Free means free, says the FTC

You can swim freestyle.  You can work freelance.  And there are those among us who still hold up lighters and yell “Play Free Bird.”  But for marketers, one thing you can’t do is advertise a product as free and then bill customers’ credit cards — not once and certainly not over and over and over again.

The legal theories advanced in the pending case against Canadian Jesse Willms, ten companies the FTC says he controls, and other individual and corporate defendants aren’t new.  What’s noteworthy is the sheer scope of the international enterprise: The FTC says the defendants raked in more than $467 million from consumers in the US, Canada, UK, Australia and New Zealand through an elaborate scheme of false product claims, unauthorized celebrity endorsements, forced upsells, undisclosed terms and conditions, unauthorized charges, and ruses designed to evade the credit card industry’s risk management system.

The FTC’s complaint is a veritable travelog of deceptive practices allegedly perpetrated by individuals using a labyrinth of corporations registered in Edmonton, Alberta; Surrey, England; Idaho Falls, Idaho; Nicosia, Cyprus; and points between. The lawsuit alleges the defendants used a vast global network of online affiliate marketers to peddle everything from acai berry diet miracles, teeth whiteners, and anti-colon cancer products to work-at-home schemes, government grant programs, free credit reports, and penny auctions.  The ads were ubiquitous and often featured eye-catching — and unauthorized — “endorsements” from Oprah Winfrey and Rachael Ray.  In addition, the complaint charges that the defendants plastered their websites with the logos of “60 Minutes,” CNN, MSNBC, USA Today, CBS, and other media outlets, despite the fact that none of them had endorsed or positively reported on any of the products.

One hallmark of the scheme, says the FTC, were promises of “free trials” that opened an illegal pipeline to consumers’ credit card and bank accounts.  Once the defendants had the account info, the FTC claims they really went to town, posting monthly charges on people’s accounts without their authorization and after expressly representing the transaction as “free.”  According to the complaint, when the defendants “disclosed” the details, they used every trick in the Fineprint Playbook:  tiny type, pale colors, dense blocks of text, hard-to-find terms and conditions, streaming video to draw customers’ attention away from information critical to their purchase decision, etc.

The complaint also challenges the defendants’ refund policies as deceptive.  The defendants typically advertised that their products came with an “Iron-clad 60-day Moneyback Guarantee” or a “100% satisfaction guarantee,” and that buyers could easily get “no questions asked” full refunds.  But according to the FTC, the defendants failed to clearly disclose the numerous hoops consumers had to jump through to get their money back or to stop the incessant automatic shipment of unwanted merchandise.  In many cases, buyers had to return the product at their own expense before the end of the “trial” period — which, in the case of digital products like work-at-home programs, was as short as 24 hours.  Some buyers received refunds only after complaining to law enforcers or the Better Business Bureau.  Even then, the defendants often gave just a portion of their money back.

One interesting note for FTC pleadings watchers.  It’s no surprise the defendants’ business practices generated a high rate of chargebacks — sometimes 10 to 20 times higher than the ratio allowed by credit card companies — which caused merchant banks to terminate them and place them on what industry insiders call the MATCH list.  According to the FTC, rather than clean up their act, the defendants engaged in an elaborate scheme to create new shell corporations ostensibly headed by other people, although the defendants remained in the driver’s seat.  They applied for merchant accounts using the shell corporations that couldn’t easily be traced back to them.  That way, they were able to continue to process unauthorized charges, leading to widespread consumer injury.  In addition, when merchant banks and others involved in payment processing told them their websites didn’t adequately disclose the terms of the offer, the complaint alleges the defendants created clean “dummy” sites to fool them into thinking they’d changed their practices.  The lawsuit alleges that the defendants’ evasion of credit card risk management systems was an unfair practice, in violation of Section 5.  

In addition, the FTC’s complaint alleges violations of the Electronic Fund Transfer Act and Reg E.  The lawsuit also charges that the defendants’ weight loss and cancer prevention representations for AcaiBurn and PureCleanse were false and unsubstantiated, including their claim that the products were backed by placebo-controlled clinical studies.

The case is pending in federal court in Seattle.

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