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Why was a scam company able to raise $76 Million Series B?
660 points by wenxun 1065 days ago | 174 comments
I just stumbled upon this piece on Business Insider "JustFab Raises $76 Million To Create The H&M Fashion Brand Of The Web". http://www.businessinsider.com/justfab-raises-76-million-to-create-the-hm-fashion-brand-of-the-web-2012-7

It kept me wonder why a company with very questionable (I will try to avoid using the word "fraudulent") business model was able to raise big money. Didn't the VCs have to do the due diligence?

I didn't have any direct experience with JustFab. The victim was my girlfriend. Back in January or so, one of her friends emailed her a link to JustFab, then she bought a pair of shoes from www.justfab.com and never visit the website again. Only 8 months later, in early September she was appalled to find out that her credit card has been charged a $39.95 fee for the last eight months. Yes, $39.95 for 8 months, without geting anything from JustFab.

I then did a bit research on the internet. It turned out my girlfriend wasn't the only victim. Apparently JustFab works like this: once you buy something from their website, you become their "VIP member". Then you will have to log into their website between the 1st-5th of each month and click “Skip This Month”. If no action is taken (either skip this month, or cancel your account), they just charge you a $39.95 fee every month.

According to the Business insider article, JustFab "will generate about $100 million this year" in sales, I wonder how much of this $100 million are from people like my girlfriend who simply didn't read their entire 2,500 words Terms of Service and were unaware that they were charged $39.95 a month for nothing.

p.s. After JustFab CSR refused to refund, I decide to post this story again, hoping it will get upvoted to the frontpage of HN so that more people get to know what is really going on behind JustFab

pps. Anyone could just simply google "justfab scam" to see how many others have been victimized. It's outrageous such large scale scam got unnoticed.




So I went through their checkout process, and up until the credit card stage there is zero indication that it's a membership site (I read everything on every page).

I've uploaded the credit card section here:

http://i.imgur.com/3di93.png

It says you'll be billed month per month on the right hand side under the VIP membership program, but I think it's pretty clear that the page is engineered to be misleading. It looks like a standard upsell, not a mandatory part of the purchase.

They're relying on people clicking the accept terms and conditions check box without realizing that it's signing them up for the membership, i.e. it's the terms and conditions of the program, not the site in general.

Terms and conditions boxes are common in the checkout process and nobody gives them a second thought. I'm not sure I would have caught this one if I went in naively.

Clearly unethical, IMO.

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I don't know about the US, but here in Germany you can't put that kind of stuff into your terms and conditions.

Well, you could, but those terms would be ineffective. Of course, this doesn't help if they succeed to intimidate the victim. But if the victim doesn't pay, there's nothing the scammer can do, because this case would never succeed in court.

Having said that, it might help if the victim complains to the police. Depending on how serious customer protection is taken in the US, this business might be more than merely "unethical".

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Simple solution is check your CC statements regularly for discrepencies and request a chargeback from your card provider if you get scammed.

Enough charge backs and they lose their merchant account.

Most Credit cards users don't realize just how simple it is to run a charge back. It is literally one short phone call.

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There are plenty of offshore credit card processing companies & banks who provide "high risk billing" solutions for scammy businesses like this one.

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Not only ineffective, but its planned to make this deceipt downright illegal. You have to state all of the costs in clearly readable text on the signup page itself and change the button to indicate that you are signing up with recurring costs.

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Maybe I'm being too permissive, but that screen doesn't look fishy at all. I went through the purchasing/sign-up process, and it goes like this:

    1. create a profile (answer questions on style)
    2. fill in details, click a *JOIN NOW* button
    3. get a "*first month* for 50% off" offer
    4. get to this payment screen
At no point it implies you are buying a single product, there are no "buy now" buttons or calls to action.

To me it's pretty clear that it's a recurring service, like many others that exist for chocolate, wine, beer, socks, razors, etc. The right hand side on the checkout is clear enough, and the skip the month part is there highlighted, not in small letters.

EDIT: apparently this is just the flow after choosing something on the home page. If you choose one of the "special" products or go to the Featured section, it does go through a standard add to cart + checkout flow (http://minus.com/lA7snPkHUHOZR). That is actually terribly misleading.

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But its not like any other subscription sites I'm aware of. The huge differences is that you have to visit the site each month or you'll be billed and receive NO product.

I was prepared to disagree with OP but the model does seem a little customer-hostile.

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> or you'll be billed and receive NO product.

Actually it says you'll be billed for a "Member Credit", which "can be redeemed for any JustFab style on the site".

I'm not sure what that means exactly, but if you can actually redeem one of those credits for $39.95 worth of product, then 1. it's still very misleading because you spent a lot more money in their store, on their products than you intended to, but 2. at least your money didn't just evaporate, except 3. is there anything preventing them from at some point deciding "From now on, we will only sell novelty dish-washing sponges, at the great rate of one credit per sponge!", making all out-standing credits worthless in a single TOS change?

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The grandparent's link says "Each credit can be redeemed for any JustFab style on the site."

Seems to me that they're saying if you're a member but didn't make your decision for your free (sunk cost) product by the 6th, they charge you and turn it into store credit. It's not like they're charging you and saying "too bad, you don't get anything."

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Ok, I see. So that's probably reasonable. And it's now even more clear that the whole thing is somewhat confusing.

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It may be different, yes, and I can relate to the OP's original complaint from his girlfriend. Still, given the language used on the site and the (albeit weird) use of a "credit" that can be used in the future for each month you don't buy something, it doesn't seem unfair at all to me.

I will say that the negative attention this confusion could bring them is more harmful to them than if they revamped the purchase process to just make it crystal clear what you're buying.

From my experience at Poll Everywhere, the "sidebar" on the checkout process does not get read by anyone, anytime. For some reason, the sidebar becomes a blindspot and is ignored (at least in our testing) during a checkout process and so is thus not a great spot to put reminders about how you're joining a membership and will be charged monthly if that is the only place is is put.

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It would seem reasonable that to assume "skip the month" just means "don't buy anything this month" as opposed to having to do a specific action.

After all , it would seem strange to be voluntarily charged unnecessarily.

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Logged on and signed up. selected a shoe by clicking 'add to bag', aka 'add to cart' then went to checkout whereby I was introduced to the slimy payment page.

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I agree it's unethical. This is a commercial site, it tries to offer goods in exchange for money, anything that costs money should be emphasized and explained. How would they feel if someone managed to take some of their merchandise by stealth?

I don't think this is some grey area: if you tricked me into paying a sum I never chose to pay, you're stealing money off my pocket.

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That reminds me of certain ads I sometimes see on the french TV for ringtones or silly phone games: if you read the small print you realize they actually offer a membership, not a product, and you actually pay something like 3 euros a week instead of a one-time fee. They call that "clubs" or something.

Those ads usually seem to target teenagers (they're mostly on music channels or channels aimed at kids) who probably aren't in charge of the bill and if they're not careful they might end up with a bad surprise. This is beyond shoddy.

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Thankfully that shit has been made illegal in the Netherlands a few years ago. One of the more important motivations was, like you say, how blatantly those scams are targeted at teenagers.

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It depends on how you do it, you could definitely use mail laws about unsolicited mail to get a package you didn't solicit delivered to your door. If you can do this then you can keep the goods.

The law like anything else is a system, justfab is exploiting it for fun and profit.

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If you'd care to re-read the GP post, you'll find he's talking about ethics, not laws.

I really hope you are aware of the difference.

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Thanks for the screenshot. This is outrageous IMO. Few people will notice that the TOS checkbox actually reads "JustFAB VIP membership program". Most people will take it as a normal TOAS checkbox that you have to agree every time you order from any website. So, yes, the page is designed to be misleading a.ka scam some subscription fees.

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However the entire right side of the screen is about the VIP program.

What exactly could people instead be lured into thinking they're doing here?

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Considering the fact that, you end up on the checkout page trying to purchase an item, the jibber-jabber on the right side hardly helps.

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Well all their copy tells me that they're a personalized "boutique" aka personal shopper who chooses items for you based on your style.

I'd expect that to be a re-occurring cost.

I suppose it may be out of the norm of some people, especially the HN crowd, but this kind of thing isn't really unusual.

Brick and mortar stores have VIP programs all the time.

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> Brick and mortar stores have VIP programs all the time.

Yes. But you can also show up and buy a pair of shoes. I don't believe what you are describing is a fair analogy.

When I order a pair of shoes I expect a pair of shoes. I don't expect a hat, jacket, or a personalized VIP shopper.

On this website if I pretend to order a pair of shoes there isn't anything to indicate (aside from the fine print) that I'll be receiving more than a pair of shoes.

I'd expect this place to suffer a pretty serious class-action lawsuit soon. If I was an investor I'd run as far away as possible.

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I don't really think so. When I visited the website, the first thing (it took up 50% of the page) that I saw was a call out asking you to rate items, and reveal your fashionable interests so you'd get personalized advice. Then it asked me to join their VIP program.

Honestly, I'd have to click around a little bit to even figure out how to just search something without first joining them and going through the VIP program upsales processs.

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Thank you for posting the screenshot. A clear example of a UI anti-pattern IMO.

http://wiki.darkpatterns.org/Main_Page

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Note that regardless of what the screen shot looks like today, it's very possible the site already improved its disclosure in response to complaints/threats. It would be interesting to go back in time and compare the disclosure at launch to what's on the site today.

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At least the bullet points on the right clearly describe how the site works. I'm not saying it's not misleading, but I think OP's complaint that customers have to “read their entire 2,500 words Terms of Service” to see what the deal is, is basically wrong.

(Also you don't get “nothing” for $39.95; you get store credit. That sucks if you didn't want any, of course, but given the fact that people actively sign up to be able to purchase from that store, I can't imagine it's entirely worthless.)

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So the site doesn't force you to join the VIP program? The way it is structured would definitely see a lot of people check it and click through without checking. In my experience stuff we make a lot more obvious than this is plain ignored during checkout.

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Just tried it without the checkbox ticked, and it does appear to be mandatory.

"You must read and agree to the JustFab VIP Membership Terms of Service."

Which makes sense - I bet they're making a killing on zombie subscription fees and little on legitimate users.

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And there does not seem to be any opt-out option in the profile settings (at least not without having completed checkout).

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Even that line which you say comes up when you don't check the box is likely to be misread by users who are used to having to check a terms of service box on most of everything.

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Definitely unethical. The reason to buy says, "over half a million subscribers save hundreds a year". This statement could burn them in court if proven to not be a factual statement. I would surmise that it could be shown that the half a million subscribers paying $480 a year each, (240 million total) may not save hundreds a year. The least they would have to show for a forgiving jury would be that subscribers saved a total 100 million in personalized boutique purchases and general shipping. A demanding jury would require 340 million in savings. I would wager that argued by a savvy attorney the statement could be read as a misrepresentation in advertising. It would also be based on how it read at the time of original subscription, so there wouldn't be much value in changing the statement now and only provide more validity toward it being a misleading statement. The defense would argue that people read the the info on the right, understood the terms and checked the box in agreement. The prosecution would argue that the claims in bold of so many saving so much resulted in more making the purchase, which was a false misleading statement. Sales people make these types of claims all the time over the phone or in person to get a sale, putting it in writing is a huge mistake, and online retailers shouldn't be so brash.

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I wonder how this company (and these kind of companies) can keep their merchant account open for so long. There has to be some trick here.

For example, maybe they keep enough to funds for last 6 months of chargebacks and have some special kick-back to bank? Or maybe the game plan is to always open a new merchant account after the first one is closed? Or maybe the bar is so low and they never need to worry to lose their merchant account?

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You sign up for what is called a "High Risk" merchant account.

Porn sites, bail bonds, check cashing locations, dating sites, weight loss centers, and dozens of other types of businesses use this category of services which has a very high tolerance of chargebacks.

The sad part is if you get enough chargebacks you can actually bake in a higher transaction cost and not have to pay per-chargeback fees like other normal merchants do.

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They must be seeing a large number of chargebacks which means visa or mastercard would be behind them to get this set right by the 2nd or 3rd month.

I wonder how they managed to have the site up for so long - may be some kind of a high risk merchant account provider who approved their payment gateway.

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Regarding your comment: "It says you'll be billed month per month on the right hand side under the VIP membership program, but I think it's pretty clear that the page is engineered to be misleading."

I'm sorry: you're talking about the section that explains "How the JustFab VIP Program Works"? Whose 4 bullet points say:

1. Get a boutique the first of the month 2. Browse and Buy 3. Don't like anything, skip 4. If you don't buy or skip by the 5th you'll be charged anyway?

And a default unchecked box that you read and agree?

I think the concept of "engineered to be misleading" might just put the points in say, a small font, or in the terms and conditions behind a link. If someone describes it clearly in bold font in a section explaining how the site works, well, that's a pretty strange way of misleading people.

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The misleading part is that (in at least one common usage path), the site sets itself up to look like every other online shopping site. The kind that people expect to use by putting stuff in their "shopping cart" and proceed to "checkout" and pay once.

Think of the people in your life not quite as tech-savvy as yourself, like maybe your next-door neighbour or your mother. Would you expect them not to be misled by this? Sure, I'd hope my mother would be critical enough to notice, but I can easily see it happen otherwise.

Another indication is, I assume that a lot of people who do notice will instead decide to bail out entirely and not buy anything, rather than (like I would do, if I really wanted the item) pay, log in, and cancel the account immediately. Because that's not really an obvious thing to do, given the set expectation of being a regular online shopping store.

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Don't ask for a refund, go to your bank or CC company and charge back the 6 months. That'll hit them where it hurts. Little known fact about chargebacks: the merchant pays an administration fee, typically $20 to $50. Per charge!

That is why the smarter scammers refund to everybody who complains, not refunding is plain dumb. This scam has been around for a long time, usually it's adult companies that sell you a 'free' membership with an age verification which comes with a pack of subscriptions tacked on for other stuff that you will never use.

This practice of selling unsuspecting consumers a subscription with auto-renew when they think they're doing a one time transaction needs to be stamped out.

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I cannot stress this enough.

If the company continues to receive chargebacks claiming fraudulent charges (which this really does appear to be) they will find themselves in a difficult place with card processors.

Some processors drop clients if they crack 0.5% a chargeback rate.

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I have no idea how complicated this is, but with 76 million in funding, what are the chances they found a way to process credit cards them selves?

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Zero.

The credit card processing chain is quite complicated, with banks, card companies, ISPSs, processors and merchants all having fairly clearly delineated roles. A merchant - no matter how big - implementing the whole chain is unheard of.

Visa, MC and other cc companies care a lot more about their reputation than they'll even care about a company like this.

Much larger fish have been put on the bbq over less substantiated claims of fraud.

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Hasn't Amazon implemented their own?

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Do you have an amazon credit card?

As far as I know they use GE as the issuing bank, they may have other deals in place.

As far as I know - but this may very well be wrong or at least out of date - amazon does not have a banking license and the network used is VISA.

This seems to confirm that:

http://www.cardhub.com/d/amazon-credit-card-1015c/

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I've got an Amazon credit card (in the UK) and it's a Mastercard run by MBNA.

I would guess Amazon have looked at replacing as much of the payment chain as they can and done the parts that are profitable to replace. But they have a long way to go before the enormous hassle of becoming a bank is going to be attractive and possible.

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It's not nearly enough. Some major conglomerates (If I recall correctly then GE, GM, Samsung and others) do stuff like that in-house by creating bank-subsidiaries in their largest markets, but I'd guess that it would be reasonable at 78 billion revenue, not 78 million.

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And even then that's not the whole chain. After all, a GE capital card is backed by another card company:

http://www.gemoney.com.au/en/credit_cards/index.html

Piss off VISA/MC/JCB/AMEX and you're in trouble.

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That's just to become an acquiring bank, to save on exchange fees.

Ultimately VISA determines who gets to participate in the VISA credit exchange network and will fine acquiring banks who participate in things like this. No one can force their way in and avoid responsibility -- period.

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Even worse are scams that look like a free service (doing stuff like horoscopes) but require you to enter an address and then send you a bill for a 12 month subscription, and threatening legal action if you don't - quite common here in Germany. There's actually new legislation since July that requires all online transactions to explicitly say there's a fee right on the confirmation button, otherwise they're not legally binding.

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I definitely second this. I used to work a children's website, where kids would often take their parents' credit card and make purchases, and we'd inevitably end up with many chargebacks (even though we offered refunds, many people went straight for the chargeback option instead of contacting us). The chargebacks not only cost the company extra - even if the company wins the dispute - and if chargebacks happen too frequently, banks may shut down the account.

I have also won 3 chargebacks against companies who never delivered their product or used deceptive practices. The process was not too difficult, and I believe the CC companies tend to side with the consumer. Verdicts on the disputes can take several months to process though.

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That's pretty accurate. As far as the verdicts are concerned, yes, they can take a while to process but if a company gets a negative reputation the process tends to be expedited considerably.

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Don't forget that doing a chargeback doesn't absolve you from having to pay for services you've legitimately signed up for, it just denies the parties the convenience of settling through the credit card companies.

They can take you to court for breach of contract, and if (IANAL) the subscription contract is found to be legit, you have to pay + fees.

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That is true in theory, but in practice, especially in situations like this that does not happen.

For that there would have to be a much more transparent sign up process and actual delivery. Non-performance is not a good basis to start a law suit, especially if you're on the non-performing side.

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I agree, but the GP made it sound like a get-out-of-jail-free card.

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Well, it's sad in a way but there are consumers that use it exactly like that. They order stuff and then charge back the money in the hope that the merchant won't care enough to fight the chargeback, which can cost a multiple of the original transaction.

Most large merchants have risk mitigation strategies that attempt to detect this before a charge gets processed and goods are shipped but that's a less-than-perfect mechanism.

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They'll argue you checked the checkbox. You'll argue you didn't. It's their word against yours and they will lose, because they can't prove you actually checked the checkbox.

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First: You're in court. That's a whole lot more than you bargained for.

Second: Are you a lawyer? Is that the guaranteed outcome of such cases? Will it really carry no weight that they can (probably) substantiate their claim that you checked the box with a technically sound argument that their website actually works? A manual release test plan, unit tests, cucumber scripts?

That one, single checkbox, and the fact that you have to manually check it, is the legality upon which the entire business hinges. Especially if they're a little shady, they'd be sure to have their stuff in order around this.

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The first is certainly true, but won't happen if they are bound to lose.

I'm not a lawyer, but I am a programmer. I would never swear that my software works so correctly that I will use the actions of the application as proof that a user did check a box. If he claims he didn't, well, he just may be right. I've seen enough weird things happen not to trust any software to behave correctly all the time.

Now my technical reasons may not be relevant for a judge, but I doubt judges are very trustworthy of technology (they should have heard plenty of cases where technology failed and they will be users of all kinds of awful consumer technology, that sometimes, suddenly fails for no clear reason) and won't think favorably about a company with these kinds of practices. Perhaps I'm naive, but those things combined will lead a judge to believe you over the company.

  That one, single checkbox, and the fact that you have to
  manually check it, is the legality upon which the entire
  business hinges.
It can be entirely legal, while at the same time anyone that claims otherwise should immediately be refunded and let go. In fact, it would be smart to do that, as it prevents bad publicity. Any user that is dissatisfied should be compensated and should be free to leave, always. That saves money.

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How hard can it be to retain this data upon registration? Site operators would be insane not to. It's one bit per user in a database: Checked box or not?

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However, be careful and only do a chargeback when you are sure you never want to deal with that merchant again. Many will blacklist you if you do a chargeback, because of that high chargeback fee (which they have to pay even if they have sufficient documentation to successfully fight the chargeback).

I'm kind of surprised no one has started a service for merchants to warn them of chargeback prone customers (there are people who go straight for the chargeback without even trying for a refund first).

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> I'm kind of surprised no one has started a service for merchants to warn them of chargeback prone customers (there are people who go straight for the chargeback without even trying for a refund first).

There are plenty of such services. You don't see them because they don't normally operate on the merchant level, they operate on the IPSP / processor / card company level.

The reason why they don't usually operate on the merchant level is because that would allow a merchant to pollute the pool with their 'known good' cards to stop people from buying a product with competitors. You have to wonder when you buy this information as a merchant whether it is clean or not. But when an IPSP / processor or card company uses their aggregate knowledge then it starts to be really useful.

You can do AVR checks and so on all by yourself as a merchant but most if not all reputable IPSPs will have an anti-fraud system in place that does all kinds of checks.

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There is a service that warns merchants of fraud-likely customers. Precharge. I was surprised to not see it anywhere on HN to date.

You can learn more at http://precharge.com/guaranteed_chargeback_protection/

Essentially you pay Precharge to qualify the customer and if it passes their fraud checks, they will reimburse or fight the chargeback.

They might be maintaining their own repository of problem customers here: http://www.chargebackfile.com/

Hope this is helpful to anyone considering mitigating chargeback risk.

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Look into MaxMind MinFraud. In addition to providing a 'risk score' for your online orders, it's also a kind of collective blacklist like you described. Any MaxMind customer can report an IP or e-mail address as associated with a fraudulent order, and any other MaxMind customer who recently scored an order with the same IP or e-mail gets a warning about the increased risk.

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There was one, it was called BadCustomer. I don't think it's around any longer, since the people running were running shady rebill scams like Fab.

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Also, if 1-2% of your charges through a merchant result in a chargeback, the merchant will drop you completely. However, a good scam company will have a few merchants lined up just for this reason.

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> the merchant will drop you completely

You mean processor/bank/merchant account, not merchant. In the parlance of the payment industry justfab is the merchant in this story.

And yes, there are scammers that have processors / banks lined up but they burn through them at a rate of about 1 every 8 weeks or so, and each time that happens they forfeit a large amount of cash. There are not that many merchants willing to play the game that way.

50 chargebacks or 0.5%, whatever gets hit first and you're in trouble. Reputation damage to the CC companies and you're out for good. Merchant account hopping is not a long term viable strategy.

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Another little known fact about chargebacks: You lose some of your rights if you pay charges before disputing them.

Try it, absolutely still try it, and good luck!

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That's nonsense. The only time a chargeback makes sense is after the payment has already gone through.

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Nonsense? You're a real charmer, tisme.

There's a bit of mis-information here.

First, while credit card companies and banks can chose to honor disputes of any age, your rights under the FCBA protect you for only 60 days -- and the FCBA doesn't apply to debit cards at all.

My tip -- that you should never use a debit card and with credit cards you should dispute charges before paying the bill -- is correct in spirit but not in the letter of the way I worded it, so mea culpa on technicalities but the point is correct. The FCBA only grants you 60 days to dispute a transaction (after the statement cut, not the transaction itself).

Also, CC disputes have some consequences. Companies aggregate & share lists of customers that have charge-backed. Finding yourself on the list can see you turned-away from legitimate, good businesses that have to protect themselves against dispute-prone customers.

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He means after you've paid your credit card bill with the included charges on it.

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I see 6 month chargebacks on a regular basis (dealing with consumer fraud is fun), so these definitely happen, they're possible and if consumers can do it when they are the ones defrauding the merchants there will be a lot less trouble when it is the merchant doing the defrauding.

In many cases the cc company debiting your checking account is automated and there is no step for you to verify other than to periodically go through your statements to see if you have taken on any ghost charges.

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What the parent meant was "after you paid the bill". It's hard to go back later and say the charge was fraudulent after you received the bill and opted to pay it. In theory, payment = acceptance of charges.

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Theory doesn't matter much here. Especially not with automated debiting of checking accounts to pay the balance or some amount of interest or a combination of those.

As a customer of the card company you have the right to dispute charges as far back as you want, whether they'll honor that or not is a different question but typically up to 6 months in a card-not-present situation should give you no problem at all. And once the complaints about this company start rolling in it will get even easier.

Mass chargebacks are a very powerful weapon in the hands of organized consumers.

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> It's hard to go back later and say the charge was fraudulent after you received the bill and opted to pay it.

Not when it's lumped into a single balance that you pay significant monthly interest on.

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This is the best suggestion, but unfortunately may not be possible for them to recover everything depending on how they paid/their credit card company. Most banks only allow you to do a chargeback for charges within the last 1-2 months on debit purchases and 6 months on credit card purchases.

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Do the 1-2 month chargeback, and then when you've got that, take the company to small claims court. The chargeback may bring you extra weight (or not, IANAL).

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Banks and, at least VISA, are not as quick to do chargebacks they used to be. Now, they'll only do them if the customer says their card was stolen. Found this out when my mother was scammed by a moving company for the 50% deposit (company never showed). She called the number on the back of the card to dispute the charges (I believe its the bank's customer service number, not VISA's). But the bank told her they couldn't reverse the charges since she was the one who authorized them. To get her money back, she'll have to take the moving company to small claims court.

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I have used AMEX since the last 9 years, precisely for things like these. They are REALLY good at processing disputes and chargebacks, and in the last 9 years, there has never been a time when I 'lost' a claim against such fraudulent charges (I've had around 5 such claims).

On the other hand, both Visa and Mastercard are pretty much useless to 'protect' you against charges like these.

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Debit cards (which from the way you're talking about a bank it sounds like this was) are like that. It's why your best practice is to always use a credit card when buying things (it's not like it costs you anything, as long as you have the discipline to not run up a bill you can't pay).

(disclaimer: I'm not from the US)

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There is a huge difference between a card present, authorized charge and a card-not-present unauthorized rebill.

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This business model reminds me of those fly-by-night mobile subscription services from the early 2000s. The ones who'd make you think you were buying a single ringtone, and the next thing you knew, you'd been surreptitiously signed up for a $29.99/month subscription.

I remember evaluating the books for one of those companies back in the day. It was wildly successful at the surface level. But if you dipped below the surface, you noticed that its biggest strategic weakness was "Breakage," i.e., the rate at which people eventually discovered they'd been duped and then cancelled their subscriptions. It turned out that the average subscription lasted 2 to 3 months, and nobody kept a subscription longer than 5 months. This basically meant that the company's entire business model was predicated on scamming new users at a rate quicker than its existing users could break away. While not a Ponzi scheme in the true sense, the model operates on a similar assumption. But the assumption is not sustainable in the long run.

I look at a lot of companies these days -- especially all the companies in the pop-up sale business, the subscription-box business, etc., and wonder how many are following this playbook. And I wonder why VCs keep backing them. Obviously it's a fantastic way to earn tremendous growth up front. And, while the getting lasts, the getting is pretty darned good. But it's sad to think that legitimate startups may get turned down, or underfunded, for the quick buck and easy exit that can be made on this crap.

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That business model is alive and well in Hungary. A single SMS was sent from my phone in August (nobody in the family knew anything about it, so we can only assume it was sent by somebody else who may have gained access to the phone while the kids took it to day camp). This SMS "authorized" three different companies to send me "premium SMSs", each of which cost $2.50 (roughly, converted to USD).

My phone's a prepaid, so this ran the balance down to the minimum $1.50 in short order, but I didn't know whether perhaps somebody in the family had simply used those minutes - so I recharged it with $50. In three days, it was back at $1.50 and it had done nothing but vibrate in my desk drawer occasionally.

The "premium SMSs" were sent as system SMSs so they wouldn't appear in my Inbox; if I hadn't noticed one or two I wouldn't have seen them at all. I thought they were simply SMS spam, not even knowing that a "service" like premium SMSs even existed. They seemed to include a URL and nothing else - on a phone that only supports Internet on GPRS, which is no longer even available in Budapest.

T-Mobile said that for privacy reasons, they can't divulge the identity of those companies. Of course, T-Mobile gets about half of the cost of each premium SMS, so it's not terribly surprising that they're not highly motivated to stamp out scams. I told them to remove my ability to enjoy the premium SMS service, and they obliged, but that's as far as they would go.

(Nothing against Hungary. Same thing happened to me once in America with 900 numbers; the only thing the phone company would say is that somebody must have plugged a phone into our outside service jack - we turned off 900 numbers then and made sure they were off for every subsequent landline we obtained, but a scam's a scam.)

I have no recourse under Hungarian law, incidentally. Since a subscription was entered from my phone, there's nothing I can do to recover that money. It's no great problem for me, but that's a lot of money to the average Hungarian, who is absolutely powerless against a big foreign company like T-Mobile.

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But you're not powerless. I (and I'm sure many others here) are purchasers of mobile servcies and are influential in recommend them to others.

I currently have T-Mobile in the US and haven't had the problem you describe, but based on your story I'll probably be a bit more willing to shop around next time I need to change my contract.

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This scams are happening big time here in India.

Sometimes they are enabled without your permission. My mom's phone number auto-magically gets subscribed for 'premium SMSs'. She doesn't understand how to send SMS's and cant use the phone interface apart from dialing a few numbers. Yet she often complains of money getting deducted from her pre paid account.

Called the customer care numerous times and every time all we get is - 'We are sorry sir, may there was an error in our system'.

Needless to say these mobile company thieves make millions from these 'errors in the system'.

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It reminds me more of the book catalogues. 5 books for a pound or something as a joining perk, but you then had to buy a book a month for 6 months or they would automatically sell you the default book etc.

I never thought that was a shady business model, per se, and whilst it wasn't entirely intuitive how they worked to a 14 year old, I blamed myself for screwing up by joining- not the company.

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As a child my father had pointed out to me that those book offers (in the UK at least) were only for adults (18 and over). So I used to fill in the form without ticking the 'I'm and adult' box, and see if they sent me the books. Most did, though as I was a minor they had no recourse to ask for payment. If only you'd contacted them and told them you were too young to sign a contract!

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But at least the book clubs (at least the ones that I know) make it obvious that you sign up for a membership and have to buy something (monthly or yearly).

This site seems to be entirely designed to mislead you into thinking you're just ordering one item, while in fact you are signing up for a membership.

Signing up for the first one (book club) may be a bad business decision on the customers part, but this second style simply seems fraudulent to me.

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>This site seems to be entirely designed to mislead you into thinking you're just ordering one item, while in fact you are signing up for a membership.

Bingo!

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When books you didn't order start showing up in the mailbox, you pretty quickly catch on to what's happening. Charges that just show up on your credit card statement are a lot less obvious to most people.

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Those ringtone companies were just promoting ads and whatnot to get people to 'buy' something that made them, on average - what? - $70? If the cost of customer acquisition was, say, $20, they're making $50/head. For many people, having an automated business making $50/customer profit is pretty good.

Not every business is 'sustainable' through repeat customers - funeral homes come to mind. However, if the only way to be sustainable is to break laws, that's where the problem lies.

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"Not every business is 'sustainable' through repeat customers"

Sure, but at the scale the ringtone business grew (and burned through users), they eventually ran out of suckers to scam. A lot of them would fold shortly thereafter, or move on to a different market (usually a completely different country), or consolidate with another company overseas and tap the suckerbase there.

This model is basically a modern, bigger-scale version of the old snake oil sales model. Set up a shop in town, sell a bunch of bad merch, get run out of town, find a new town. Rinse and repeat.

Eventually, though, your model catches up to you. Either you're closing up shop in old markets and opening new ones that aren't as big or lucrative, or you're keeping a toehold in the old markets -- but the costs of doing so grow faster than your revenues. Or you flee Market A for Market B, only to have a competitor or two leap into Market B the next month.

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These companies exist even today. The have an army of affiliates promoting their offers on all ad networks out there. These companies are paying the affiliates $10-15 for each valid billing info.

Sad thing is, JustFAB seems to be just like these companies. Only it looks good and it is supposed to be a 'legitimate' business.

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To answer the question at hand: "Why was [this] company able to raise $76 Million Series B?" They make money.

What's more concerning to me is that the coverage in TechCrunch[0] and Business Insider wasn't able to raise a modicum of doubt. If googling "JustFab" returns "Class Action Lawsuit" in the first 5 results, it would seem that the reporters either didn't do the absolute minimum required for effective journalism, ignored it, or were instructed to ignore it.

We've all heard the "online journalism is broken" refrain, so I won't repeat it here.* I'll just note that if it's so far gone that googling the topic of interest is out of the question, this form of journalism is worse than I thought.

[0] http://techcrunch.com/2012/04/26/fashion-retail-and-styling-...

* Edit: some forms appear to be doing quite well, e.g. nytimes.com. I'd also point out that there are some online articles I've found on TC or TheNextWeb, or AllThingsD that were quite good.

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Then again since when TechCrunch really practiced journalism?

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https://www.google.com/search?q=scamville

led to an entire industry being changed

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Nik, your articles would seem to be of a much higher standard (and, accordingly, posted with greater infrequency) than most others on TC.

Plain and simple, it seems that most of the time, most of TC’s homepage is not investigative, but sensationalized triviality.

Thanks for being a part of the exception.

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I respect you man. Not gonna argue with you. Just before the re-branding of Hotmail to Outlook, there was an article on TC, claiming it takes '14 seconds' for Gmail to load. And posts like that one are not rare on TC.

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[2009]

C'mon, you really don't think TC is well on its way to being Valleywag II? With articles like the recent, "Color CEO Bill Nguyen Checks Out Of Day-To-Day Operations..."?

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Pretty terrible of Techcrunch to have a favorable article about it: http://techcrunch.com/2012/04/26/fashion-retail-and-styling-...

That shit is poisonous to the startup sector, some people already think it's some kind of voodoo and this kind of thing doesn't help.

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I have many concerns about TechCrunch. They are the CNBC of the tech community (essentially a mouthpiece for those that pay). All we need now is an expose like http://www.youtube.com/watch?v=gMShFx5rThI

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class action lawsuit - dated oct 2011 though - http://www.scambook.com/blog/2011/10/justfab-com-justfabulou...

and some more people with similar stories:

http://www.consumeraffairs.com/online/justfab.html

http://www.scambook.com/company/view/146/JustFabcom

http://forum.purseblog.com/the-glass-slipper/justfab-com-sca...

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Two comments from a consumer Internet lawyer's perspective:

- Any company of any size in America has been sued in a consumer class action -- many reputable companies scores or even hundreds of times. Some lawyers make their living that way. Most of these suits involve highly subjective elements such as whether there was enough disclosure in the right place of the right type to avoid consumers being misled. (Inevitably, in any mass-market consumer business, some consumers will be misled -- not necessarily the sharpest tools in the drawer.)

- Don't ever believe the version of the facts portrayed in a plaintiffs' complaint (in any suit). Ours is an adversarial system, meaning that, as in politics, you can count on each side to overstate its version of reality about 10X or 100X so that it looks like they're inhabiting alternate universes.

JMHO.

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This reminds me, more than anything else, of "co-registration" scams where buying a legitimate product on e.g. Digital River would get your CC details sent over to a seedy e.g. "buy our coupon book emails for $9 a month recurring. DigitalRiver went through with it because they offered DR a ~$30 CPA where DRs per-transaction cut was generally below $2. A few other publicly traded companies whose product teams must have at least a room temperature IQ started doing it, wsaying it was aboveboard and value-adding with a straight face, until the FTC said WTF.

This just makes the coregistration first party.

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So basically this is the Columbia House[1] of shoes. That's not a scam, it's "a catch". When a consumer hears the pitch -- in the case of Columbia House, it was "get 8 CDs for 1 penny", in the case of JustFab it's "get any pair of shoes for $39" -- they should be asking what the catch is. An ungodly number of businesses involve catches to survive. How about cell phones? That new iPhone is only $200... but you have a 2 year contract and a $400 fee for leaving early.

Columbia House and the Columbia Record Club were around for 60 years. I doubt this model will ever go away or be deemed illegal.

[1] - http://en.wikipedia.org/wiki/Columbia_House

edit: hey, there's a wikipedia article about this model

http://en.wikipedia.org/wiki/Negative_option_billing

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8 cds for a penny is ridiculous, so there has to be a catch. $39.95 for a pair of shoes sounds quite reasonable.

Having to pay for a membership without performance is ridiculous.

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Columbia House was always upfront about the fact that your 8 CDs were merely the start of your membership, and they would send you a CD every month. If this site were at least sending you a pair of shoes you didn't want each month, you'd catch on a lot faster to the fact you're now part of a club.

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The difference, at least from my point of view, is that it is a realistic deal to find a pair of shoes for $39 dollars when I don't think it's reasonable to be able to buy X cds for a penny, for even X=1. The closer you get to the actual or expected value of what you're buying, the more unethical I feel it is, just because you're going to be tricking a greater number of people.

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If you bought into Columbia House in the 90s, as I did, the math worked out to ~$10 average for each CD over a year (the 8-for-a-penny plus the full-price ones), back when they were $16 each at the local store.

The promotional offer was an attention-catcher, but you still saved $4-6 per CD.

Just because you feel like "there must be a trick" doesn't mean there is a trick.

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The cleverness of Columbia's approach was that a certain percentage of people at the margin would keep (and pay full price for) CDs that they'd never have bothered to go out any buy on their own. Just like credit cards: Issuers hate people who pay the balance off every month and earn them zero interest -- but most consumers aren't quite that disciplined.

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The interesting question is whether the business model would be deemed illegal outright (highly unlikely). Under US law, at least, it's all about disclosure. False/misleading claims and deceptive business practices are usually what get companies in trouble. Those are subjective, to be sure.

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Biased answer but with some facts: I'm an investor in the company, and many here on HN know me personally. JustFab is not a scam, and I would not be involved with it if it was -- indeed it's a spectacular and very consumer friendly company that I'm proud to be a part of and I think will be a great success.

This comment thread has been quick to conclude that it is a scam, on some fairly sketchy evidence. While I don't dispute that the author's friends experience might be true, the fact that someone didn't notice that they were signing up for a subscription product is somewhat undermined by the fact it took them 8 months to realize the charge was appearing on their credit card. It's possibly not a person who pays attention to details.

If you want to understand the degree to which the company's customer base understands and is in love with the company, check out their facebook page and the consumer engagement. Here's a pair of shoes they posted for a sneak peak this week: https://www.facebook.com/photo.php?fbid=10152125991230508...

90 Comments, 4,800 likes in a few days -- for a commercial promotion. Read the comments on this or any of their threads -- no one is bitching about being scammed or not understanding they are members of a suscription site -- they LOVE it.

Justfab has hundreds of thousands of subscribers. A new subscriber who joined last month will, given churn rates, be likely to be a paying subscriber for more than two years. They will make purchases in more than four months in their first year. They understand the premise: a personal shopper has selected a boutique for them at the beginning of the month, all the products are great value, and their obligation is to come and check the boutique that has been prepared. If they don't want anything that month, they just click skip and they're done.

Now, many of you would clearly prefer a world where you would not have to log in to say "no thanks" -- and that world is available to you at the mall. Justfab shoes are quality identical to shoes twice their price at the mall, because they have crushed the traditional retailer and supply value chain. But to deliver the value that the customers want, they need to be very thoughtful about costs.

The #1 challenge in ecommerce is customer acquisition. Pretty much every company has to spend more to acquire a customer than they will make in margin on the first transaction, so you're dependent on a lifetime value of purchases to make money. The reason few outside of Amazon have been able to make this work, and even Amazon (and it's bought businesses like Zappos and Diapers) make very little money is because you keep having to reacquire the customers to get their business... think of people just clicking through those google ads at the top, whether they've been there before or not.

The idea of the subscription model is to get customers in a regular habit of checking in. When they commit to that, Justfab can in turn commit to pricing for the quality they provide that would be unheard of anywhere else. Justfab's typical customer isn't wealthy but likes to look good, and can't afford to just disregard price, and JF is the place they find a style/quality/affordability combination that works for them.

To be clear: as stated, JustFab is on track to do $100M+ in sales this year, from hundreds of thousands of subscribers who check in every month and understand exactly what they're getting into. The site has a very high net promoter score, a return rate that is less than half of Zappos.

As a general rule, if a customer signs up for a subscription product, doesn't check in and calls in because they got charged, we explain the system and try to keep them as a customer, but if they want a refund they will generally get it. People who don't call for 8 months I'm less sure about what the standard policy is.

If I go to the homepage, the biggest call to action for me (it's customized so not everyone will get the same) is "Buy one get one free sale happening now. JOIN TODAY." If they were trying to trick you, would the call to action say Join?

As has been pointed out, when you join by making your first purchase, the purchase page which others have linked has two key things:

* A very clear description that you are signing up for a subscription program. This says plainly and in bold type, in the same font size as everything else on the page: "If You Do Not Make A Purchase Or Skip The Month By The 5th, You'll Be Charged $39.95 For A Member Credit On The 6th. Each credit can be redeemed for any JustFab style on the site."

* A check box that says you accept the terms of VIP membership. This box is in a clear and large font, uses the word membership, and is not opt-out -- you have to proactively opt-in.

I don't see how a reasonable person could argue that this is a scam or a trick. Not only are the terms presented in plain english and large fonts, the site has a huge number of passionate and loyal customers.

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Josh,

I see your long answer, and, being a bit familiar with companies like Intelligent Beauty, I raise you a long list of questions. I don't expect you to answer them, but in my mind they can help separate "value-enhancing offer" for customers vs. "revenue-enhancing trick" for the company.

1.) How long does the average customer stay in the monthly program before cancelling?

2.) What percentage of customers opt-out on initial sign-up?

3.) On average, what % of the monthly subscription charged to the customer is ultimately spent on merchandise vs. becomes breakage?

4.) If you changed the text next to the check box to say, "You will be charged $39.95/month," do you think opt-in rates would change? If consumers aren't being misled, you should see little-to-no change in opt-in rates.

5) If I call to cancel after N months, do you refund the unused balance? Do I have to use it as a "store credit?" Do you offer me 100 cents on the dollar or some fraction thereof? Are consumers given incentives not to cancel or to convert the remaining unused balance into merchandise before cancelling?

6) Does the unused balance expire? If so, after how long?

7) Do you email customers to let them know they need to log in every month, or is it their responsibility to remember?

8) What portion of the company's revenues (and, more importantly, gross margin dollars) is in product sales vs. unused subscription dollars as breakage?

9) Why must consumers call customer service to cancel vs. doing it online? Is it difficult or time-consuming to reach customer service?

If this subscription is a value-add for customers, one would expect:

- A high portion of the charged dollars converting into merchandise sales vs. becoming breakage. Consumers rarely find it enjoyable to be charged $39.95 and not to get anything for it (even Columbia House sent you the CDs at the same time they collect the money; you get the money first, and I have to remember to come to you to get the shoes).

- A reasonable % of customers opting-out at initial purchase. If 99% opt in, your disclosure is ineffective, as it beggars belief that people are dying to pay $39.95 a month. Or, if you change the language of the text box as I suggest above, no observed difference in opt-in rates.

- A low churn rate in the % of consumers who call to cancel once subscribed.

- A consumer-friendly policy that allows subscribers who cancel to receive 100% on the dollar for the unused balance either in cash or store credit, at their option.

- The majority of the revenues and gross margin dollars come from shoe sales, not subscription fees.

- Easy, online cancellation. Shouldn't it be as easy to get out of the program as to get into it? If not, why not?

[Edit: formatting, again]

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I wouldn't call it a scam, but it's very cleverly worded and benefits from (or takes advantage of) impulsive or rushed buys. Things like "complete checkout" but not "and join" on the button for example. It's more a matter of ethics.

Asked the wife if she heard of the site and she recounted a tale similar to the OP, albeit not spanning 8 months, only 2-3. And as I had assumed, was able to get shoes for the months she was charged for before she cancelled...which is cool. But, again, it wasn't overly obvious to her either. And my wife is a smart (and CHEAP) woman who would notice an unobsured message that she'd be billed once a month.

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It sounds like a good business that's also running some unethical revenue-enhancing recurring billing scam. Take away the scam and revenue goes down.

Where's the "every month while you're a member" in that text?

"JOIN TODAY" does not imply subscription with recurring charges, just like "sign up" or "create an account" doesn't.

"there's a box you have to click indicating that you accept the terms" - perhaps that gets you off the hook legally, but not ethically.

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If you're going to do e-commerce different than everyone else you better be clear about it and you're not. Companies like JustFab are the reason people like my mother doesn't want to user her credit card online. You aren't just screwing the consumer, but the rest of the industry as well. And you're doing it to people who "can't afford to just disregard price".

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Yes. This is called "negative option billing" (http://en.wikipedia.org/wiki/Negative_option_billing). We (at BillGuard) see many people that fall into these kind of shady business models. It's pretty amazing that this is still legal and VCs are throwing money at it.

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It probably tells you more about the VCs who invested rather than the company. The opportunity cost of where to deploy their money is likely higher these days and a VC who is investing in a fairly scam-ridden business is probably looking to capitalize on a quick exit.

In this case, everyone knows the jig may be up quickly, so they're looking to expand quickly and leave before the known end.

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You would think that if any page explained how the program worked, it would be this one: http://www.justfab.com/how-justfab-works.htm

but I didn't find a single mention of membership fees on this page.

I'd heard a lot about this company, but had no idea what they were until now. Disgusting.

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Could you ask your girlfriend how she didn't notice a large recurring charge for 8 months? I would like to know because that is a puzzle I deal with it work.

We sell a software product and service on a subscription basis (not hidden like justfab...it is clear to the customer that they are buying a subscription--the product is kind of pointless without the subscription).

Occasionally I find someone who bought years ago, and apparently stopped using the product. At least, I can tell that they have not obtained updates through our update servers for a long time. Yet they do not cancel the service. It just goes on re-billing them a few bucks a month, every month.

I'm reluctant to cancel their accounts, because maybe they are obtaining updates some other way, such as downloading the latest version and installing it periodically, and their firewall is blocking the update checks. But I am always conflicted, because it could actually be someone that really just doesn't look at their credit card statement, and has no idea he is still paying us years after they stopped using our product.

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I've encountered the same thing in another subscription business where there was system data showing the customer hadn't used it in a long time. My personal (not legal) opinion is that, assuming these account for an immaterial percentage of revenue, the safe approach is to go ahead and cancel them. The reason is that to do otherwise would make the company look really ugly if ever questioned by a state AG or the FTC or in a class action suit. It's tough to say "Yes, we had computer records clearly showing the customer hadn't logged in for 16 months but kept charging her each month anyway because she never said stop." Folks whose jobs entail protecting consumers (even against themselves) don't like hearing that.

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I realize the person in this example is the OP's girlfriend, but in my experience, the most common explanation is third-party payers. (For example, kid off at college, credit card bills get paid by parents or grandparents. Or corporate card used for many office-type overhead expenses where the recurring charge is so small, relatively speaking, it falls beneath the scope of any audits.)

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Thanks for posting this. This sounds quite the shady venture.

Obviously, the next step for you, at the very least, is disputing the charges with the card company, seeing that the company is unwilling to refund the fees.

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It may be harder than you think to get the credit card company to stop the charges.

http://uncrunched.com/2012/08/26/my-undead-credit-card/

Like it or not they have a good business model.

And the VCs probably don't care if they're ethical, as long as they get a good ROI.

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Some VC information on this page if you're interested.

http://www.crunchbase.com/company/justfabulous

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Yeah, one of those investor entries is bizarre... Basically, a random set of characters:

Website pcjyyvafopee.com Blog pcjyyvafopee.com Twitter @mpizldqpida Phone 91857712122 Email juxukt@yhjfkm.com Employees Founded 8/95 Description tPdwOyyKkVKVskrYrIv

http://www.crunchbase.com/financial-organization/technology-...

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FWIW, I've personally worked with partners at a couple of these funds, as well as some of the senior execs at the parent company, and they are stand-up guys, not con artists. Aggressive direct marketing isn't a crime (have you ever watched TV infomercials?), although there are certainly gray areas where disclosure could be clearer, etc.

IMHO the most important consideration is that the more aggressive any company is about acquiring new customers under this kind of model, the more liberal it should be about returns/refunds/cancellations. There were many lessons learned a couple years ago when discount-membership checkout programs (WebLoyalty, Affinion, Vertrue) and their e-commerce partners (Fandango) got the smackdown from various state AGs. There's enough similarity here to warrant paying close attention and making sure to stay on the right side of a thin line. Here's example coverage of the previous controversy:

http://www.zippycart.com/ecommerce-news/1165-affinion-vertru...

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As an aside, one of the investors is listed as mpizldqpida - what kind of name is that?

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If you say his name backwards, you send him back to his home dimension.

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<Series A> Gilt Groupe Investor Matrix Partners Leads $33M Round In Fashion Retail And Styling Platform JustFabulous — JustFabulous, a fashion retail and styling platform, has raised $33 million in <Series A> funding lead by Matrix Partners (who also invested in flash sales giant Gilt Groupe)[1]

The <Series B> Round was led by new investor Rho Ventures, with participation from existing backers Matrix Partners, Technology Crossover Ventures (TCV) and Intelligent Beauty, JustFab’s parent company, which incubated and launched the startup in 2010. The total amount of money now raised by JustFab is $139 million.[2]

______________

From:

[1] http://www.techmeme.com/110921/p29#a110921p29

[2] http://techcrunch.com/2012/07/26/justfab-just-nabbed-another...

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VCs investing in con artists are scum.

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Charge-backs hurt their credit score, I believe, so it's going to hurt them well and proper, if it keeps happening.

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p.p.s. Anyone could just simply google "justfab scam" to see how many others have been victimized. I'm surprised such large scale scam got unnoticed.

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My girlfriend had almost the exact same experience, such a scam. I was outraged when I looked through the site a year ago. In her opinion the shoes she did get we'rent even good quality, she gave them away. And when she called about the $40 charge that she knew nothing about, they told her she didn't want to cancel. When she asked why not, she was told they'd be getting some really cute shoes in next month and wouldn't want to miss out. Even after getting out of it, she was still called 3 times in future months to ask why she was unhappy with her purchase/and the membership she never knowingly signed up for. Can't stand JustFab or companies like it.

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No idea if this is a common experience but if you want a refund, just call your credit card company and do a chargeback...

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Shoedazzle pioneered this but had to get rid of the subscription and flip to a per-item charge because of scam complains.

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Similar sites like ShoeDazzle recently removed the monthly subscription model so they will likely follow given enough complaints.

Note that as someone pointed out below, the billing provides a credit so theoretically your girlfriend has $320 in credit at JustFab and she can go buy some one-price-fits all items which makes no sense to me at all (t-shirt at $39.95 wtf?).

VC investments in LA tend to leverage the celebrity power of the backers since that gives access to a large audience and guarantees marketing/press coverage right off the bat.

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Assuming for the sake of discussion that there are unlawful deceptive practices going on, either this company isn't getting the right legal counsel or is choosing to ignore it. Either way that sounds like bad news.

There are plenty of legitimate businesses operating on continuity models (monthly charge, keep sending you stuff until you cancel), but they are regulated at both state and federal levels, and many states have laws with very specific requirements about what must be disclosed and how (e.g., CLEAR AND CONSPICUOUS disclosure on the checkout page, not buried in the site TOS, confirmation by e-mail, easy-to-find link to cancel, etc.). I'm not going to give an opinion on this particular site, but we did a meticulous 50-state review at eHarmony for just this reason, to head off any claims that consumers were somehow being misled about recurring charges. It has to be updated as states change or adopt new laws. The FTC also has jurisdiction but it's much easier to get the attention of state regulators and especially class action plaintiffs' lawyers.

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From reading the sign-up page, it sounds like each month you are billed you receive a 'credit' that can be used to purchase an item from the site.

To me, the responsible thing to do would send an email to customers that have been billed for the month but have no yet redeemed their credit near the end of the month. Let them know they have a credit and suggest some items that they could purchase with the credit.

At least that would give information to the customer so they are more aware of what's going on sooner rather than later and people may feel less that they are being 'scammed' because the site was actually trying to help them get what they are paying for.

However, I agree that the signup page should make it more clear that it's a recurring charge. In fact, I would support a rule/regulation that required a user check a box that specifically states, "I understand that I am agreeing to a recurring monthly charge of $xx.xx".

I know that I'd be pretty pissed if I saw a recurring charge show up that I wasn't expecting.

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So I had some pretty angry thoughts after hearing this. I mean this is seriously unethical and immoral and I'll be extremely surprised if this approach stays after what seems to be an increasing amount of public pressure.

The fact some well known VC's pile a ton of money into this does not surprise me one bit. The company is making money and to be fair they do explain it pretty clearly IF YOU GO LOOKING. What they're doing isn't illegal. However, more should and could be done online to protect people from bad practices such as these.

CC companies do offer a form of protection through chargebacks, and over here in the UK whenever I have needed to dispute a transaction the mere mention of 'chargeback' usually kicks the retailer into shape.

One company I have HUGE respect for is TeamTreehouse, I mean look how they manage a subscription service[1]. Best practice indeed.

[1] http://cl.ly/image/0u0B1t313e3P

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There are hundreds of websites that operate the same way. JustFab's membership fee is higher than any other that I've heard of, but there are tons of websites that are built around the idea that most people who shop online don't think to read the fine print. While in most cases the burden of responsibility should fall on the buyer, I think it's perfectly reasonable for a person to assume that when they buy a product from an online store, that they aren't going to be automatically enrolled in a membership program. I really hope that in the near future, people who run such businesses will start getting thrown in prison where they belong.

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I sent this link to my brother who is an lawyer / attorney in Germany for intelectual property and competition/ antitrust law. Apparently justfab.de operates under German law. He said if another shoe retailer would be his client, there might be good chances to give them a really good kicking. I jokingly said, he should ask Zalando. But he refused and said a lawyer is not allowed to ask people to be his client. So if you run a shoe e-commerce site under German law and want to see this scam go out of business, you should NOT ask http://rechtsanwalt-metzler.de/

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This is classic case of deceptive "negative option billing" (http://en.wikipedia.org/wiki/Negative_option_billing). At BillGuard (http://billguard.com) we see 10's of thousands of people fall into these kind of shady business models and its our mission to end such deception and financial abuse. It's pretty amazing that this is still legal and that VCs are throwing money at it. Even the famed post transaction scam by Web Loyalty Group was backed by a very prominent VC. Money sells.

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The page clearly says you'll be charged every month. It charges you and applies a credit, implying you can use the credit any time. It doesn't charge you and then not let you use the money.

Is it misleading? Yeah slightly, except it says exactly what will happen with a bright pink numbered list. Did they create the program hoping some people will forget about it? Yes definitely. But, this a common tactic employed by any company with a monthly subscription.

All this outrage is a little ridiculous.

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No, it's not ridiculous.

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Clearly? No. It's buried in the last point in the second list. It's pretty scammy. Sorry, but porn sites aren't this deceptive. Hell, they talk about joining the membership, and go on to talk about how with the membership, you can buy things for 39.95. No where does it talk about credits or even implying that you can use the credits at any time.

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Why wouldn't a scam like that be worth a $76m investment? The business is obviously very lucrative.

If a business is profitable in the hundreds of millions, as long as it is borderline legal, someone will invest in it. Thats the sad reality of how this stuff works.

Though it is disappointing that Business Insider didn't take a few seconds to make an attempt at journalistic integrity, and do some research here rather than once again simply regurgitating a press release as some fluff piece.

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This is the way most vertical ecommerce startups are operating. My friend just got a charge from a site that she bought a promotional item and turns out they're a subscriptiOn service and if you didn't sign in and check skip this month, they'll bill you without shipping you an actual good.

Which also brings up a thought, remember that there was a used one credit card number thing a whole back, I'm betting this will get popular soon enough with all these things happening.

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In Poland they couldn't take any money for subscription, because all online transactions are done with instant wire transfer, not with credit cards. Buyer has to approve all transactions with sms code. You can define periodic transfers, but not by accident, and you can always stop them.

There are companies (like pobieraczek.pl) that tried this scam but they had to take money through courts, and courts decided it was scam and buyers didn't have to pay.

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Normally you only see these types of action pages on adult sites (and Zynga games).

All the important info is far away from the button as possible.

Page is 'technically' letting you know that you're signing up for a subscription, yet the button only says "Complete Checkout"...nothing about 'Signing Up'.

They went through some verbal hoops to not use terms like 'subscription', '$39.95 a month' and to keep the '$39.95' away from the word 'month'.

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I thought Groupon only got 30M...

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Could you buy something and cancel your account immediately afterwards, so you just pay once, log in, cancel account, and that's it?

Don't get me wrong, that does not make this right. It's just, I wonder, if their business model is based on these "zombie subscription fees" (as reitzensteinm so aptly called them) would they maybe lose money on actual, singular purchases? (or an unsustainably small profit margin)

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I'd also like to note that you can't cancel online; you have to call them. There's a button to press to cancel, but it just takes you to a page asking you to call them.

If you're intimidated by the thought of a CSR who will try to argue you out of cancelling, it gets easier to click "Skip this month" until you forget, and get charged.

It's a very dodgy business model.

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It is a Netflix for shoes. The difference is that Netflix do not mention their price without mentioning 'per month', while JustFab never mention it.

I went through the checkout process. If you were introduced to this site as a cheap shoe store, rather than as a 'netflix for shoes', you could easily be mislead.

They are definitely in the grey area.

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> It kept me wonder why a company with very questionable (I will try to avoid using the word "fraudulent") business model was able to raise big money

You called them a scam company in the title and the body, so I am curious why the reluctance to use the word fraudulent too. What is the subtle distinction that I'm missing?

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I really don't understand how companies are able to do this, based on how stringent credit card processors are when it comes to chargebacks. With this type of misleading selling tactics i would expect JustFab to have chargebacks well above acceptable standarts of CC processors.

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Right. Let's consider the possible hypothesis that the customers like the service and know what they're getting into, and thus chargebacks aren't above average (which is the actual case with this company.)

Chargebacks don't lie, not at this scale. If customers were being scammed, they wouldn't be able to process cards.

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Some of their investors don't seem very credible. Obviously investors they spoke to picked up on the fact that many of their customers complain about them. According to ScamBook "10,000 people viewed their article about 'JustFab Scam".

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checkout the wikipedia page: http://en.wikipedia.org/wiki/JustFab

The criticisms are mentions as well as a lawsuit. Also note that this HN page is given as a source.

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A twitter search on JustFab also shows they have hired some spammers to pump their site. Lots of tweets like this: "Dеаr guуs, whеn will уоu lеаrn? Girls сan nеvеr hаve tоo manу shоes! Sincеrеly, Sign uр аt JustFab & stаrt buуin"

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It does mention on their site that if you get charged the 39.95, you will get a member credit, which you can redeem for one style later on. So at least they are not just stealing.

Was your girlfriend able to redeem her credits?

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If this is such a large scale problem, how do they still have merchant accounts? I would expect they would be flooded with reversals from the CC companies and banks.

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While this is a bit scammy, I couldn't get past the part where she didn't notice this for 8 months. Come on people. Do a budget. Stop being stupid with your money.

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It doesn't seem out of the question that a funder could be just as dishonest as this company.

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Frank & oak has a similar confusing model on their hunt club

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As crazy as this is, this is an old technique from the adult video (Porn) industry. Recurring charges that also can't be disputed with either the company or the issuing credit card company.

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Revenue is king. Ethics are optional.

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Because the scam works.

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Worked for Zynga!

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This sounds like the book of the month or CD of the month scams we would get in the postal mail. The first month is free and you buy discounted books or CDs but after that each month you buy one or they charge your credit card each month. Same thing but a web site.

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There's a big public one of these called Groupon too...

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That was a bit shady if you're buying stock, but I've never had any trouble buying a groupon, getting a groupon redeemed, or getting one refunded. Overall I think Groupon is pretty legit for its customers, and businesses actually get paid (whether or not they can support themselves with the kind of clients Groupon brings in is another issue).

If you have to read mice type to find out the full T&C, there's something less than reputable about how you do business.

EDIT: Just looked at the FAQ on the site, they are up front with their 2 options. The shoes are $39.95 if you sign up for the VIP program, otherwise they're full price. So if you want the sale price, you've got to sign up for VIP. http://www.justfab.com/faq.htm#Q02

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This looks pretty clear in the FAQ on their website. Every month that you're a member, you have the option to buy one of that month's items at a discounted price. If you don't take that option, you get a credit to buy additional items in subsequent months. If you don't want to sign up for the membership then you can select that option at checkout (and pay more).

Did it take your girlfriend 8 months to notice this recurring charge on her statement?

I have a story about forgetting to cancel my online newspaper subscription. Look for that on HN soon!

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Riiiight. So I should have to scour FAQ pages and TOSs in order to disambiguate that this is an opt-out-only membership-type club with recurring charges? Go to their home page and tell me it doesn't look like another zappos. Does zappos continually charge me if I don't come back? No. Then click on "How JustFab works"...does it say ANYTHING about recurring membership fees? No, it makes the site seem to be just some kind customized shopping service.

JustFab isn't going to help disambiguate their business model up front because that would hurt their bottom line.

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My girlfriend was studying in the US at the time, she didn't have a SSN, she was using a visa card issued by the china construction bank, her father paid the bill every month and didn't notice anything unusual. She finished her study and returned back to China last month, only then did she find out the $39.95 charge for the last eight months. Basically JustFab robbed her $320 for nothing.

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If your newspaper had a skeezy way of disguising a subscription as a purchase these things might be similar.

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