Yesterday, the Federal Trade Commission proposed a lifetime ban on a skin cream seller from negative option marketing. The FTC sued Gopalkrishna Pai and eight companies he owned in 2019 for charging consumers a small shipping and handling fee for skin cream, usually $4.99, and then charging them full price for the products and signing them up for recurring charges without their knowledge. Pai and his companies bilked consumers out of tens of millions of dollars in ‘junk fees’ in violation of ROSCA (Restore Online Shoppers’ Confidence Act), alleges the FTC.

“Our proposed order banning defendants from the subscription marketing business and ordering the return of assets is a big win for consumers, and it should send a strong message to other unscrupulous marketers,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, said in an October 11, 2023 press release. “The FTC will continue its crackdown on junk fees and subscription traps.”

Disclosure of fees not clear and conspicuous

In the FTC’s complaint, the consumer watchdog alleges that disclosure of the fees in question was not clear and conspicuous. Instead, they were hidden behind a small link on the sales websites, and that consumers had a difficult time canceling their subscriptions or getting refunds when they returned the products. The FTC also believes Pai created hundreds of shell companies to handle payment processing.

The proposed 16-page order awaiting approval by a US District Court judge seeks a judgment of just under $34.1 million with all but $169,903.20 suspended due to the defendants’ inability to pay. The full amount will be required immediately if the FTC finds out that the defendants lied about their finances.

FTC seeks monetary relief and other stipulations

In addition, the settlement between the FTC, Pai and the other defendants includes the following stipulations:

• Pai and his companies are permanently banned from using any negative option marketing scheme.
• Pai and his companies are prohibited from deceiving consumers regarding any product or service they sell or market.
• Defendants in the case must remand the contents of seven bank accounts at various financial  institutions and a retirement account in Pai’s name.
• Pai must sign over his interest in a promissory note secured by real property to an FTC-appointed liquidator.
• Pai has already surrendered more than $500,000 to the US as part of a federal criminal suit against him.
• The surrendered assets will be used to provide refunds to consumers deceived by the scam.
• The defendants will be required to file compliance reports, starting at the one-year mark.

Last year, Pai pled guilty in a lawsuit filed by the U.S. Attorney’s Office for the District of Puerto Rico. In this case, the defendants waived their rights to appeal or challenge or contest the proposed settlement order.

Insider Take

The FTC continues to seek justice in an attempt to protect consumers while punishing wrongdoers severely for dark patterns and the improper use of negative option marketing. As we’ve said before, the type of behavior alleged by the FTC hurts everyone – the consumers who were bilked, the government who has to expend extensive resources to resource and take action against bad actors, and other subscription companies who play by the rules. We expect this type of action to continue as long as there are unscrupulous business people out to make a quick buck at the expense of consumers. Last year alone, the FTC returned $392 million to consumers, some as the result of negative option marketing schemes.

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