Julep Beauty settled a lawsuit brought by the Washington state attorney general stemming from its recurring monthly makeup subscriptions—which it enticed customers to sign up for with a free or discounted initial shipment, but which some customers had trouble cancelling. The settlement was announced by the attorney general’s office Tuesday.
The attorney general’s complaint alleged that between 2012 and 2015, Seattle-based Julep sold cosmetics through a “negative option subscription program,” called Maven Plan, at a cost of $19.99 or $24.99 a month.
Negative option marketing is a decades-old business practice in which consumers are billed for and shipped products unless they explicitly opt out, rather than opting in. The Federal Trade Commission promulgated its first rule in 1973 requiring subscription sellers to “clearly and conspicuously” disclose information about recurring shipments, and give them the option to decline a shipment or cancel their subscription. Examples of the practice include free or low-cost magazine trial subscriptions that convert to full paid subscriptions, 10 CDs-for-$1 offers (from the days before online digital music), and Internet or cellphone services that renew automatically.
A host of startups and established companies today sell everything from diapers to software on a subscription basis—some quite effectively. Earlier this summer, Unilever announced the acquisition of razor subscription service Dollar Shave Club for a reported $1 billion. Other entrepreneurs in the increasingly crowded monthly-box-of-goods industry see a reckoning coming, in part because of practices that make it difficult for consumers to cancel.
Julep collected customer billing information, ostensibly to pay for shipping of free beauty products offered as enticements, but failed to communicate clearly to customers that they were also signing up for a monthly plan for which they would be charged until they canceled it, according to the Washington attorney general’s complaint (PDF). When consumers tried to cancel their subscriptions, they encountered a telephone customer service operation described in the complaint as “woefully inadequate to handle the very high volume of consumers calling Julep to cancel their subscriptions.”
An option to cancel via e-mail was removed, the complaint alleged, because Julep “believed it made it too easy for consumers to cancel; Defendants were losing too many subscribers by allowing email cancellation.”
Washington State Attorney General Bob Ferguson announced a settlement including $1.5 million in restitution to affected consumers, which Julep says it paid voluntarily, before it was contacted by the attorney general’s office; $250,000 in attorney’s fees; and $250,000 in Julep goods, to be channeled to nonprofits and governments helping homeless people, domestic violence victims, and others.
The settlement (PDF) also contains a litany of injunctions regulating Julep’s business practices related to subscription sales, consumer communications and notifications, and customer service, among others. Failure to comply with the terms will result in a $250,000 civil penalty, suspended as part of the settlement.
After the settlement was announced Tuesday, Julep CEO Jane Park, pictured above, took umbrage with the way the attorney general’s office characterized it in a news release, which reads in part, “Julep Beauty, Inc. and its owner Jane Park, will pay $3 million for using deceptive ‘negative option’ marketing tactics to lure consumers.”
Park says in a statement to Xconomy that the $3 million referred to in the AG’s release overstates the settlement impact to Julep, which she calculates as $500,000—$250,000 for the attorney’s fees and $250,000 in “product donations I offered to make to local women’s organizations and homeless shelters.”
The AG’s office apparently used the retail value of those products—$1 million, rather than the $250,000 cost to the company—as well as the restitution and suspended civil penalty, in calculating the $3 million total.
Park also says that her statement in the attorney general’s release—“I want to take this opportunity to acknowledge and take responsibility for Julep’s previous practices that formed the basis of the AG’s lawsuit that was settled and announced today”—was “modified to take out the context.”
She further disputes the AG’s description of Julep’s practices as “deceptive marketing,” claiming: “We have always been clear about the terms and benefits of our Maven subscription program, which is beloved by thousands of women across the country. Unlike passive subscriptions, at Julep we actively invite our Mavens to engage with us monthly, sending multiple communications prior to any charge.”
“We stand behind our press release as issued,” says Peter Lavallee, communications director for the Washington state attorney general’s office, in an e-mail to Xconomy.
(An interesting side note: Julep was represented in the matter by Ferguson’s predecessor in the attorney general’s office, Rob McKenna, who is now a partner in law firm Orrick’s Seattle office. McKenna focused on consumer protection, data, and privacy during his two terms as Washington attorney general from 2005 to 2013.)
Park characterizes the underlying issues as growing pains that are in the company’s past.
“As a startup, we experienced some operational challenges over two years ago that we addressed proactively and voluntarily, months before ever being contacted by the Attorney General’s Office,” she says in the statement. “In the summer of 2014, we experienced a period of extraordinary growth at the same time that a change in fulfillment practices caused delays in shipping. As a result, we experienced an unprecedented volume of customer service calls and we were not able to answer all of our call volume.”
In 2014, the Better Business Bureau gave Julep an “F” rating resulting in part from poor responses to consumer complaints about the Maven subscription shipments. Park addressed the Better Business Bureau rating in an interview that year with Xconomy.
Park co-founded Julep in 2006 and has raised more than $60 million from investors including Madrona Venture Group, Maveron, and Andreessen Horowitz.
