FTC Brings First Lawsuit Under 2010 E-Commerce Statute

-Miracle_Cure!-_Health_Fraud_Scams_(8528312890).jpgThe Federal Trade Commission (FTC) has filed a lawsuit against a Nevada company and its affiliates for a variety of alleged deceptive practices in the sale of products online. FTC v. Health Formulas, LLC, et al, No. 2:14-cv-01649, complaint (D. Nev., Oct. 7, 2014). The lawsuit is the first one brought by the agency under the Restore Online Shoppers’ Confidence Act (ROSCA), 15 U.S.C. § 8401 et seq., which Congress passed in 2010. ROSCA requires online sellers to disclose the details of transactions known as “negative options” to consumers up front. The FTC claims that the defendants violated ROSCA and several other federal statutes in their marketing and sales activities. It obtained a temporary restraining order (TRO) and a preliminary injunction (PI) against the defendants, and it is seeking a permanent injunction.

A “negative option” is defined as a transaction in which the consumer’s failure to reject goods or services through some affirmative act constitutes acceptance of the seller’s offer. 16 C.F.R. § 310.2(u). To put it another way, the customer accepts the goods or services and becomes obligated to pay for them by doing nothing. Negative option billing is common in online or mail-order clubs like Columbia House, which periodically send customers a CD or DVD and allow them a period of time to return it, after which they are billed for it.

Consumers have generally not been successful challenging negative option billing provisions in court if the contract clearly discloses the nature of the transaction, but many negative options are not so clearly explained. ROSCA requires online sellers to “clearly and conspicuously disclose[]…all material terms of the transaction” to the consumers before obtaining their billing information in online sales and marketing. 15 U.S.C. §§ 8402, 8403.

The defendants, according to the FTC’s complaint, are engaged in the business of selling health-related products and services online, including weight loss products, dietary supplements, and male enhancement products. They include numerous California- and Nevada-based businesses, as well as several individual officers and managers. The FTC alleges that the defendants “trick consumers into disclosing their credit and debit card information” and then enroll the consumers in programs with monthly billing. Health Formulas, complaint at 4. This allegedly often involves “free trials” or “buy-one-get-one-free offers,” id., without disclosing to consumers that acceptance of these offers will result in negative option billing and other charges.

The lawsuit asserts seven causes of action, including one count of ROSCA violations. It also alleges three counts under the Federal Trade Commission Act, 15 U.S.C. § 45(a); one count under the Electronic Fund Transfer Act, 15 U.S.C. § 1693e(a), and Regulation E, 12 C.F.R. § 205.10(b); and two counts under the Telemarketing Sales Rule, 16 C.F.R. §§ 310.3(a)(1)(vii), 310.4(b)(1(iii)(A). The court granted the FTC’s motion for an ex parte TRO on October 9, 2014, and it entered a stipulated PI against several defendants on November 17. The FTC has filed additional proceedings based on this case in the Central District of California and the Northern and Southern Districts of Indiana.

Business law attorney Samuel C. Berger offers fixed-fee legal-service packages to entrepreneurs and businesses in New York and New Jersey in a wide range of legal matters, including business formation and choice of entity, contracts, and business finance. Contact us today online or at (212) 380-8117 to schedule a confidential consultation with an experienced business advocate.

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Photo credit: FDA graphic by Michael J. Ermarth (“Miracle Cure!” Health Fraud Scams) [Public domain], via Wikimedia Commons.