August 17, 2017

negative-option-lawsuit
Negative Option Lawsuit

Last month, the Federal Trade Commission (“FTC” or “Commission”) filed a negative option lawsuit in a Las Vegas federal district court against a tangled web of business entities and related individuals in connection with the defendants’ low-cost “trial” marketing practices.

What should marketers know before offering free or low-cost trials?

Low-Cost “Trial” Marketing Campaign

According to FTC court records, a hodgepodge of 59 related business entities (formed in Arizona, Colorado, Indiana, Nevada and Wyoming), their owner and two of their officers operated as a common enterprise dating back to the mid-2000s.  The defendants allegedly sold tooth whitening products using at least 87 websites promoted by affiliate marketers through use of email marketing, surveys, website banner advertisements and blog advertorials.

The Commission claims that the defendants used “negative option” marketing techniques by delivering tooth whitening products to consumers for a trial period at an initial low cost ($1.03 plus shipping and handling), and subsequently shipping additional products each month at the cost of approximately $100 per shipment until each such consumer cancelled.

FTC’s Negative Option Lawsuit

On July 24, 2017, the Commission commenced a negative option lawsuit against the defendants in the U.S. District Court for the District of Nevada (Case No. 17-cv-2000), claiming that their low-cost “trial” marketing practices violated the FTC Act and the Restore Online Shoppers’ Confidence Act (“ROSCA”).

The FTC alleges, among other things, that the defendants:

  • failed to obtain consumers’ express informed consent before charging their credit cards;
  • misrepresented the price of the subject trial offers; and
  • failed to adequately disclose the material terms associated with their offers.

The negative option lawsuit claims that “[c]onsumers have suffered and will continue to suffer substantial injury because of Defendants’ violations of the FTC Act and ROSCA” and seeks injunctive relief, as well as damages in the form of disgorgement of the defendants’ profits.

Make Sure Your “Free” and “Low-Cost” Marketing Practices Don’t Cost You Big

When done correctly, recurring billing methods provide a convenience for both businesses and their consumers by doing away with the need to revisit the purchase/payment process each month for a product or service that the consumer plans to use for an extended period of time.  However, as the above-referenced case illustrates, federal authorities and state attorneys general alike have been active in investigating such marketers’ “free” and “low-cost” trial offers and, in some instances, have taken enforcement action for deceptive advertising practices.  To minimize the risk of negative option lawsuits, it is essential that businesses work closely with experienced marketing counsel to provide clear and conspicuous disclosures to customers concerning trials, subscriptions and all renewals.

If you are interested in learning more about this topic or need to review your marketing practices and procedures, please e-mail us at info@kleinmoynihan.com, or call us at (212) 246-0900.

The material contained herein is provided for information purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney.  Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.

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Related Blog Posts:

Putting the Positive in Negative Option Billing

Supplement Marketer Settles FTC’s Negative Option-Related Lawsuit

Court Enjoins California Marketers from Continuing Negative Option “Risk Free Trials”

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