On May 13, 2020, the Federal Trade Commission filed a complaint in the Eastern District of Pennsylvania against American Future Systems, Inc. (“AFS”), a Pennsylvania-based telemarketing company, and its alleged co-conspirator, International Credit Recovery, Inc. (“ICR”) (AFS and ICR, collectively, “Defendants”), for conspiring to bilk businesses into paying for publications that they never ordered. Pursuant to the scheme, AFS made unsolicited calls to various businesses and organizations across the country in an effort to dupe unsuspecting employees into agreeing to receive free samples of the company’s publications. In reality, AFS would enroll the businesses in negative option programs without their consent. According to the FTC, when the businesses failed to pay for these products, AFS referred the matter to ICR, a debt collection agency, in order to prod the businesses into making payment.
What are the FTC’s allegations?
Defendants’ Illegal Negative Option Marketing Practices
As we have previously blogged, negative option marketing, where a consumer’s silence constitutes consent to an offer, can be a perfectly acceptable business tool when done correctly. However, the FTC’s complaint in this matter makes clear that while Defendants’ scheme may appear analogous to other negative option campaigns, Defendants’ actions were wholly improper. On the facts at issue, FTC intervention was all but inevitable.
AFS publishes and sells books, pamphlets and newsletters for businesses on an array of topics, including human resources, employment law and environmental compliance. According to the complaint, when AFS calls a business for the first time, AFS uses a number of techniques designed to trick the unsuspecting called party into accepting “free samples” of AFS publications. For example, instead of expressly telling the target business that it is receiving a sales call, AFS employees merely state that their publications may be useful to the subject business. On the sales calls, the AFS telemarketers explain that they are offering the called party free copies of their newsletter or other publications for a “no risk” review. At the end of the call, AFS usually asks the called party for his or her date of birth, “just to verify I spoke to you.” While this process is designed to create the impression that AFS is sending free samples of their products, AFS is actually enrolling the business in a negative option program with the intent to charge the organization for all “samples” received.
According to the complaint, within 60 days of the initial call, AFS sends an invoice to the unsuspecting business for whatever sample publications were discussed over the phone. The invoice, which typically seeks payment of at least several hundred dollars, arrives even if the business never actually received the sample publications. These invoices do not explain how to cancel the subscription or otherwise avoid a monetary obligation. Nor do the invoices include a telephone number or email address to dispute payment. In an effort to appear legitimate, subsequent invoices sometimes identify the name and date of birth of the employee that allegedly agreed to purchase the AFS subscription. If the business does not pay, AFS sends additional invoices for approximately six (6) months before sending the account to a collection agency, such as ICR. The complaint alleges that ICR subsequently begins a campaign to harass the business into paying the illegitimate debt. Although ICR does not take steps to verify the debt and is aware of AFS’s business practices, ICR misinforms businesses that their failure to pay may impact their credit rating or result in litigation. In truth, ICR does not report nonpayment to the credit agencies, nor does it refer AFS matters to litigation.
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Regulatory Action and Legal Jeopardy
Legitimate negative option marketing can come in several different forms, such as prenotification plans, continuity plans, automatic renewals, free-to-pay (or nominal-fee-to-pay) conversion plans. The FTC’s guidance on negative option marketing requires that sellers clearly and conspicuously disclose upfront (and prior to billing), all material terms, such as minimum purchase obligations and cancellation policies. Here, by contrast, AFS appears to have purposefully hidden these and other material terms from potential customers. Although ICR allegedly knew that the debts were illegitimate, it worked with AFS to scare businesses into paying. In short, AFS and ICR appear to have broken these fundamental rules of marketing and are now facing serious consequences. Not only is the FTC seeking injunctive relief, it is also seeking an order requiring AFS and ICR to disgorge all ill-gotten gains received in connection with operating this scheme. Because several members of AFS and ICR executive leadership are named as individual defendants in the action, they may also face personal liability for these transgressions.
As readers know, state attorneys general and the FTC frequently investigate negative option marketers for far less egregious and purposeful misconduct than that at issue in this proceeding. To avoid such an outcome, it is important that continuity marketers work with experienced marketing attorneys to guide them through state and federal consumer protection laws. If you need assistance reviewing your negative marketing practices or are facing an FTC investigation, please e-mail us at firstname.lastname@example.org, or call us at (212) 246-0900.
The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney. Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.
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