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Legal Review: Online 'Mystery Charges' Under Investigation

1 Jul, 2009 By: Jeffrey D. Knowles, Venable LLP’s Advertising, Ellen T. Berge Response

Just about every retail business uses upsells to convince consumers to spend more money. Fast-food restaurants ask customers if they want to "make it a combo." Toy stores ask customers if they need batteries. As a result, consumers spend more money than they otherwise would have spent if no one ever asked if they wanted to add fries and a drink.

 Jeffrey D. Knowles
Jeffrey D. Knowles

These days, it is rare to complete an online purchase without being asked to buy something else. The online upsell is an easy and lucrative transaction. The customer has already provided credit card information and can spend more — often with just one click of the mouse. Even if the upsell involves the sale of a third-party's products or services, the merchant will simply transfer the customer's contact and billing information.

Ellen T. Berge
Ellen T. Berge

Not surprisingly, consumers have logged thousands of complaints with the Better Business Bureau (BBB) and other authorities relating to unauthorized credit card charges and online upsells. In many cases, upsell offers give consumers a trial period in a membership or club program that continues with monthly recurring charges if the consumer does not take certain steps to cancel. If disclosures about the material terms of the offer are not made clear, consumers believe they are merely agreeing to try something for free without further commitment.

Some marketers obscure the distinction between the upsell offer and the initial transaction, so that consumers believe they cannot complete the initial transaction without accepting the upsell offer.

Lawmakers are now closely scrutinizing online upsells. On May 28, Sen. John D. (Jay) Rockefeller IV (D-WV) — chairman of the U.S. Senate Committee on Commerce, Science and Transportation — announced a committee investigation into online upselling practices that generate thousands of "mysterious monthly charges" to consumer credit cards. The committee sent investigative demands to two companies that offer monthly membership programs as post-transaction upsells on well-known movie ticket and travel Web sites.

The Commerce Committee letters note that consumers enroll in the programs simply by clicking a "yes" button and providing an E-mail address. In other words, consumers are not asked to re-type credit card information provided during the initial transaction, even though the seller of the membership program is a different party.

The practice of transferring credit card information from one marketer to another marketer is common in upsell and other transactions, typically referred to as card-on-file transactions. In contexts other than online sales, the FTC has challenged the transfer of credit card information without the customer's knowledge or consent as a violation of Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. In the telemarketing industry, the transfer of credit card information has been uniformly condemned.

A possible result of the Commerce Committee investigation could be new laws aimed at blocking the unauthorized transfer of credit card information between merchants as a means of preventing unwanted charges. The investigative requests issued by the Commerce Committee ask for information directly related to transferring consumer credit card or debit card account information from the merchant who initially collected this information to the membership service provider. The letters also request lists of every E-commerce retailer with whom the membership service providers have entered into business relationships to market the online upsells.

Lawmakers may take the view that the retailer and the membership service provider are jointly liable for deceptively luring consumers to enroll in the upsell program. This view corresponds to an FTC theory that an entity that provides substantial assistance to a company engaged in marketing programs that violate Section 5 of the FTC Act or the FTC's trade regulations is, itself, engaged in unfair, deceptive acts and practices. This "substantial assistance" doctrine is expressly embodied in the FTC's Telemarketing Sales Rule.

While the Senate Commerce Committee is not typically as active in investigations as other committees, the investigation into "mystery charges" generated by online upsells could significantly change the DR industry and marketing relationships among electronic retailers.

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.

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