Central Coast Pays $1.5M in Acai Marketing Settlement

CHICAGOPhoenix-based Central Coast Nutraceuticals Inc. will pay $1.5 million as part of a settlement the company made with FTC for marketing acai berry supplements, colon cleansers and other products using allegedly fraudulent free trial offers and phony endorsements from Oprah Winfrey and Rachael Ray. The money will be made available for consumer refunds.

The settlement order also bans Central Coast from "negative-option" sales, such as continuity plans and free or introductory price trial offers, in which consumers pay nothing up front or only a small fee to receive a product, but are then automatically charged a higher price unless they take steps to cancel the shipments, or return the product before the end of the trial period.

A 2010 FTC complaint alleged that two individuals and five related companies deceptively claimed that their Acai Pure supplement would cause rapid and substantial weight loss, and that their Colotox colon cleanser would prevent colon cancer. Also, despite claiming to offer a "free" trial for a nominal fee and full refunds upon request, the defendants allegedly repeatedly made unauthorized charges to consumers' bank accounts, and made it all but impossible to avoid paying full price for the products, typically $39.95 to $59.95.

"I think this case really underlines the FTC's concerns with how products are promoted and that deceptive advertising online will be monitored and addressed by FTC," said  Justin J. Prochnow, attorney and Shareholder in the Denver office of the international law firm of Greenberg Traurig LLP. "The FTC has settled several recent cases regarding negative options and affiliate marketing and will continue to do so."

In this case, FTC charged that the defendants violated the Federal Trade Commission Act, as well as the Electronic Fund Transfer Act and its implementing language, Regulation E.

The settlement order against the defendants includes an $80-million judgment, which represents the total amount of consumer injury caused by their scheme. The monetary judgment will be suspended when the FTC receives assets worth approximately $1.5 million from the defendants.

The settlement order requires defendant Graham D. Gibson to pay the FTC the balance of his investment account, transfer to the FTC $500,000 after mortgaging his home in Phoenix or transfer the property to a court-appointed liquidator if he cannot obtain the mortgage, and divest himself of his interest in a Hawaii vacation property. It also requires the court-appointed receiver to transfer to the FTC the estimated $600,000 that will remain in the accounts of Central Coast Nutraceuticals and the affiliated corporate defendants after their outstanding expenses are paid.

In addition to banning the defendants from selling any products or services with a negative option feature, the settlement also prohibits them from:

Under the settlement order, the defendants also are required to monitor the activities of any affiliate marketers selling products or services on their behalf, including reviewing any marketing materials used to ensure that they comply with the order.

While FTC certainly has issues with weight loss claims pertaining to acai berries, Prochnow said he doesnt think the weight-loss claims were the main focus. He said FTC  was primarily concerned with how the products were marketed. "The misleading implications that Rachael Ray and Oprah were endorsing the product, the bogus free trial offers and subsequent credit card charges, and the monitoring of affiliate marketers are the areas that I think are instructive for the rest of the industry," he said. "In particular, compliance with the necessary disclosures for free trial or 'negative option' offers and the monitoring of affiliate marketers are areas I expect to see a continued focus on by the FTC."

At the request of the FTC in August 2010, a federal court halted the allegedly illegal conduct of Central Coast Nutraceuticals, imposed an asset freeze, and appointed a receiver to oversee the corporate defendants.

Central Coast previously faced problems in the state of Arizona. In January 2009, the Arizona Better Business Bureau filed a lawsuit against the company for misleading sales and marketing practices. That consumer fraud lawsuit lead to Central Coast paying $1.3 million in fines. The company was ordered to pay $1 million in civil penalties to the state of Arizona, $350,000 in consumer restitution, and $25,000 to cover the states legal and investigative costs.

This case is part of the FTC's ongoing efforts to stop the illegal marketing practices of some acai product manufacturers.

In April 2011, the agency filed actions in six different federal courts against 10 affiliate marketing operations for using fictitious news websites to market açaí berry weight-loss products. "The affidavits in support of the cases filed in April 2011 make it clear that FTC and FDA do not believe that there is competent and reliable scientific evidence to support that acai berries are helpful in promoting weight loss," Prochnow said. "As in other recent Consent Orders, the FTC took the opportunity to define competent and reliable scientific evidence as at least two adequate and well controlled human clinical studies of the products or similar products in order to make permitted weight loss claims."