Internet Marketers of "Free" Products Ordered to Pay $9.9 Million

The FTC continues to crack down on Free Trail Offers sold on the Internet. The most recent settlement with Ultralife Fitness, Inc. is similar to the FTC's settlement with Think All Publishing and NextClick Media that we reported on back in June 2008.

Ultralife Fitness

In December 2008 a Utah-based operation that the Federal Trade Commission alleged lured online customers with free samples of a purported weight-loss supplement in a scheme to obtain their credit or debit card information was ordered to pay $9.9 million to settle FTC charges of deceptive and unfair marketing, and of violations of federal regulations governing the electronic transfer of funds.

According to the FTC's complaint, the defendants, operating through their umbrella company Ultralife Fitness, Inc., lured customers by promising to send, for a specified trial period, free samples of the dietary supplement Hoodia, which they claimed caused weight loss. The FTC's complaint also alleges that customers provided their credit or debit card information with the understanding that it would be used only to cover shipping and handling costs of the free Hoodia samples. However, customers later discovered that they were enrolled without their consent, into continuity programs - one for periodic shipments of Hoodia (at a cost of approximately $50 a month) and another for fitness instruction (at a cost of approximately $30 a month). The complaint states that the defendants withdrew funds or assessed fees before consumers received the Hoodia, after the Hoodia was received but before the trial period ended, and even when the consumer never received the Hoodia supplement.

Also according to the FTC's complaint, in addition to providing inadequate notice of enrollments in the continuity plans, the defendants failed to give consumers adequate notice of fees, costs, and cancellation polices; and failed to inform them that their financial account information would be used to pay for the continuity plans. The Web site's order pages made no reference to this information; instead, it was buried in nearly 12 pages of text in the site's "terms and conditions" section. Further, the link to the terms and conditions section did not convey the relevance or significance of the information.

Under the terms of the proposed settlement, the defendants are ordered to pay $9.9 million, which is the total estimated consumer injury. However, based on the defendants inability to pay, all but $150,000 of that judgment is suspended. Each of the three individual defendants is responsible for paying $50,000 of the $150,000 owed to the FTC.

The defendants are barred from misrepresenting any material fact in connection with the sale of a dietary supplement, food, drug, device, or heath-related program or service. The same prohibition applies to material facts used to market products or services offered through a "negative-option" plan - a plan in which goods or services are provided automatically, and consumers must either pay for the service or specifically decline it in advance of billing. Specifically, the defendants cannot misrepresent the cost or charges for any good or service they offer; whether a transaction has been authorized by a consumer; that a product burns a significant amount of fat while the user sleeps; that a product can cause substantial weight loss with no additional effort; that a product can cause weight loss of two pounds or more per week without diet or exercise; and that a product can safely enable consumers to lose more than three pounds per week for more than four weeks. The defendants also are barred from using billing information to acquire payment from consumers unless defendants first obtain informed and express consent from the consumers. In addition, the defendants must obtain written authorization for preauthorized electronic fund transfers, in accordance with the EFTA.

The Basics

A company may claim its free trial offer has no risk or obligation for the consumer. And that may be true, but only if you take timely action to avoid future obligations. For example, you may have to contact the company to cancel during the trial period to avoid receiving additional goods or services or to pay for what you've already received. By not canceling, you may be agreeing to let the company enroll you in a membership, subscription or service contract, and to charge the fees to your credit card.

Companies must clearly and prominently disclose the "material" terms of their trial offers before you give your consent. Material terms may include: 1) the fact that by accepting the trial offer, you're actually agreeing to be enrolled in a membership, subscription or service contract or paying for additional products and services if you don't cancel within the trial period; 2) how much time you have to cancel before you incur charges; 3) the cost or range of costs of goods or services you'll receive if you don't cancel during the trial period; 4) how to cancel during the trial period; 5) whether you'll be charged a non-refundable membership fee if you don't cancel within the trial period; 6) whether fees will be charged automatically to the credit card you used to buy other goods or services.

Moreover, some states, such as Utah, have specific affirmative disclosure obligations relating to negative option programs that must be utilized in conjunction with the enrollment process and disclosure of the program terms.

In light of the recent FTC activity, companies marketing products or services using a negative option need to ensure proper disclosures are provided.

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