FTC Charges Georgia Firm with Deceptive "Negative Option" Marketing and "Up-Selling" Violations

The Federal Trade Commission has filed a complaint in federal district court in Atlanta, Georgia charging Georgia-based Preferred Alliance, Inc. and its principal Bruno Faillace, who did business as VacantSun Travel Discounts and GenesisCard, with a range of illegal activities related to the company's sale of buying club memberships through third-party telemarketers. According to the FTC's complaint, in pitching their supposedly "free" no obligation trial offers to consumers nationwide, the defendants' telemarketers failed to tell consumers that the offer was actually a "negative option" plan, under which the defendants would automatically charge the purchasers a $99.95 annual fee if the purchasers did not cancel by the end of the trial period and in a prescribed manner. In addition, the FTC's complaint alleges that the defendants received consumers' billing information from the telemarketers without the consumers' consent, used the information to illegally bill the consumers, and then either refused to provide refunds or did not do so in a timely manner.

"Telemarketers need to be sure that consumers agree to be charged, and what account will be charged -- even if they have an account number from another transaction," said Howard Beales, Director of the FTC's Bureau of Consumer Protection. "If you charge consumers without their permission, we'll charge you with committing a fraud."

The Defendants' Business Practices

The FTC's complaint alleges that Preferred Alliance solicited prospective customers using deceptive telemarketing, followed-up by misleading direct mail. Employing the corporate names VacantSun Travel Discounts and GenesisCard, the defendants allegedly used third-party telemarketers whom consumers had contacted directly to purchase a variety of advertised products, including vitamins and diet aids. In some instances, the third-party telemarketers called consumers directly to pitch their products and services. The FTC alleges that after the telemarketers made a sale, they sometimes offered Preferred Alliance's discount travel or discount family health care plans through an "up-sell" - a marketing technique in which a vendor sells its products or services through a telemarketing call, then attempts to sell additional products or services after the consumer already has provided his or her payment information for the initial sale.

During the up-sell, the defendants' telemarketers allegedly told consumers that the Preferred Alliance promotion was a "trial gift," "risk-free package," or provided at "no charge to you." According to the FTC, they did not disclose, however, that Preferred Alliance would automatically enroll the consumers as GenesisCard or VacantSun members or that they would automatically charge the debit or credit cards the customers had used to make the initial purchase unless the consumers cancelled the membership. In addition, the defendants allegedly failed to disclose the requirements for cancellation. Further, according to the complaint, after obtaining the consumers' credit or debit card information for the initial product sale, the third-party telemarketers transferred the consumers' billing information to Preferred Alliance.

Preferred Alliance then sent two pieces of direct mail to consumers - a "membership kit" and a "courtesy notice of automatic billing." Consumers simply discarded many of these items because they thought they were junk mail, the FTC's complaint said. Preferred Alliance then began billing consumers in one of two ways. They either began immediate billing, despite representations that such billing would occur only after a specified free-trial period, or double-billed consumers' debit or credit cards for their "membership enrollment."

The defendants allegedly never told consumers that they already had their debit or credit card information. When consumers later complained about the unauthorized billing, the FTC's complaint contends, Preferred Alliance failed to issue promised refunds or failed to do so in a timely manner.

The Commission's Complaint

According to the Commission's complaint, the defendants violated Section 5 of the FTC Act, the Telemarketing Sales Rule, Truth in Lending Act, and Regulation Z in the following ways. First, either directly or through third-partly telemarketers, defendants allegedly failed to disclose material information to consumers, including the negative-option aspects of the upsell. Second, they allegedly unfairly billed consumers without their knowledge or authorization. Third, they allegedly failed to promptly credit consumers for money they were owed.

In filing its complaint, the Commission is seeking injunctive relief to stop permanently the allegedly illegal practices, as well as any other ancillary relief, including consumer redress, disgorgement of ill-gotten gains, and restitution as deemed appropriate by the court to remedy injury caused by the defendants' actions.

The Commission vote authorizing the staff to file the complaint in federal district court was 5-0. It was filed in the U.S. District Court for the Northern District of Georgia, Atlanta Division on February 12, 2003.

NOTE: The Commission authorizes the filing of a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant actually has violated the law. The case will be decided by the court.

Copies of the complaint 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. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No.: 022-3072)
(Civil Action No.: 03-CV-0405)