United States: Putting Individuals In The (Urth)Box: FTC Goes After Individual Executives For Unfair And Deceptive Practices

Last Updated: June 12 2019
Article by Jonathan A. Direnfeld, Emily S. Tabatabai and Aravind Swaminathan

In an increasing trend, the Federal Trade Commission (FTC) joined other federal regulators seeking to hold individuals – not just companies – liable in enforcement proceedings. The most recent target was San Francisco-based UrthBox, Inc. and its principal, Behnam Behrouzi. Specifically, Urthbox and Behrouzi agreed to settle FTC allegations that UrthBox engaged in unfair or deceptive acts or practices by: (1) failing to adequately disclose key terms of its "free trial" automatic renewal programs, and (2) misrepresenting that customer reviews were independent when, in fact, UrthBox provided customers with free products and other incentives to post positive reviews online.1

Notably, the FTC decided to hold Mr. Behrouzi individually accountable for UrthBox's alleged unfair and deceptive conduct, which personally subjects him to future conduct restrictions for the next twenty years relating to marketing practices. This settlement, which received final FTC approval on May 17, 2019, appears to be an effort by the FTC to "make good" on a February 27, 2019 statement by two FTC Commissioners on the TikTok COPPA settlement,2 in which Commissioners Rohit Chopra and Rebecca Kelly Slaughter stated that moving forward, the FTC should look to hold officers and directors personally liable for unfair and deceptive practices. These statements followed efforts by other regulatory agencies (namely the SEC and DOJ) to consider whether executives should be personally liable in connection with privacy and cybersecurity incidents.3

The UrthBox settlement reinforces that the new FTC leadership is committed to pursuing more stringent remedies in consumer protection actions, including privacy and cybersecurity enforcement actions. Companies caught in the FTC's crosshairs should be prepared for the FTC to pursue larger monetary penalties, more burdensome prospective conduct restrictions and demands that executives should be held personally liable for privacy, cybersecurity and marketing violations.

To better understand the order and its impact, let's "unbox" the UrthBox settlement.

Auto-enrollment, Negative Option Plans and "Free" Snack Box Offers

UrthBox offers healthy snack options, where subscribers can purchase a one-month, three-month, six-month or twelve-month subscription to snack boxes. The boxes contain a mix of healthy foods, beverages and snacks that are claimed to be 100% GMO-free, organic and natural. The subscription price varies, depending on the size of the box.

According to the FTC, from October 2016 through November 2017 UrthBox offered a "free" trial of snack boxes with new customers paying only shipping charges, depending on the box size. Before obtaining the customer's billing information (required for shipping), UrthBox failed to disclose that customers must cancel by a certain date or they would automatically be enrolled in a six-month "negative option"4 subscription ranging in price from $77 to $269, depending on the size of the snack box. UrthBox then charged consumers the total amount owed for six months of snack box shipments on the first of the month following shipment of the free box.

More specifically, the FTC alleges that UrthBox did not clearly and conspicuously disclose before obtaining the consumers' billing information required to redeem their free snack box, including:

  1. the length of the subscription term (six months),
  2. the amount that UrthBox charges the consumer (e.g. $119.99 for the entire six-month pre-payment charge),
  3. the timing of the charges (the first of the month following shipment of the free box), and
  4. the cancellation date before auto-enrollment (before the first of the month following shipment).

While UrthBox described the subscription information on its "Terms & Conditions" and "FAQ" pages, which were accessible to consumers via hyperlinks, consumers were not required to click on these hyperlinks to obtain a free snack box. Moreover, even when clicked, consumers would have had to scroll through lengthy pages with dense legalese to find the relevant information. In numerous instances, consumers who had ordered a free snack box from UrthBox did not know that UrthBox enrolled them in a six-month subscription plan until they discovered a charge on their credit card statement.

As a result, the FTC deemed the disclosures were "inadequate in terms of their content, presentation, proximity, prominence, or placement such that consumers were unlikely to see or understand such disclosures."5 Moreover, the FTC also stated a failure of UrthBox to obtain the consumers' express informed consent to the negative option feature before charging the consumers' credit or debit card, as required under the Restore Online Shoppers Confidence Act (ROSCA).

Advertising Through Customer Reviews and Sponsored Endorsements

From January through November 2017, UrthBox conducted an incentive program to induce customers to post positive reviews of its snack products on the Better Business Bureau's (BBB) website by offering to send its customers a free snack box if they posted a positive review on the BBB's website. The FTC alleges that UrthBox paid cash bonuses to its Customer Service representatives for each positive review they induced consumers to post on the BBB website.

The FTC Endorsement Guides (Guides) require that, if there is a "material connection" between an endorser and an advertiser, that connection must be "clearly and conspicuously" disclosed, unless that connection is apparent from the context of the communication. In light of the explosion of new social media marketing and influencer campaigns, the FTC has stepped up its policing of deceptive advertising and endorsement practices, and sent more than 90 letters reminding influencers and marketers of the required disclosures. The FTC also updated its Endorsement Guides, and released its Enforcement Policy Statement on Deceptively Formatted Advertisements, and its companion guidance, Native Advertising: A Guide for Businesses, to bring the Endorsement Guides in line with current marketing techniques. The Guides and related guidance, at their core, reflect the basic truth-in-advertising principle that endorsements must reflect the honest opinion of the endorser, and cannot be used to make a claim that the product's advertiser could not legally make.

In this instance, despite the BBB requirement that consumers who post reviews about a company must certify that they have not been offered any incentive from the company to write the review, many of UrthBox's reviewers failed to disclose to the BBB that they in fact had been offered such an incentive for submitting their positive reviews. Instead, these reviews appeared to be independent comments reflecting the opinions and experiences of ordinary consumers who had tried UrthBox's products and services.

UrthBox similarly encouraged consumers to post positive reviews on other sites, including TrustPilot.com, and between 2014 and 2017 offered store credit and/or free snack boxes in exchange for positive consumer reviews on Twitter, Instagram, Tumblr, and Facebook. At the time, UrthBox had no procedures or policies in place to monitor these reviewers' posts.

The FTC alleged that the failure to disclose the "material connection" between UrthBox and the reviewers constituted deceptive acts or practices in violation of the FTC Act.

Liability for Company Executives

The FTC decided to hold Mr. Behrouzi personally liable for UrthBox's actions because "he controlled or had the ability to control UrthBox's conduct that the Commission alleges violated the FTC Act and ROSCA." The significance of this decision means that the restrictions contained will apply to Mr. Behrouzi for the next 20 years regardless of his place of employment (i.e. it follows him even if he leaves UrthBox).

Under the proposed settlement order, both UrthBox and Mr. Behrouzi:

  • are prohibited from misrepresenting endorsers of its products, and they are required to clearly and conspicuously disclose any material relationship or connection to consumers, reviewers or endorsers of its products in close proximity to that representation;
  • must take all reasonable steps to remove any reviews or endorsements where the reviewer was compensated, unless UrthBox discloses that the reviewers received incentives in exchange for the review, and to monitor any endorsers they engage;
  • are prohibited from making misrepresentations in connection with the marketing or sale of any good or service with a negative option feature;
  • must receive a consumer's express informed consent before using billing information to obtain payment for a good or service with a negative option feature;
  • must provide customers with "a simple mechanism" with which to cancel their subscription before the free trial period runs out and they are charged.

Any violation of the terms of the settlement may result in a civil penalty for Mr. Behrouzi (and UrthBox) of up to $42,530 per violation, which the FTC interprets broadly to include each consumer who saw a deceptive review or who signed up for a non-compliant negative option plan.

Key Takeaways

Given the FTC's continued commitment to the enforcement of endorsements, testimonials and auto-enrollment programs, as well their recent pledge to hold individual executives liable for company violations, it is more important than ever that companies review and update their current practices.

  • Endorsements and Testimonials:

Companies that engage in sponsored customer endorsements or testimonials are responsible for ensuring that endorsers (e.g. bloggers, influencers) or individuals providing testimonials (e.g. consumer review), clearly and conspicuously disclose any material connection between the individual providing the endorsement or testimonial and the company. For example, a material connection could be the receipt of free products, special access and privileges, discounts and rewards, and/or other monetary or non-monetary incentives.

The following practices may be helpful for managing sponsored endorsement programs:

  1. Remember that the concept of "sponsored" content is broader than just content for which compensation is paid; endorsements may be sponsored if the company provides anything of value in exchange for the endorsement or testimonial, including free products.
  2. Provide guidelines to endorsers or influencers to ensure that the endorsements and testimonials are truthful and not misleading – the consumer must be able to evaluate the endorsement before making a purchase, and therefore must understand the connection between the endorsement/testimonial and the company.
  3. Include in any endorsements or testimonials conducted over social media the appropriate disclosure statements, including applicable hashtags such as #sponsored or #ad.
  4. Have procedures or policies in place to monitor endorsers' posts on social media or other third-party websites. If you discover endorsements that do not contain appropriate disclaimers, work with the endorser to ensure such disclaimers are included in the future or be prepared to cut ties with any endorser who doesn't follow your guidelines.
  5. Follow the FTC's Guidelines on the Use of Endorsements and Testimonials in Advertising6 and related guides.
  • Auto-enrollment Programs:

While businesses are likely familiar with ROSCA, it is important to understand that there are some state-specific laws that include specific provisions relating to auto-renewals and how to cancel such subscription services (e.g. Oregon, California and Virginia).

Companies should review their programs to ensure disclosures are adequate in terms of their content, presentation, proximity, prominence or placement such that consumers are likely to see or understand such disclosures. Specifically in connection with negative option subscriptions and auto-enrollment, make sure you are (1) clearly and conspicuously disclosing all material terms before obtaining the consumers' billing information, (2) obtaining the consumer's express informed consent before making the charge, and (3) providing a simple mechanism to stop recurring charges.

Material terms include, but are not limited to:

  1. the length of the subscription term (e.g. three months);
  2. the amount of the charges and what the charges cover (e.g. $29.99 for the entire three-month subscription, to be pre-paid in full);
  3. the timing of the charges (e.g. the first of the month following the trial period); and
  4. the cancellation date before auto-enrollment (e.g. before the first of the month following the trial period).

Footnotes

1 In the Matter of Urthbox, Inc., Complaint, United States of America before the Federal Trade Commission, https://www.ftc.gov/system/files/documents/cases/172_3028_urthbox_complaint_4-3-19.pdf.

2 Lesley Fair, Largest FTC COPPA Settlement Requires Musical.ly to Change its Tune, Federal Trade Commission Business Blog (Feb 27, 2019), https://www.ftc.gov/news-events/blogs/business-blog/2019/02/largest-ftc-coppa-settlement-requires-musically-change-its.

3 See https://www.usatoday.com/story/money/2019/03/07/equifax-data-breach-former-executive-pleads-guilty-insider-trading/3095802002/; see also SEC Settlement Against Yahoo!, conditioning settlement on continued cooperation by Yahoo! in SEC's ongoing investigation; see also Yates Memo.

4 The Commission's Telemarketing Sales Rule (TSR), 16 C.F.R. § 310.2(w), defines a negative option feature as: "in an offer or agreement to sell or provide any goods or services, a provision under which the consumer's silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer."

5 In the Matter of Urthbox, Inc., Complaint p. 4, United States of America before the Federal Trade Commission, https://www.ftc.gov/system/files/documents/cases/172_3028_urthbox_complaint_4-3-19.pdf.

6 FTC's Guides Concerning the Use of Endorsements and Testimonials in Advertising, https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc-publishes-final-guides-governing-endorsements-testimonials/091005revisedendorsementguides.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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