banned ingredients such as sibutramine, rimonabant, phenolphthalein and bumetanide.
“A large percentage of these products either contain dangerous undeclared ingredients or they might be outright fraudulent on the ingredients and have no effect at all,” said Michael Levy, the director of the FDA’s division of New Drugs and Labeling Compliance. “We don’t think consumers should be using these products.”