FTC Investigating Loot Boxes and Drops Hammer on Another Dietary Supplement Marketer

Loot Box Games Draw Regulatory Scrutiny

The Federal Trade Commission has long been interested in safeguarding the online activities of children. The FTC now appears to be investigating loot box games and their impact on children.

Loot boxes are prevalent in the gaming niche and offer players goods virtual items, randomly. Players pay for the opportunity to win goods that can be sold on secondary markets.

Chairman and FTC investigation lawyer Joe Simons stated at a recent congressional oversight hearing that the agency would be looking look into the in-game loot boxes. The comment comes following Senator Maggie Hassan’s letter to the Entertainment and Software Ratings Board calling for an investigation into loot box practices.

“The prevalence of in-game micro-transactions, often referred to as ‘loot boxes,’ raises several concerns surrounding the use of psychological principles and enticing mechanics that closely mirror those often found in casinos and games of chance,” Hassan wrote.

Loot boxes have long engendered growing concern amongst consumer advocacy groups for being predatory and crossing the line into illegal gambling.

According to reports, researchers have found links between loot box spending and gambling addiction.
Loot boxes are also being closely scrutinized internationally and some countries have outright banned them.

FTC Halts Alleged Shell Company Scheme That Imposed Unlawful Continuity Plans

Earlier this week, the FTC announced that a U.S. district court in California issued an order temporarily halting an alleged Internet marketing scam involving “free trial” offers for personal care products and dietary supplements online. The FTC alleges that consumers were, in fact, charged the full price of the products and enrolled them in negative option continuity plans without their consent.

The defendants have been charged with setting up shell companies in the United States and the United Kingdom, which they then allegedly used as fronts to open merchant accounts. Those merchant accounts allegedly were used to process millions of dollars in consumer payments for the defendants’ products, allowing the defendants to avoid detection by the credit card networks and law enforcement for several years.

According to the FTC’s complaint, the operation offered various online subscriptions in the U.S. and U.K. since 2014. The “free trials” were for personal care products and dietary supplements. Claims of weight loss, hair growth, clear skin, muscle development, sexual performance and cognitive abilities no doubt caught the agency’s attention as all fit squarely within the regulatory bullseye for substantiation related issue.

The FTC also alleges that the defendants represented that consumers could pay a $4.95 shipping and handling fee for a 30 day supply, but then charged consumers the full price for the products—approximately $90. The Commission also allegedly enrolled consumers in unwanted negative option continuity plans without their knowledge or consent, and continued to charge them approximately $90 per month. The FTC alleges that the defendants failed to clearly and conspicuously disclose material terms, made cancellation unreasonably difficult and tricked consumers into enrolling in additional continuity plans.

The FTC’s complaint also alleges that the defendants used shell companies and straw owners to obtain merchant accounts. According to the Commission, the defendants formed at least 32 limited liability companies between August 2013 and May 2016 for the sole purpose of obtaining merchant accounts.

According to the FTC, the defendants also formed at least 37 limited companies in the United Kingdom, including the corporate defendants named in the complaint. The FTC alleges the individuals named as directors of the U.K. companies actually are the same California residents used as signors on merchant account applications submitted in the U.S.

The defendants have been charged with violating Section 5 of the FTC Act, the Restore Online Shoppers’ Confidence Act and the Electronic Fund Transfer Act.

Richard B. Newman is an FTC investigation lawyer at Hinch Newman LLP. Follow him on LinkedIn.

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