On October 11, 2023, The Federal Trade Commission (FTC) reported a settlement, mandating a lifetime ban on Gopalkrishna Pai and eight companies under his ownership and operation, for regulatory violations related to undisclosed and recurring fees for skin care products in violation of the Restore Online Shoppers’ Confidence Act (ROSCA). The settlement requires Mr. Pai to turn all his funds and assets over to the FTC, and stipulates a conditional monetary judgment of $34,081,6073, which will be partially suspended based on the inability to pay the full amount.
The Complaint and ROSCA Violation
In 2019, the FTC lodged a complaint against Pai and the various entities he controlled for violations of the Restore Online Shoppers’ Confidence Act (ROSCA) in connection with various negative option plans the defendants employed in connection with their continuity program.
In its complaint, the FTC alleged that from February 2016 through of August 201, the defendants charged consumers tens of millions of dollars in fees without their knowledge and consent through the online sale of skincare products, such as Vita Luminance, Regenelift, and Revived Youth Cream.
The defendants allegedly enticed consumers with free trial offers that carried a minimal shipping and handling charge, generally under $4.99. These offers were advertised as “Risk Free”, with catchy phrases like “RUSH MY FREE TRIAL” or “CLAIM YOUR FREE TRIAL,” but failed to disclose that the full product price of $90.00 would be automatically charged and monthly charges would continue unless they canceled within a limited time frame. These and other pertinent details were hidden behind a small link on the defendant’s websites.
The Complaint also states that consumers were often stymied in their attempts to cancel, even when they returned the products unopened. According to the FTC many consumers reported that reaching the defendants’ customer service line was an uphill battle, and that the few who were able to get through found cancellation to be a painfully complex process.
Negative Option Marketing
The FTC uses the phrase “negative option marketing” broadly to refer to a category of commercial transactions in which a customer's failure to take an affirmative action, such as to reject an offer or cancel an agreement, as agreement to be charged for goods or services. The old school book-of-the-month club is a classic example, but the FTC views any program in which customer silence is viewed as assent to be a negative option plan, and this includes continuity plans with regular monthly shipments.
Enacted in 2010 to address ongoing problems with online negative option marketing, ROSCA prohibits charging or attempting to charge consumers for goods or services sold on the Internet through any negative option feature unless the seller:
- clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information;
- Obtains a consumer’s express informed consent before charging the consumer’s account; and
- Provides simple mechanisms for the consumer to stop recurring charges.
Credit Card Laundering
Another issue referenced in the Complaint was the defendants’ effort to mask their operations by establishing over 100 shell companies through which to transact their business. These companies, fronted by straw owners, were allegedly instrumental in acquiring the merchant processing accounts required to handle and process consumers’ credit and debit card payments.
To sustain the accounts, the defendants employed a web of authentic and fictitious websites that helped them evade detection from credit card institutions and law enforcement agencies. Using shell companies in this manner is known as credit card laundering, and it is prohibited by the FTC Act.
The FTC's settlement with Gopalkrishna Pai and his associated companies should serve as a cautionary tale for anyone considering dipping their toe in the dangerous waters of negative option marketing.
This case highlights a classic example of a marketer ignoring its basic compliance obligations in favor of immediate financial gain, a poorly thought-out strategy which nearly always yields disastrous results. Transparent business practices that prioritize consumer rights and interests are not just ethically sound but also legally necessary.