The FTC sued Willms and related defendants for violating the FTCA and claimed that Willms offshored assets to avoid scrutiny and liability. The deceptions occurred in (1) the sale of health and beauty supplements; (2) the operation of penny auctions; and (3) the sale of research services ranging from reverse telephone research to genealogical research.
Willms and the other defendants marketed weight loss supplements, colon cleansing supplements, teeth whiteners, and credit report programs as free or risk-free trials for which the purchaser had to pay only a nominal fee. But consumers were not adequately informed that the purchase was not free or that they were being enrolled in a recurring fee program. Defendants’ websites disclosed the charges but de-emphasized them and placed them in ways likely to be missed by consumers.
The FTC produced consumer complaints indicating that consumers were enrolled in multiple services without their awareness and that they found it very difficult to remove themselves from recurring charges. Defendants often enrolled buyers of one product into several “free” trial programs for unrelated products, information about which was usually disclosed only on the ordering page, “where the buyer was otherwise likely to focus on filing out the requested information to complete the sale.” Defendants claimed that they no longer engage in this “upselling” practice. As for the cancellation/refund policies, many consumers also complained that the time to return the products and affirmatively cancel was very narrow, and the FTC contended that the terms of cancellation were not prominently displayed, leading to numerous customer complaints and difficulties obtaining refunds.
Substantively, the FTC alleged that defendants made false and misleading claims about the efficacy of their products (including weight loss and cancer prevention) and used false celebrity endorsements from Rachel Ray and Oprah Winfrey, misleading customers about the products' safety and reputation.
In late 2009, defendants moved into the penny auction business. The FTC alleged that their sites use “misleading terms to lure customers in with the promise of winning expensive items for mere pennies.” The website requires a $150 enrollment fee and a recurring monthly charge of $11.95, which are allegedly not disclosed up front and set forth only in small font. Refunds are extremely difficult to obtain because consumers are required to use up all their bids without winning an item, leading to hundreds of consumer complaints.
The FTC also pointed to defendants’ high charge-back rates from various credit card companies and the use of multiple corporations as shells. Charge-backs come from disputed charges, and Visa and MasterCard view them as indicators of overly risky or predatory conduct. They frown on rates of 1% or more; defendants had rates over that and as high as 22.7%. Because defendants couldn’t get their charge-back rates down, they created new shell companies that contracted with new merchant processors to avoid Visa and MasterCard investigations. They also allegedly changed the billing descriptions on consumers’ bills to deceive them.
Further, the FTC alleged that Willms moved substantial funds offshore to Cyprus corporations. Defendants allegedly got over $400 million in gross revenues over the time in question, and the FTC provided emails suggesting that at least some of this was moved to Cyprus to avoid scrutiny.
As for defendants’ current activity, the FTC alleged that their 88 websites ranging from phone number lookup services to criminal background checks and to judicial records search services violated the FTCA by inadequately disclosing the existence and terms of negative option continuity plans with recurring monthly charges. “The websites contain nearly identical landing pages where users enter in information about which they wish to search. Several pages later, the user is presented with a page stating ‘For a Limited time, we are offering your report for $1. Please continue to ensure you get your report.’ … If the user presses the "SHOW ME MY REPORT!" button, she is directed to a page where she can fill in her credit card information. On the page in larger font in red is stated ‘Your Report is Ready. Please Order Now to Ensure You Get Your Report.’ Smaller font in the upper right, below the credit card information, discloses that “after 7 days if you do not cancel your account you will be billed $18.95 and each month thereafter for up to 5 searches of 500 million records and additional searches for only $1. To cancel anytime simply contact us by calling 866-437-1702.” The FTC argued that this was inadequate disclosure.
The court found that the FTC would likely succeed on its Section 5 and Electronic Funds Transfer Act claims against the past and current conduct.
Defendants were likely to be liable for failing to disclose negative option and features for services offered for low initial costs or that were advertised as free or risk-free and for misleading consumers that cancellation and refunds were easy to obtain. The FTC provided substantial anecdotal testimony of actual deceptiveness, including declarations from 27 individual consumers who complain that the true costs of the products weren’t made clear. The FTC also offered a statistical sampling of 48 customer calls to defendants, provided by defendants, showing consumer confusion over the terms. “Forty-four percent of the forty-eight calls showed the consumer did not understand the true nature of the charges, fifty-five percent of the call showed the customers were not aware they were enrolled in a monthly program, and nineteen percent of the callers were unaware that they were enrolled in related ‘upsell’ programs.”
But wait, there’s more! The FTC provided information from 635 consumer complaints submitted to the FTC regarding defendants’ penny auction sites, with 600 complaining failure to adequately disclose the signup fee. In a year, Alberta’s BBB received roughly 1,110 consumer complaints, mostly about the membership fees and monthly bid fees. “Defendants' argument that these sampling sizes are too small to be significant misses the mark. Consumer complaints are highly probative of whether a practice is deceptive, and the mere fact that some persons did not know they were deceived is not proof the acts are not deceptive.”
The FTC offered an expert declaration on how the weight loss and SwipeBids penny auction sites were misleading. First, the landing pages advertising the services don’t contain the key terms and conditions. Second, “the websites use font size, white spaces, color, boxes and arrows to emphasize the purported benefits of the products and services, while minimizing the information about the costs.” Third, the cost information is unreadable unless a viewer scrolls down. “Fourth, the webpages place the key information about the costs on pages where the user is focused on filling out other information and distracted.”
Defendants offered their own expert, who argued that this approach improperly assumed that buyers aren’t capable of making their own decisions. “This argument may ultimately convince a jury, but it does not plainly rebut Kleimann's analysis of the placement of key elements of the bargain outside of the buyer's view.”
In addition, the FTC went after the misleading claims about cancellation policies and practices”
Consumers were often told that “you will never be charged” and that there was a “TRUE SATISFACTION GUARANTEE” for many of the services. Yet refunds were usually only available by jumping through a myriad of hoops. Cancellation periods were exceedingly short and the terms required for a refunds were difficult to meet. For those enrolling in penny auctions, a refund was only possible when all of the bids were used and the buyer won no items. Out of six-hundred-thirty-five consumer complaints related to the auctions, five-hundred-twenty-nine stated that they never received a refund, despite trying to follow the complex process. Similarly, with regard to the trial products, nearly half of those complaining to the FTC did not receive full refunds.The court found a likely § 5 violation here as well.
Defendants argued that their current websites were FTCA-compliant, but the court disagreed:
These websites continue to contain negative option and continuity plans (e.g. ‘trial’ packages) whose enrollment fees and recurring costs are poorly disclosed. Notably, the fact that the services for sale contain any continuity plan or negative option is not disclosed until the user lands on the sixth page on which he or she is required to enter credit card information. The landing page and the four following pages nowhere suggest there are any other charges but a one-dollar fee. (See, e.g., Dkt. No. 79-1 at 2-6.) The ordering page itself discloses the terms of the continuity plan in text that is smaller than the other text. The placement is not central, and there is no means of purchasing the service without accepting enrollment into the continuity plan. The website design and layout are similar to those the FTC's expert reviewed and found to have a net impression that was misleading.Defendants tried to compare their sites to an Intellius website that the court found nondeceptive, but the differences were patent. The Intellius website contained a stand-alone page explaining the terms of the offer, including the continuity plan and negative option, without any requirement to input information. There was also a separate box on the same page allowing users to remove the continuity plan before buying. Defendants’ websites don’t permit the purchase of their services without the continuity plan. Also, the font size, text placement, and overall page display was entirely different, with a roughly consistent font size for the entire Intellius disclosure page. And Intellius has two successive pages disclosing the continuity plan to the user before the credit card input page.
Defendants’ experts concluded that no reasonable consumer would be deceived by their sites, but the court found that a “highly speculative proposition.”
The FTC also brought FTCA § 12 claims based on the false claims about the weight loss and colon cleanse products and on the false endorsements. The court found likely success as to the weight loss product, AcaiBurn. The claim was that "the key ingredients in AcaiBurn were found to cause up to 450% MORE WEIGHT LOSS than dieting and exercise alone will get you." The FTC’s expert provided a declaration that the ingredients wouldn’t do that. Defendants’ expert argued that the product was marketed as just one component of a weight loss regime, but there was no substantiation of the claim that the ingredients caused rapid weight loss.
As for the colon product, PureCleanse, the FTC argued that defendants strongly implied cancer prevention through the use of an embedded video of Katie Couric on the PureCleanse website discussing colon cancer. Defendants argued that the website nowhere directly stated a cancer prevention message. Their expert argued that the video only showed that colonoscopies are important to prevent (?) and detect colon cancer. The court disagreed: the inclusion of the video “suggests that the pills may have a strong correlation to prevention of colon cancer, a fact that has not been shown to be true.” Though this was a close question (why?), the court found likely success on the merits.
Defendants offered no response to the allegations of false celebrity endorsement, which the court found unsurprising, since both Rachel Ray and Oprah (yes, the court just calls her Oprah) have denounced the use of their personalities to advertise these products. Though there was no evidence that these efficacy and endorsement claims continued, an injunction was still proper.
The FTC also argued a § 5 violation because defendants charged consumers’ accounts without express informed consent and ignored proper attempts to cancel charges. Another likely success on the merits. This was unfair: it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” 15 U.S.C. § 45(n). Likewise, the FTC argued an EFTA violation (and violation of EFTA regulations) because defendants failed to obtain written authorization from consumers for the merchant to place recurring charges on consumers' debit accounts, and provide a copy of the written authorization to the consumers, and an EFTA violation by definition also violates the FTCA.
The FTC argued that the high charge-back rates were evidence of unauthorized charges. Many of the charge-backs were coded as unauthorized charges or fraudulent charges. During one period, 38% of MasterCard’s 1273 charge-backs were coded as "fraud transaction--no cardholder authorization" or "non-possession of card." This was typical of 2010. The FTC contended that defendants tried to minimize charge-backs by splitting up charges, relabeling them confusingly, and processing sales through multiple merchant accounts with diferent payment processors, as well as by creating different corporations with nominee principals who could obtain apparently unrelated merchant accounts to avoid Visa and MasterCard’s flags.
Here, the defendants offered a “substantial” defense that the user of corporate affiliates to obtain merchant accounts was not an unfair practice, and that the affiliates were responsible for the high charge-backs. First, merchant processors require an American citizen to be the signatory, so Willms was required to use other individuals to open these accounts. Willms didn’t hide his his beneficial interest in the companies and he never directly dealt with Visa or MasterCard. He claimed that he used multiple processors "to obtain increased volume to satisfy the bona fide customer demand for his product and not for any other reason." Moreover, defendants argued that they were "repeatedly victimized by affiliate fraud," leading to the charge-backs.
However, the FTC’s counterattack was sufficient to show likely success on the merits. There was substantial testimony that Willms’ beneficial ownership interests weren’t adequately disclosed and that the affiliates were structured to avoid scrutiny. The evidence that the charges were coded confusingly on consumers’ statements was also unrebutted.
An injunction was appropriate, and defendants’ past conduct was “sufficiently serious and deliberate to suggest a strong likelihood of continued unfair advertising practices in the absence of an injunction.” The court accepted the FTC’s request for a broad injunction prohibiting defendants from (1) offering for sale any product with a negative option and continuity plan feature; (2) offering any products, programs or services as "free" trial" or "bonus"; (3) misrepresenting the nature of the costs to receive the product and any cancellation policy; (4) failing to disclose the amount, timing, and manner of payment of fees and the terms and conditions of any refunds; (5) making representations about the performance, benefits, and safety of any products, including those about weight loss and colon cancer; (6) misrepresenting that any product is endorsed by a celebrity or using consumer testimonials about obtaining refunds; (7) charging or debiting a consumer's bank account or credit car without express informed consent; and (8) requiring them to cease collection activities, maintain proper accounting, and preserve all records related to this action. In addition, defendants were ordered to engage in compliance monitoring and to distribute copies of the order.
Defendants argued that the restriction on negative option and continuity plans was unconstitutional and inappropriate. Nope. Any FTC remedy reasonably necessary to the prevention of future violations doesn’t impinge on constitutionally protected commercial speech. The prohibitions here satisfied that standard.
The court also granted the FTC’s request to freeze Willms’ assets and require repatriation of his funds to the US. The FTC showed that defendants had engaged in substantial offshoring on a daily basis. Combined with the FTC’s current inability to trace the whereabouts of over $400 million in revenue, that supported an asset freeze and an accounting. “[A]t the bare minimum, Defendants have bank accounts in Cyprus through which they have transferred funds and there is no full accounting of where their assets are,” and defendants’ emails suggested that the movement of funds outside the US might be for an improper purpose (there was a reference to “money laundering” in a sort of half-serious way). However, the FTC didn’t show that the other individual defendants engaged in offshore asset transfers, so the freeze only applied to Willms and the corporate defendants he controlled and directed. The other individual defendants and their personal assets were presently untouched.