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Law Enforcement Targets Continuity Programs Print E-mail

July 2009

For more information contact Jim Kaminski at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it This e-mail address is being protected from spam bots, you need JavaScript enabled to view it   or 202-293-8975.

L
aw enforcement authorities nationwide are stepping up their efforts against e-commerce sites which sell goods and services in conjunction with automatic monthly billing plans (also referred to as “continuity programs”).  A good example of this prosecutorial activity is the Arizona Attorney General’s Office recent law suit against Central Coast Nutraceuticals, Inc. (“CCN”).  Under the settlement agreement concluded in June 2009, CCN will pay $1,375,000 for consumer restitution, penalties, and costs, as well as submit to significant restrictions on its business practices.  The Arizona Attorney General’s complaint alleged that CCN used deceptive and misleading sales and advertising practices in selling its nutritional products and fitness consultation services over the internet.

Specifically, CCN advertised a “$1.00 risk free trial offer” for its goods and services. Consumers were obligated to pay a “shipping and handling” charge of $4.95 to take advantage of the offer.  Consumers were also required to enter their personal information, including credit and debit card details, on a billing page that included two pre-checked boxes for offers involving additional dietary supplements.  Consumers were charged $39.90 for these products.  Consumers were also automatically enrolled in a fitness and diet consultation service called “Fit Factory” for another $29.95 per month, and a “Lifestyle” program which was billed on a monthly basis.  All of these programs required consumers to take affirmative steps to cancel their memberships to avoid the additional charges.

The Arizona Attorney General found that the term “risk free” was misleading because the offer allegedly carried a degree of risk, finding specifically as follows:  First, CCN required consumers to return the trial product within a short trial period.  Some consumers did not receive the product until the trial period expired.  Second, CCN required consumers to obtain a Return Merchandise Authorization and pay for return shipping. The Arizona Attorney General viewed this requirement as onerous.  Third, CCN in some cases charged consumers for additional orders before the trial period had expired.  Fourth, CCN presented contradictory information in its promotional materials as to when the trial period expired.  Lastly, the Arizona Attorney General alleged that the terms and conditions were not adequately disclosed because they were buried in fine print.  As such, the pre-checked boxes were ineffective disclosures of the material terms of the offers. 

The Arizona Attorney General also alleged that CCN failed to properly provide refunds by requiring consumers to overcome many obstacles, such as facing telephone hold times of over an hour with customer service representatives.  CCN also did not respond to consumers’ emails containing cancelation requests.

As a result of the allegations and the subsequent settlement, the Arizona Attorney General was able to obtain a large financial penalty, and other relief against CCN, including the following:  CCN is now prohibited from claiming that consumers may obtain a refund unless the company sets up a dedicated customer service line and responds to those requests within a 24-hour time frame.  Prior to purchase, CCN must obtain affirmative consent from the consumer to the terms of the offer.  The disclosure containing the material terms must be placed in close proximity to a clear and conspicuous description of the offer.  A similar disclosure must also be included with the receipt of the product.  CCN is prohibited from charging for the products prior to the expiration of the trial period.
 
And, perhaps most significantly, by CCN’s settlement with the Arizona Attorney General, the company must now pay $1 million in civil penalties to the State, $350,000 in consumer restitution, and $25,000 for legal and investigative costs.

As this case illustrates, marketers would be well-advised to clearly and conspicuously disclose the terms of an offer prior to accepting payment from consumers.  The State of Arizona’s case against CCN is a good example of why such disclosures are important.

© 2009 Hughes & Bentzen, PLLC.



 
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