Complaint alleges hidden transactions, auto pay programs

Occupational Therapy?

If the Federal Trade Commission (FTC) has got its details right, one of the named defendants in a recent complaint, Gopalkrishna Pai (Pai), was very active in establishing and running more than 100 companies as part of a skin care products online scheme.

The FTC filed a complaint against Pai and several of his companies in the United States District Court for the District of Puerto Rico on Feb. 21, 2019, for the defendants’ practices relating to negative option marketing. The complaint alleged that the defendants used more than 100 shell companies with straw owners to obtain merchant processing accounts needed to accept and process consumers’ credit and debit card payments. These interrelated companies had addresses around the continent, including in Puerto Rico and Wyoming.

The Takeaway

According to the FTC, Pai used this mass of business entities to carry out an elaborate negative option marketing scheme which ultimately brought in tens of millions of dollars through their “deceptive trial offers and payment processing scheme.”

The alleged front for the negative option scheme was a suite of skin care products that were advertised as “risk-free” online, with only nominal shipping and handling costs. Once a consumer signed up, the FTC says, Pai and his companies would charge them $90 for failing to cancel the offer within 14 or 15 days; simultaneously, the consumer would be enrolled in an auto-ship program that charged $90 monthly. These arrangements were disclosed – but only under a small “terms and conditions” hyperlink in the ads that was light gray font and appeared away from the prominent text and graphics on the page that urged consumers to complete the checkout process. In addition, Pai is accused of making cancellations difficult or impossible, and evading detection by using his 100-plus companies to conceal credit card transactions.

Pai and his companies were sued by the FTC in the District Court of Puerto Rico for violations of the Restore Online Shoppers’ Confidence Act’s (ROSCA) illegal negative option provisions. The FTC sought an award to redress the injury to consumers resulting from the defendants’ ROSCA violations, a permanent injunction to prevent future ROSCA violations by the defendants, and an award for the costs of bringing the legal action. As of early March 2019, there was no word of a settlement.

This case is another example of the FTC aggressively monitoring and regulating companies which deploy negative option marketing to sell their products. Although companies may legally market to consumers for trial periods and “risk-free” purchases, they must do so in compliance with the technical notice and consumer cancellation rights provisions of state and federal laws. The FTC has continued to crack down on those entities which fail to adequately disclose the full terms of these subscription agreements and fail to provide adequate notice to the consumer.

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