Way back in September (in a galaxy far far away, or so it now seems), I blogged about a case brought by the FTC against several companies and individuals operating an alleged online subscription scam, involving personal care products and dietary supplements for skincare and weight loss. Defendants offered "trials" of their products for low shipping and handling fees but then enrolled consumers into a continuity plan without their knowledge or consent, automatically charging consumers the full price for the products at the end of the trial period and on an ongoing basis. The FTC filed a complaint in district court alleging violations of Section 5 of the FTC Act, the Restore Online Shoppers’ Confidence Act (ROSCA), and the Electronic Fund Transfer Act. The defendants agreed to a court-ordered preliminary injunction.
Now, the operators of these subscription programs have settled with the FTC. The orders against the two groups of defendants bar them from negative option marketing, require them to get consumers’ consent before billing them, and impose serious financial judgments: $74.5 million against one group of defendants and $67 million against the other. Although the monetary judgments in both orders are partially suspended, the defendants are required to turn over over $4 million, which may be used by the FTC to provide refunds to defrauded consumers.
Although it is evident that, as alleged, defendants’ actions were beyond the pale, the orders they were required to sign to settle the case are still instructive for other marketers engaged in any kind of negative option marketing. The orders contain the following provisions of note:
First, the definition of negative option marketing: "an offer or agreement to sell or provide any good or service, a provision under which the consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement is interpreted by the seller or provider as acceptance or continuing acceptance of the offer." In other words, a free trial that automatically converts to a for-pay subscription unless the consumers cancels before the end of the free trial is a form of negative option marketing.
Second, offering a good or service on a “free,” “sample,” “bonus,” “gift,” “no obligation,” “discounted” basis, or with "words of similar import," can denote or imply the absence of an obligation on the part of the recipient of the offer. In other words, many common marketing terms can create a consumer takeaway that the marketer is offering something without strings attached.
Third, failing to tell consumers all material information in a clear and conspicuous manner before charging their cards is prohibited, and the following information is considered "material": the total cost or price of the good or service; the amount, timing, and manner of charging all fees, charges or other amounts that a consumer will be charged or billed (including the date of the charge, and whether it will be a credit card or checking account charge); the mechanism for consumers to stop a charge; and all important terms and conditions of any refund and cancellation policy.
Yet another reminder from the FTC that, as stated by Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, in the FTC’s press release: “The FTC will continue to go after companies that offer supposedly ‘free’ trial offers, but hide the real terms and conditions in the fine print.” And don’t forget the state enforcement actions too!