Legal Review: Getting Strict With Negative Option Marketing1 Mar, 2009 By: Jeffrey D. Knowles, Venable LLP’s Advertising, Ellen T. Berge Response
Lured by online free trial offers for skin creams, make-up, weight-loss supplements and other products, consumers have apparently been unable to answer one fundamental question: "What's the catch?" Federal and state regulators are coming to the rescue.
Jeffrey D. Knowles
In February, the Federal Trade Commission's (FTC) Division of Enforcement issued a set of five principles for making online "negative option" offers — offers where the consumer's failure to reject or cancel an offer signals consent to be charged. The FTC principles focus on making adequate disclosures, obtaining consent and providing effective cancellation procedures. This announcement followed the FTC reaching multi-million dollar settlements with two dietary supplement marketers that failed to make adequate disclosures about "free" sample offers.
Meanwhile, the Washington state legislature is considering a bill that, among other things, would require marketers to obtain a consumer's signature indicating agreement to a negative option offer.
Ellen T. Berge
Negative option marketing can take a variety of forms. In free-trial offers, the consumer receives an introductory supply of a product for free and must cancel or return the goods by the end of the free-trial period to avoid being charged for the product. In addition, the negative option category also includes continuity plans, such as auto-ship programs and membership clubs; automatic subscription renewals; and pre-notification plans, where sellers send periodic notices offering goods and consumers must affirmatively reject the goods to avoid charges.
The FTC designed these principles to address certain problematic aspects of the model. The principles are consistent with existing FTC rules and standards.
Principle 1: Marketers should disclose the material terms of the offer in an understandable manner. The negative option guidelines suggest that to comply with Section 5 of the FTC Act, marketers of negative option plans should disclose, at a minimum: the existence of the negative option offer; the offer's total cost; the fact that a consumer's billing information will be transferred to a third party (if applicable); and how to cancel the offer.
Principle 2: Marketers should make the appearance of disclosures clear and conspicuous. Disclosures should be placed on a Web page in a size, color and location where consumers are likely to see them.
Principle 3: Marketers should disclose the offer's material terms before consumers incur a financial obligation. Placement above any button a consumer would click to submit an order is suggested.
Principle 4: Marketers should obtain consumers' affirmative consent to the offer. Marketers should not rely on pre-checked boxes as evidence of consent.
Principle 5: Marketers should not impede the effective operation of promised cancellation procedures. Marketers should not hang up on consumers who call to cancel, place them on hold for an unreasonably long time or misrepresent the reasons for delays in processing cancellation requests.
FTC staff also recommended further research in the areas of online consumer behavior, the making of effective negative option disclosures on mobile devices, and the value of follow-up reminders.
While these guidelines apply specifically to online offers, the legislation in Washington state would apply to all negative option offers. The bill imposes certain disclosure requirements, which are consistent with some negative option disclosures currently in the FTC's Telemarketing Sales Rule but more extensive in other respects.
The Washington bill also requires that the marketer obtain the consumer's "express agreement" — a written or electronic typed signature — to be charged. Without "express agreement," the proposed law would allow the consumer to keep the goods or services as gifts.
If the offer involves a free trial and the use of pre-acquired account information (card-on-file information or account information obtained earlier in the transaction), the bill requires sellers to give at least five days notice before submitting charges for payment. It does not specify how notice should be given, and nor does it indicate whether notice also needs to be given before each subsequent shipment in recurring billing situations.
Jeffrey D. Knowles is chair of the advertising, marketing and new media practice at Washington, D.C.-based Venable. Ellen T. Berge is an attorney at the firm specializing in advertising and marketing law. They can be reached at (202) 344-4000.