Kate Hudson cofounded Fabletics.
Michael Buckner / Getty Images
In January of last year, Adam Goldenberg reached one of the largest-ever deceptive advertising settlements with the Federal Trade Commission, with one of his companies agreeing to pay more than $26 million in penalties for peddling a miracle weight-loss powder. Seven months later, he received a different kind of honor: JustFab, his e-commerce startup, was valued at $1 billion by investors, making it a “unicorn,” Silicon Valley’s most coveted achievement.
The journey of Goldenberg and his longtime partner, Don Ressler, from the murky fringes of internet marketing to the pinnacle of paper wealth in Silicon Valley is the story of how two men, for a decade, have been conning consumers into subscriptions for anti-aging shampoo and wrinkle cream under the guise of “brand-building” and “innovation.” Since at least 2004, consumers have accused the men’s businesses of exploiting their credit card information and sticking them with unwanted charges — complaints that are stacking up at JustFab and Fabletics.
But that history hasn’t stopped some in tech from viewing its business as The Next Big Thing. The men have raised more than $300 million in equity funding for JustFab, more than either Gilt Groupe or Warby Parker, from venture capital firms like Matrix Partners and Technology Crossover Ventures — small shops by Silicon Valley standards, but ones that have invested in other big names like Gilt, Dollar Shave Club, and Spotify.
It also hasn’t turned off JustFab’s celebrity backers, including Kimora Lee Simmons, who served as JustFab’s creative director until May, as well as Kate Hudson and her brother Oliver. And it has attracted little scrutiny from the tech and business press that have covered JustFab’s rise, with outlets like Bloomberg News and the Wall Street Journal instead focusing on its lucrative business model, which is to sign up shoppers to recurring $30 to $50 monthly subscriptions for discounted clothes and shoes. Consumers, even if they don’t choose to receive any items, are charged unless they remember to opt out in the first five days of the month.
It’s a model the company says will rake in $500 million this year across sites including JustFab, Kate Hudson’s Fabletics, FabKids, ShoeDazzle, and FL2. That puts the company in the big leagues: The Container Store brought in about $780 million in sales last year, while Vera Bradley posted about $509 million in revenue. While JustFab has yet to post a profit, Goldenberg recently deemed last year’s funding a “pre-IPO round.” A spokesperson for JustFab said the company is on track to post a profit this year.
It didn't take long for Intelligent Beauty to face the same consumer backlash Alena's products drew.
The BBB fielded hundreds of complaints regarding the company's free trial offers and frustrating return processes between the end of 2006 and 2010, according to documents from the Business Consumer Alliance. The FTC, in response to BuzzFeed News' FOIA request, shared 66 complaints made about Intelligent Beauty between 2010 and 2013 naming Kronos, Sensa and JustFab. Consumer watchdogs criticized a number of its ads, and in 2009, Bare Escentuals sued Intelligent Beauty for making a blatant knockoff of its Bare Minerals line and advertising it as "Better than Bare." Part of the company's beef with the brand: "highly misleading and fraudulent" offers. The lawsuit was settled in 2010.
Intelligent Beauty's tactics disproportionately hurt poor customers who were hit with unexpected overdraft fees after failing to return products or cancel unwanted subscriptions. That same problem features in plenty of complaints today about JustFab and Fabletics; the company line is that JustFab doesn't reimburse users for "non-company charges" like bank fees and phone bills.
"I didn't believe that I would have the astounding results shown on the imagery in their advertising," read one complaint from the end of 2008. "But I had hoped for something better than what I got...SCREWED!"
But while JustFab has revenue streams befitting a unicorn, its predecessor companies were less ethereal beasts. For more than a decade, starting at MySpace’s parent company, Goldenberg and Ressler’s customers have frequently complained of getting tricked into recurring credit card charges and fooled by deceptive advertising and misleading promises — promises the FTC said sounded “like magic pixie dust” in a warning to consumers regarding the diet product Sensa. It made more than $300 million in sales before the federal regulator intervened.
The ugly hallmarks of those past enterprises live on in JustFab: The company and its affiliates, for all their happy customers, have often been accused of deceiving shoppers who think they’re making a single purchase into signing up for a subscription that automatically charges them each month unless they opt out within a five-day window. The sites use terms like “VIP Membership” instead of “subscription,” and JustFab and Fabletics in particular downplay the options for avoiding charges each month; cancellations require lengthy phone calls.
Consumer watchdogs have received a flood of complaints over the practices, and Facebook, Twitter, and review sites are home to many others from the U.S., the U.K., and Australia.
Goldenberg has deemed such complaints to come from “a very, very small minority” of unhappy users, but the numbers are considerable. JustFab amassed more than 1,400 Better Business Bureau complaints between August 2012 and the middle of last month. To put that in perspective, it’s more complaints than Time Warner Cable racked up in New York City in the same period; Spirit Airlines, one of the country’s most-hated companies, racked up about 2,500. JustFab has hardly the name recognition of those companies. Its accreditation with the BBB was revoked in May.
The FTC, in response to a Freedom of Information Act Request from BuzzFeed News, sent over another 234 complaints about JustFab from consumers railing against deceptive subscriptions and excessive email marketing.
Its legal troubles have also mounted, with the company reaching settlements over its business practices with a group of district attorneys in California, the Florida attorney general, and a separate Florida consumer who filed a lawsuit in 2011.
“As a company that has gone from 0 to in excess of 3.5 million customers in five years, we have had inevitable bumps along the way,” JustFab’s spokesperson said in an email, noting that the business has at least an 8 out of 10 on ResellerRatings.com from more than 60,000 consumers. “Customer satisfaction is a top priority for us and when there are issues with service, product quality, shipping deadlines, and the like we always do everything we can to make it right.” The spokesperson said the BBB complaints represent less than 0.001% of the 3.5 million customers JustFab acquired in the same period.
Goldenberg, 34, and Ressler, 43, declined to be interviewed for this story.
Click Here Copywriting & Creative
There’s a chance, of course, that all of the people who feel duped by JustFab are wrong.
But Goldenberg and Ressler have faced precisely these kinds of consumer complaints — thousands, in fact — about a long list of miracle weight-loss and beauty products since at least 2004. There were the Dream Shape diet pills, meant for consumption before bedtime — “Dream Shape Burns Fat While You Sleep.” There was the Hydroderm Body Shape Cellulite Toning Lotion, “the ‘secret weapon’ that will help tone and firm the areas that exercise alone can’t shape.” (That one got dinged by the U.S. Food and Drug Administration.)
Later there were Kronos hair products, sold as “Botox for your hair,” and Raw Minerals, a knockoff of the better-known BareMinerals makeup line. Most notoriously, there was Sensa, a weight-loss powder that claimed if you sprinkled it on meals before eating, you would lose an average of 30 pounds in six months without making any changes to your diet or exercise habits. It just made you feel full, Sensa said, citing clinical studies alongside photos of juicy hamburgers and cheese pizzas. “Eat yourself skinny!”
Click Here Copywriting & Creative / Via clickherecreative.com
Sensa agreed to a nearly $50 million judgment with the FTC last year, though it could pay only about half that. (Ressler wasn’t named in it.) Goldenberg and Ressler are still fighting lawsuits over Sensa after the business collapsed late last year, including one from Bank of America that also names JustFab as a plaintiff.
For at least six brands associated with the two men before JustFab and Fabletics, customers complain they signed up for a “free trial” of the product, entering their credit card details to cover a $4 to $5 shipping fee. But if the product wasn’t returned within a few weeks — and accounts from customers say this was incredibly tough to do — they ended up with anywhere from $50 to $100 in charges and a recurring subscription that was a nightmare to cancel.
That might sound familiar to disgruntled JustFab customers today. The billion-dollar company paid $1.88 million last year to settle a consumer protection lawsuit out of the Santa Clara and Santa Cruz district attorney offices that alleged its brands, including Fabletics and the Kim Kardashian-associated ShoeDazzle, failed to “clearly and conspicuously” explain that its advertised discounts required a “monthly and automatically-charged subscription fee.”
“We were concerned that consumers had signed up for essentially a shoe or an outfit of the month club without enough disclosures where the consumer could determine that,” said Kelly Walker, Santa Cruz County assistant district attorney. “This is becoming a business practice that we’re becoming very concerned about. We are setting up a task force here in California just to deal with these companies with automatic renewal or automatic negative option sales programs.”
“From day one, we have been upfront about our flexible subscription model, the value it creates for our customers, and its terms of service,” JustFab’s spokesperson told BuzzFeed News.
JustFab’s backers have little to say about the company, its predecessors, and the litany of complaints against them. Passport Capital and Technology Crossover Ventures declined to comment while Matrix Partners and Rho Ventures didn’t return multiple phone calls and emails. JustFab told BuzzFeed News it doesn’t publicly disclose the full membership of its board of directors, though press releases have named TCV’s John Drew, Rho’s Mark Leschly, and Matrix’s Josh Hannah. Reps for Kimora Lee Simmons and Kate Hudson also declined to comment.
Walker, the Santa Cruz assistant DA, said his first contact with Goldenberg involved Sensa. In 2012, before the FTC stepped in, he was part of a group of California DAs who reached an $800,000 settlement with Sensa and its parent company, Intelligent Beauty, after finding fault with the company’s advertising claims, its use of the word “free,” and, of course, its automatic subscription enrollment and shipment of products to customers.
Walker added, “We were aware of him, and now we’re aware of other companies that he’s involved with doing the same kind of thing.”
The MySpace Connection
Goldenberg and Ressler met in the early 2000s at Intermix Media, the parent company of MySpace, where both worked in its Alena product marketing division. The unit was never as well-known as MySpace, but it was the company’s main profit engine up until 2005, when Rupert Murdoch’s News Corporation acquired Intermix for $580 million, mostly for the social network. (That was back when $580 million was a lot of money to pay for a website.)
Goldenberg, a wunderkind who joined Intermix in his late teens, became the president of Alena in 2004. The unit trumpeted its expertise in cost-effectively building brands online and selling “high margin” and “innovative” items straight to consumers. In practice, it was papering the internet in ads for Dream Shape diet pills and Hydroderm antiwrinkle creams, promising “better than Botox” results and offering up free trials.
From left: Don Ressler, Kimora Lee Simmons, and Adam Goldenberg.
John Sciulli / Getty Images
Alena was responsible for most of Intermix’s $79 million in revenue for the year ended March 31, 2005. In regulatory filings, its growth was consistently attributed to higher sales on a subscription basis, where “customers agree to accept regularly scheduled shipments of selected products.” As it would be for many other items associated with Goldenberg and Ressler during the next decade, the first purchase was always facilitated through a “risk-free trial.”
But the trial wasn’t really free or riskless, as journalist Julia Angwin wrote in her 2009 book, Stealing MySpace: The Battle to Control the Most Popular Website in America: “Customers were charged a shipping and handling fee of $5.95 and were automatically enrolled for monthly shipments of $49.95 bottles of wrinkle cream. Customers often failed to cancel before the first shipment arrived, and the Internet message boards were full of complaints from customers lamenting Hydroderm’s tactics.”
The Business Consumer Alliance, which is the former Los Angeles affiliate of the BBB and oversees complaints to the bureau made before March 2013, sent BuzzFeed News more than 600 complaints filed against Alena between 2004 and 2006 from across the country.
Sensa via FTC / Via ttps://www.ftc.gov/sites/default/files/documents/cases/140107sesnaexhibits.pdf
Intelligent Beauty: New Name, Same Thing
Goldenberg and Ressler left Intermix shortly after the News Corporation acquisition, creating an entity called Brand Ideas, which merged with a marketing group to become Intelligent Beauty in 2007, according to its website at the time. The two men were co-CEOs of the company, which would later spawn Sensa and JustFab. Intelligent Beauty said it planned to use the internet and home-shopping channels to “powerize” its “electronic brand building” efforts.
In practice, that meant a factory of winking pop-ups, banner ads, advertorials, and landing pages everywhere from Yahoo Mail to AOL and MSN, displaying pictures of old women transforming into young ones and scales tipping to lighter numbers. The rapid A/B testing and modification of these ads has always been Goldenberg’s strength, said two former employees, who spoke on the condition of anonymity. Spammy examples still live on the website of one of its marketers, Click Here Copywriting & Creative, which heralds its abilities to feed search engine spiders and design clicky, “emotionally charged” ads.
It’s the kind of thing you look at and instinctively want to close.
Sensa via FTC / Via ftc.gov
JustFab: The Billion Dollar Startup With A Dark Past http://ift.tt/1FwOKD7
