Adult Web Sites Settle FTC Charges

Operators of "free" adult Web sites, who claimed they required a credit card number just to verify consumers' age, but then placed unauthorized charges on consumers' credit cards, have agreed to settle Federal Trade Commission allegations that their scheme violated federal laws. The settlement will require the Web operators to provide refunds to consumers who were improperly billed, to post "clear and conspicuous"disclosures of their billing practices on their Web site, and will bar violations of the Truth in Lending Act and the FTC Act in the future.

The FTC alleged that Xpics Publishing, Inc., and its principals, Mario G. Carmona and Brian M. Shuster, hosted a variety of adult web sites offering "free" viewing, or "free 30-day" or 90-day trials. Consumers were required to provide credit card information to verify their age. But consumers who visited the sites soon discovered that their credit cards were billed, sometimes in a matter of hours, after they registered for the "free" trial, the agency alleged. Xpics advertised that consumers who canceled in a timely manner would not be charged any fees, but Xpics used a variety of tactics to make it impossible for consumers to cancel their registration. In some instances, consumers who attempted to cancel were "upgraded" to a more expensive and also unwanted service. In certain cases, unauthorized charges were placed on the credit card accounts of consumers who had never visited any of Xpics' adult sites. The FTC alleged that the defendants failed to inform consumers that if they submitted their credit card and signed up for the "free" trial, the consumers would be automatically billed; that by submitting their credit card information, consumers were consenting to allow the defendants to bill their accounts; and that consumers would have to observe a waiting period or view additional material before they could cancel. In addition, the FTC alleged that some consumers who canceled and asked for refunds never received them; others received them only months later.

The settlement bars the defendants from making misrepresentations about "free" services and misrepresentations that a credit card will be used for age verification only. In any future advertising or sale of adult entertainment goods or services on or through the Internet, the defendants will be required to disclose monthly or recurring charges; the length of any free trial; how to cancel membership in order to avoid charges; how to contact Xpics; and the terms and conditions of their membership. In addition, the defendants must explain to consumers what information they are collecting about them and obtain consumers' authorization before selling it to third parties. Each of the disclosures must be made, and must be verifiable, before the defendants request any payment information from consumers.

The settlement also requires that the defendants take certain steps to assure that they are not placing unauthorized charges on consumers' credit cards by using reasonably available commercial means to verify that credit card information provided by users of their sites is valid. The settlement also requires the defendants to notify consumers when their free trial is about to expire by posting an automatic notice on the Web site that consumers will clearly see. In addition, the settlement prohibits the defendants from blocking access to their cancellation page, requires that they cancel accounts in a timely manner, and requires prompt refunds where charges were unauthorized or where they were "authorized" by a minor. The settlement also prohibits the defendants from changing the terms and conditions of their membership - "upgrading" consumers' service, for example - without consumers' approval.

In addition, the settlement requires the defendants to issue refunds to consumers and to place banner ads on Yahoo that link to a site where consumers can file online claims. Refunds will go to consumers who said that they had never subscribed, but were billed; consumers who said the membership was purchased by a minor; consumers who canceled or attempted to cancel their membership and were subsequently billed; and consumers who enrolled for a free trial, canceled their membership, and then were billed. Consumers who believe they were improperly billed by xpics.com, sexmuseum.com, sexroulette.com, assawards.com, livestreamsex.com, or xxxsexphotos.com can complete a claim form by clicking on the banner ad that will be posted on Yahoo at http://dir.yahoo.com/Society_and_Culture/Sexuality/
Activities_and_Practices, shortly. Consumers also can file for a refund by using the Online complaint form on the FTC's home page at http://www.ftc.gov

Finally, the settlement requires that the defendants post a statement that discloses what information about the consumers they are collecting, the uses that will be made of the data, and to whom it may be disclosed. The settlement also contains record keeping provisions to allow the FTC to monitor compliance with its order.

The Commission vote to approve the settlements was 5-0, with Commissioner Orson Swindle dissenting in part, and issuing a separate statement. Commissioner Swindle objected to the order provisions requiring defendants to post a privacy policy. He explained, "I support the allegations in the complaint that Xpics Publishing, Inc. and the other defendants engaged in deceptive acts or practices in violation of Section 5 of the FTC Act by representing to visitors to their pornographic web sites that they were requesting the visitors' credit card information only to verify that the visitors were of legal age to view the pornographic materials. . . . At its core, the complaint alleges that defendants made an implied representation that they would use the credit card information only to verify age and that this representation was false because defendants also used their customers' billing information to place unauthorized charges on their credit cards. There is [however] no allegation that defendants transferred consumers' billing information, or other personal information, to third parties. I object to the privacy provisions in the order because they are not reasonably related to the complaint allegations, which do not implicate privacy concerns but merely involve misrepresentations and unauthorized billing violations. In the absence of a transfer of information to a third party, I do not believe that a false claim as to how billing information will be used internally is sufficient to justify imposing privacy requirements."

The stipulated final judgment and order was filed in U.S. District Court for the Central District of California in Los Angeles and signed by Judge Margaret M.. Morrow, July 18, 2000.

NOTE: A stipulated final judgment and order is for settlement purposes only and does not constitute an admission by defendants of a law violation. Consent judgments have the force of law when signed by the judge.

Copies of the complaint and stipulated final judgment and order are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; toll free at 1-877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 982-3541)
(Civil Action No. 00-07613 MMM)