FTC Halts Online Subscription Scheme that Deceived People with “Free Trial” Offers
Marketers of cosmetics, supplements defrauded consumers out of $74.5 million, agency alleges
The operators of an online subscription scheme agreed to settle a Federal Trade Commission complaint alleging that the defendants duped consumers out of more than $74.5 million by luring them with supposedly “free trial” offers for cosmetics and dietary supplements, then enrolling them in subscriptions and billing them without their consent.
The court orders settling the FTC’s complaint ban the defendants from negative option marketing, in which the absence of affirmative consumer action constitutes consent to be charged for goods or services. The orders require the defendants to get consumers’ consent before billing them. The orders also impose financial judgments, which the FTC may use to send refunds to affected consumers.
“These companies promised free products for only the cost of shipping, but then charged consumers for expensive subscriptions,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “The FTC will continue to go after companies that offer supposedly ‘free’ trial offers, but hide the real terms and conditions in the fine print.”
According to the FTC’s July 2019 complaint, since at least April 2016, AH Media Group, LLC (AH Media) and the company’s owners, Henry Block and Alan Schill, pitched at least eight different product lines to consumers. The defendants primarily sold cosmetics and dietary supplements with claims that they promote younger-looking skin or weight loss.
The FTC alleged that the defendants used deceptive websites to charge consumers for both the “trial” product and ongoing monthly subscription plans. The defendants claimed consumers would have to pay only a small shipping and handling fee for the trial, while hiding the actual cost. After two weeks, the defendants charged consumers $90 for the trial product and enrolled them in unwanted and costly negative option subscription plans.
The defendants allegedly used a network of shell companies and straw owners to process consumer payments. By using dozens of nominally distinct companies, the FTC alleges the defendants circumvented underwriting requirements and monitoring programs and made it more difficult to be detected by consumers and law enforcement. In October 2019, the FTC filed an amended complaint adding Zanelo, LLC as a defendant, alleging it also was active in the AH Media scheme.
In addition to the ban on negative option marketing, the proposed settlement order against Schill and Zanelo, LLC bans the defendants from misrepresenting any fact material to consumers concerning any good or service, and requires the defendants to provide clear and conspicuous disclosures regarding fees and refunds.
That order also requires the defendants to obtain the express consent from consumers before charging them or debiting money from their bank accounts, and requires that they get preauthorization before making any electronic fund transfers. Finally, the order imposes a $74.5 million judgment against the defendants.
The proposed order against AH Media and Block contains the same conduct provisions as the Schill and Zanelo, LLC order, but imposes a $67 million judgment against the defendants.
The monetary judgments in both orders are partially suspended. In all, the defendants are required to turn over approximately $4,345,000. This money may be used to provide refunds to defrauded consumers.
The Commission vote approving each proposed order was 5-0. The FTC filed the proposed settlements in the U.S. District Court for the Northern District of California. The order against defendants Alan Schill and Zanelo, LLC has been signed and entered by the court.
NOTE: Stipulated orders are subject to court approval and have the force of law when signed by the District Court judge.
The Federal Trade Commission works to promote competition, and protect and educate consumers. You can learn more about consumer topics and file a consumer complaint online or by calling 1-877-FTC-HELP (382-4357). Like the FTC on Facebook, follow us on Twitter, read our blogs, and subscribe to press releases for the latest FTC news and resources.