FTC Settlements Bar Deceptive Online Marketing of "Free" Internet Auction Kits

An online marketer of purportedly “free” Internet auction kits, which automatically charged unwitting consumers $59.95 a month for enrollment in an “online supplier” program for Internet auctions, has agreed to settle Federal Trade Commission charges that its actions violated federal law. The separate proposed court settlements with the company and two of its former executives bar them from similar deceptive conduct in the future, and require them to make specific disclosures to ensure consumers are aware of any recurring-fee plans (also known as “continuity plans” or “negative option plans”) for which they are signing up or being charged. The proposed court settlements also require the settling defendants to pay a total of what could be more than $1 million.

According to the FTC’s complaint, Commerce Planet operated a Web site offering consumers a free “online auction kit” that included information about how to start a business selling products on online auction sites such as eBay. Commerce Planet claimed the kit would provide consumers with “an easily managed online business that has the potential to supplement, or even replace” their current source of income. Although Commerce Planet allegedly told consumers they would be charged as little as $1.95 shipping and handling for this “free” trial offer, consumers had to provide their credit card information, and many were unwittingly signed up for the company’s $59.95 per month “Online Supplier” program. The FTC contends that over an 18-month period Commerce Planet did not clearly and conspicuously disclose that, by registering for the “free offer,” consumers also were agreeing to be enrolled in the “Online Supplier” program and would be charged a “membership fee” of up to $59.95 per month unless they canceled within a few days of ordering.

The terms and conditions of the program, including information about the recurring $59.99 fee, were difficult to find on Commerce Planet’s Web site. They appeared on a separate page from the trial offer that could only be accessed by a link, or on the payment page, but below the bottom of the visible screen. Most consumers did not even realize they had been enrolled in “Online Suppler” until their credit cards were repeatedly charged, after which many requested refunds. Most consumers had difficulty getting a refund, frequently calling the company multiple times, and sometimes had to contact an attorney or ask their credit card companies to reverse the charges.

The FTC’s complaint charged Commerce Planet with violating federal law by: 1) failing to disclose that consumers who ordered their online auction kit would be signed up for a continuity
program; and 2) unfairly charging consumers for the “Online Supplier” program without getting their express informed consent to do so.

The proposed court orders settle charges against Commerce Planet, former Commerce Planet CEO Michael Hill, and Aaron Gravitz, the former president of Legacy Media LLC, a wholly owned subsidiary of Commerce Planet. The orders prohibit the settling defendants from misrepresenting any material facts associated with the sale of a product or service, including specific representations that are common in negative-option offers. The FTC’s case against the fourth defendant, former Commerce Planet president Charles Gugliuzza, will proceed in federal court.

The settling defendants must make specific disclosures before requesting payment for any product or service and before making any offer with a continuity plan feature. They must first get consumers’ express informed consent before charging them for any goods or services, and must document the consumers’ consent in all transactions involving a continuity plan feature. Finally, the proposed orders require the defendants to provide information about their refund policies, honor their refund policies, monitor their sales agents, and track their agents’ billing information.

The orders include judgments of $19.7 million against each settling defendant, which have been suspended due to their inability to pay. Under the orders, however, Commerce Planet will pay $100,000, Gravitz will pay $192,000, and Hill will pay $230,000, plus future proceeds from loans that may bring his total payments to over $900,000.

The Commission vote authorizing the staff to file the complaint and proposed stipulated final orders against Commerce Planet, Hill, and Gravitz, as well as the complaint against Gugliuzza, was 4-0. The complaint was filed in the U.S. District Court for the Central District of California on November 10, 2009, and the stipulated orders were lodged with the court on November 16, 2009. The orders have not yet been signed by the court.