FTC To Review Its Negative Option Rules. It’s About Time!

No marketing method has incurred the wrath of the Federal Trade Commission, with more dire consequences (asset freezes, receiverships, ruinous monetary judgments) to the targets of its wrath, than continuity, subscription or auto-renewal plans containing a “negative option” feature (under which the consumer agrees in advance to recurring charges for a product or service until he cancels). The issue with such offers is the adequacy of disclosure of the existence of a negative option, the length of any trial period (free or otherwise), the frequency and amount of the recurring charge, the right to cancel without incurring more charges, and the method to cancel. The FTC has shut down dozens of businesses, seizing and forcing the disgorgement of their (and their owners’) assets, for failing to disclose a negative option, or failing to do so effectively in its judgment, thus harming consumers who did not realize they were enrolling in an auto-renewal plan and did not knowingly authorize the recurring charges. The FTC puts deceptive negative options in the “fraud” category in its hierarchy of enforcement priorities, and policing them lies at the heart of its fraud enforcement program.

The FTC’s authority to prevent deceptive negative option marketing rests on Section 5 of the FTC Act, which prohibits unfair and deceptive business conduct, and on the “Restore Online Shoppers’ Confidence Act” (“ROSCA).  ROSCA codifies the principle –  articulated in FTC orders, guidance documents and court decisions – that for a negative option offer to be lawful, all material terms, including recurring charges, must be “clearly and conspicuously” disclosed before the consumer submits his billing information; the consumer must give his express informed consent to the offer; and it must be easy to cancel. 

While embedding in statute the ban on “unclear” and “inconspicuous” negative option sales, ROSCA does not define the meaning of “clear and conspicuous” but leaves that task to the FTC.  According to the agency, for a disclosure to be conspicuous, it must be “unavoidable.” What, exactly, does “unavoidable” mean?  Clearly it does not mean burying the negative option terms on a hyperlinked “Terms & Conditions” page, separate from the website, or placing them at the bottom of the checkout page, “below the fold” (requiring scrolling down to see them) and far from the order button and credit card fields.  But what about negative option terms that are placed in the vicinity of the order button and credit card fields and are even disclosed multiple times?  Are those disclosures “conspicuous enough” for the FTC?  Do they pass the “unavoidability” test?               

The FTC’s answer has been no.  In FTC v. One Technologies, LP, for example, an action against a provider of credit monitoring services, the FTC alleged that the terms of a negative option offer, including a recurring monthly charge, were not adequately disclosed even though they were presented on several pages of the website: at the top of the home page (“Free 7 Day Trial when you order your 3 Free Credit Scores.  Membership is then just $24.95 per month until you call to cancel.”); on an inside page, via a link to “Offer Details” which the consumer agreed to by clicking a button to continue the enrollment process; and on the signup page in an “Offer Details” box adjacent to the credit card fields and above the order button.

Despite being provided multiple times, well above the fold and viewable, One Technologies’ negative option disclosures weren’t up to snuff, according to the FTC, because they weren’t big enough or bright enough or prominently positioned enough.  Because they weren’t “enough” of what the FTC wanted, One Technologies was required to pay $22 million to settle. The moral of the case: not disclosing negative option terms in the exact color, font, type size, and place desired by the FTC can be legally perilous and expensive indeed.  

The vagueness of the “clear and conspicuous” standard, and the subjectivity with which the FTC applies it in the “grey zone” of negative option enforcement – where the adequacy of disclosure can be reasonably argued both ways and the FTC’s use of its draconian enforcement powers, including asset freezes and punitive settlements, is highly problematic – are fair targets for criticism.  Fortunately, the FTC has now provided a forum for marketers to voice that criticism to it directly.  Last month, the agency announced that it will be conducting a review of its regulation of negative option marketing, including subscription, continuity, auto-renewal and trial conversion plans that are presently regulated under Section 5 and ROSCA, and prenotification plans (e.g., book-of-the-month clubs) that are covered by its existing Negative Option Rule. The FTC is inviting public comment on a host of questions, including this one: “Should the Rule define ‘clearly and conspicuously’, given that it requires marketers to make certain disclosures clearly and conspicuously? If so, why, and how? If not, why not?” 16 CFR Part 425         

While all the questions on which the notice seeks public input are important, none is more urgent than the need for the FTC to decide that the correct answer to this question is yes!  It then must respond by promulgating clear, articulable, concrete guidance on the meaning and application of the “clear and conspicuous” standard as it applies to negative option disclosures, and then adhere scrupulously to its own guidance in future enforcement actions.  Never again should a company and its owners, like One Technologies, be so severely sanctioned based on a subjective and highly debatable determination by the FTC that its negative option disclosures were not “adequate” to prevent consumer deception.

Talking about Direct Response, FTC, Online Marketing

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