FTC Obtains Injunction Halting Online Merchant’s ‘Free Trial’ Offers

LOS ANGELES — Attorneys for years have been preaching to their clients that the biggest potential threat to online commerce is the Federal Trade Commission.

Armed with laws like the Restore Online Shoppers’ Confidence Act, known as ROSCA, the federal agency has powers that are immensely broad and have the ability to punish and potentially leave businesses broke and shuttered.

ROSCA targets several commonly used marketing practices, including so-called “negative options,” and effectively put a clamp on traditional cross-sells by prohibiting merchants from sharing a customer’s billing information with other merchants. The law was signed by President Obama in 2010.

In a new development announced today, the FTC said that it obtained a preliminary injunction halting AH Media Group’s deceptive “free trial” offers after the agency alleged that the online retailer defrauded consumers nationwide out of more than $35 million through illegal credit and debit card charges.

According to the FTC’s complaint, since at least April 2016, defendants AH Media Group and company owners Henry Block and Alan Schill operated an online subscription scam that pitched at least eight different product lines to consumers.

The complaint charges them with violating Section 5 of the FTC Act, ROSCA and the Electronic Fund Transfer Act.

The defendants primarily sold cosmetics and dietary supplements, including Amabella Allure, Adelina, Parisian Glow, and Tone Fire Garcinia, with claims that they promote younger-looking skin or weight loss.

In the AH Media Group case, 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, usually $4.99 or less, while burying the true cost of these trials behind small-font “terms” links and faded background text.

In reality, the trials were far from free, the FTC said. After two weeks, the defendants charged unsuspecting consumers around $90 for the trial product and enrolled them in unwanted subscription plans with additional monthly charges, the agency noted.

They also used similarly deceptive upsell pages to trick consumers into a second product “trial” and related subscription plan, the FTC said.

The FTC contends that to facilitate the fraud the defendants used a network of shell companies and straw owners to process consumer payments. By using dozens of nominally distinct companies, the defendants circumvented underwriting requirements and monitoring programs and made it more difficult to be detected by consumers and law enforcement.

The FTC alleged the defendants also made it very difficult for consumers to cancel their subscriptions. The defendants did not allow consumers to cancel online, forcing them to call a customer service number.

The FTC alleged that consumers who called the number were frequently put on hold for a long time. The FTC also alleged that when consumers contacted their credit card companies to challenge the unauthorized charges — initiating a chargeback request — in many cases, the defendants used fraudulent versions of their websites to dispute the request.

The FTC filed the complaint at San Francisco federal court against AH Media Group; Henry Block, individually and as an officer of AH Media Group; and Alan Schill, individually and as an owner of AH Media Group.

The FTC also named Zanelo LLC, which is based in Puerto Rico and controlled by Schill, as a relief defendant in this case, alleging it received more than $1 million from AH Media Group.

The FTC also is seeking an order requiring the defendants to disgorge all funds that are traceable to “deceptive” acts.

“These companies promised ‘free’ trial … but then enrolled people in a subscription plan, placing big unauthorized charges on their credit cards every month,” said Andrew Smith, director the FTC’s Bureau of Consumer Protection.

For the adult industry, site operators should review their business practices and ensure that they aren’t engaging in business practices that would invite FTC investigations and prosecution, experts say. Dating sites, in particular, have been targeted.

The parent company of niche dating sites Jdate.com and ChristianMingle.com — Los Angeles-based Spark Networks USA — last year agreed to pay $500,000 in penalties and $985,000 in restitution to customers whose subscriptions automatically renewed or who were denied refunds when requested.

Spark Networks also agreed to change sales practices after being sued by the Santa Monica city attorney and district attorneys in San Diego, Los Angeles, Santa Clara and Santa Cruz counties.