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Negative Option Marketers Must Comply With Applicable State Laws

7 May, 2013 By: Marc Roth


Most marketers that sell products or services that either automatically renew or are delivered on a continuous basis until a consumer cancels are well aware of the federal laws that apply to these marketing plans. But marketers cannot overlook the various state laws that govern these plans, which in many respects place greater requirements on sellers.

At the federal level, the Telemarketing Sales Rule (TSR) and the Restore Online Shoppers Confidence Act (ROSCA, or commonly referred to as the Rockefeller bill) place certain disclosure and consent requirements on sellers of negative option programs. Both require sellers of a negative option plan to clearly and conspicuously disclose the material terms of the offer, such as the fact that the consumer’s account will be charged unless the consumer takes an affirmative action to cancel, a description of the charges, any minimum purchase obligation, the dates or frequency of the charges, and how to cancel. In addition, a seller must obtain a consumer’s express affirmative consent to the transaction.

It is important to note that the TSR and ROSCA apply to negative option and continuity offers that do not fall squarely within the purview of the Federal Trade Commission’s (FTC) Trade Regulation Rule Concerning the Use of Pre-Notification Negative Plans. That rule has a very narrow focus, governing only marketing plans whereby consumers receive advance notice of an intended product shipment and the option to reject the shipment or choose an alternative product within a specified time period.

The TSR requires sellers to make the above disclosures prior to collecting a consumer’s payment information on a telephone sale. Similarly, ROSCA applies to negative option programs offered online. However, ROSCA specifically prohibits the transfer of consumer account information from one merchant to another, and thus an upsell program offered by a merchant other than the original seller must collect a consumer’s full account information.

Often overlooked are state laws that govern these offers, which place more stringent requirements on sellers. Whereas federal laws are generally silent on what constitutes a clear and conspicuous disclosure, some state laws are more particular. For example, California and Oregon statutes require that such disclosures be presented “in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks, in a manner that clearly calls attention to the language.” Failure to comply with these requirements exposes marketers to not only regulatory enforcement actions, but to consumer class actions, which can be significantly more costly and distracting to a business.

California and Oregon also require that sellers provide consumers with an acknowledgement of the transaction in a manner that may be retained by the consumer. Further, some states require sellers that offer negative option plans that renew for a specified time period (e.g., more than 180 days) to send consumers a reminder notice that the negative option plan will automatically renew unless the consumer contacts the seller to cancel. While these laws generally require these notices be sent by postal mail, some allow them to be sent electronically (E-mail) if the transaction was conducted electronically (online) or the consumer expressly agreed to receive notices by these means.

It is imperative to monitor developments in this area, as new laws are regularly introduced and enacted by legislators seeking to protect their citizens from abuses by unscrupulous marketers.

Marc Roth is a partner in the Advertising, Marketing and Media division of Manatt Phelps & Phillips LLP in New York. He can be reached at mroth@manatt.com.
 


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