Online marketing plans and sales arrangements that allow consumers to consent in advance to receive and pay for goods or services in the future on a continuing or periodic basis are convenient and beneficial to both consumers and marketers. While these programs offer consumers the ability to try various programs and the opportunity to obtain significant discounts, at the same time, their ease of enrollment and lack of usage has created a storm of controversy. With recent regulatory actions and proposed legislative changes' continued use of advanced consent plans on the Internet requires awareness of all legal developments.
Post Transaction Marketing, Data Pass and Free-to-Pay Conversions
It is important to understand the relationship between the consumer, the familiar retailer's website where the consumer made his or her purchase and the third-party offer that is presented to the consumer as an "upsell." In the online context, typically a third-party offer comes as online consumers are completing their purchases on familiar retailers' website. After consumers have completed inputting their billing information into a "check out" purchase page on an intended e-retailer's site, but before they have completed confirmation of the transaction, unrequested third-party companies will attempt to enroll consumers in membership clubs offer discounts or other services. Due to the positioning of these offers in the purchase process, they are commonly referred to as "upsells."
Many of these offers were done in a way that consumers do not have to enter their billing information again to accept third-party offers. As a result of so-called "data pass" or "card-on-file" arrangements between retailers and the third-party companies, online consumers' credit card or debit card account numbers can be automatically transferred from the websites where the consumers are shopping to the third-party companies.
Consumers enrolled are automatically charged a monthly fee after a free trial period unless they expressly cancel. The membership programs offered by the third parties are generally free for the first 30 days. This practice is also known as "free-to-pay conversion." Online consumers will be charged on a monthly basis after the 30-day period unless they actively opt out.
Senator Rockefeller Releases Investigative Report, Requests Information from Credit Card Companies and issues a Supplemental Report
The Senate Commerce Committee was one of the first federal bodies to express concern with certain advance consent marketing practices. On November 17, 2009 Senate Commerce Committee Chairman Rockefeller released investigative report, "Aggressive Sales Tactics on the Internet and Their Impact on American Consumers." Findings from the investigation that started in May 2009 include:
- Three Internet companies - Affinion, Vertrue, and Webloyalty - allegedly exploited consumers' expectations about online shopping to trick them into joining their membership clubs.
- Consumers often do not know these companies have their credit card numbers until they start seeing charges on their bank statements.
- More than 450 e-commerce websites and retailers have partnered with Affinion, Vertrue, and Webloyalty to employ aggressive sales tactics against their online customers splitting the revenue about 50-50.
- Almost no one receives the "cash back award" that was offered to online consumers at the time of enrollment.
- Partners that paid over $10 Million: 1-800-Flowers, Buy.com, Classmates.com, Columbia House, Confi-Check, Expedia / Hotels.com, Fandango, FTC, Hotwire, InQ, Intelius, MovieTickets.com, Orbitz, Priceline, Redcats USA, Shutterfly, Travelocity, US Airways, and VistaPrint.
As part of the Commerce Committee's investigation, on December 3, 2009, Senator Rockefeller sent letters to the major credit card companies, Visa, MasterCard and American Express, requesting information related to cardholder inquires about unauthorized charges stemming from "data pass" and any efforts made by the companies to reduce the number of "chargeback" request from cardholders. Among the questions asked, Senator Rockefeller sought information as to merchant monitoring programs for chargebacks that the credit card companies have developed. Rockefeller also wanted to know what rules, if any, were in place for merchants that pass cardholders' billing information to third-party companies.
In response to Senator Rockefeller's request, Visa issued new rules on April 27, 2010 that expressly bar data pass account sharing. Under these rules, secondary transactions will require consumer to re-enter credit card information. In reviewing the new rules it is unclear whether they are restricted to only online transactions. In response to Visa's announcement, Senator Rockefeller stated that he "applaud[ed] Visa's decision to prohibit merchants from using 'data pass' marketing on its network."
On May 19, 2010 Senator Rockefeller issued a supplemental report which details the interactions between consumers and Affinion, Vertrue, and Webloyalty to get their money back. Findings of the supplemental report include:
- Refund Mitigation: Companies created scripts and policies intended to minimize the amount of money they would have to return to consumers who had inadvertently enrolled in the clubs. For consumers who insisted on refunds, the companies employed a variety of tactics to keep the refund amounts as small as possible, including requiring customers to obtain refunds by completing written affidavits.
- Magic Words: Each company instructed their call center representatives not to issue refunds to consumers, unless the consumers mentioned certain key words like "Attorney General," "Better Business Bureau," or "bank representative." Consumers who did not mention the "magic words" did not receive full refunds.
- Multiple Memberships: Because they could encounter the aggressive sales tactics of Affinion, Vertrue, and Webloyalty while shopping on hundreds of different websites, online shoppers were frequently enrolled inadvertently in multiple membership clubs offered by the same company. Consequently, many customers who called Affinion, Vertrue, and Webloyalty to cancel one membership and request a refund were actually enrolled in more than one of the companies' clubs. Companies trained their agents not to inform consumers about these additional memberships.
- Failure to Follow Credit Card Rules: Affinion, Vertrue, and Webloyalty violated MasterCard and Visa's rules for credit card and debit card transactions and American Express placed the companies in monitoring programs for merchants with high rates of disputed charges from cardholders (known as "chargeback"). Companies enjoyed uninterrupted access to the payment systems despite having $1.4M in chargeback requests and over $10M in refunds.
Restore Online Shoppers' Confidence Act
In connection with the release of the supplemental report, Senator Rockefeller introduced the Restore Online Shopper's Confidence Act (Senate Bill 3386) on May 19, 2010. The bill which is currently in the Senate Committee proposes to require Internet companies to clearly disclose the terms of the offers to consumers, and to obtain consumers' billing information, including full credit or debit card numbers, directly from the consumers. The bill would also prohibit Internet retailers and other commercial websites ("initial merchants") from transferring a consumer's billing information, including credit and debit card numbers, to post-transaction third-party sellers. While this ban applies only to account information or "other billing information that is used to charge a customer," it should be noted that in order to obtain a consumer's consent for a post-transaction sale, as described below, third-party sellers must still obtain the consumer's name and contact information themselves. Thus, it will not be sufficient to simply require a consumer to reenter his or her 16 digit account number to accept a post-transaction offer. The proposed bill would also require merchants to provide a cancellation method that is available via the Internet and the telephone. The proposed bill would require the seller to send an e-mail to the consumer, not less than 10 days prior to the initiation of each charge, clearly and conspicuously disclosing that the charge will be made, the amount of the charge and a description of the goods and services, and instructions for stopping the recurring charges (by Internet and telephone).
New York Attorney General
The New York Attorney General has been the most active state agency investigating the advanced consent marketing practices and bringing law enforcement actions. In 2010, the New York Attorney General sent subpoenas to twenty-two well known merchants that have deals with the three major companies that offer these discount programs: Webloyalty, Affinion/Trilegiant and Vertrue. The subpoenas sought information about retailers' practices of sharing consumers' account information with membership program companies; their knowledge of any deceptive solicitations; and compensation from the membership companies. The merchants being investigated include: Barnes & Noble, Orbitz.com, Buy.com, Ticketmaster.com, MovieTickets.com, FTD.com, Shutterfly.com, 1-800Flowers.com, Avon.com, Budget, Staples.com, Priceline.com, GMAC Mortgage, Classmates.com, Travelocity, Vistaprint, Intelius, Hotwire.com, Expedia/Hotels.com, Columbia House, Pizza Hut and Gamestop/EB Games.
NY AG Settles with Fandango
On January 27, 2010, online movie ticket retailer Fandango agreed to permanently end the practice of sharing customers' credit and debit card information to third-party discount program sellers. As part of the settlement, Fandango is required to implement reforms to protect online shoppers from being deceived by discount and cash-back advertisements that appear on the company's Web site. Fandango suspended contracts with any discount program sellers while it implements these changes.
Under the terms of the settlement, Fandango paid $400,000 into a consumer redress fund and adopted the following reforms: 1) Review and approve all Fandango incentive offers made in connection with online purchases and require any contracted discount club seller to provide the numbers of New York customers enrolled and complaints received from those customers; 2) Explicitly warn consumers that the incentive is offered for joining a separate company's membership club; 3) Explicitly notify consumers when they are redirected to a discount club seller's site that they are leaving Fandango's website; 4) Ensure that all cash-back or rebate offers made by contracted membership club sellers comply with New York state rebate laws by providing redemption forms and information at the time of the offer.
NY AG Settles with Affinion, Webloyalty and Partner Retailers
In August 2010, the New York Attorney General announced an $8 million settlement with Affinion Group, Inc. and its subsidiary Trilegiant Corporation, including a $5 million restitution fund to provide refunds to New York consumers and $3 million in penalties, costs, and fees. On September 21, 2010 the discount club marketer Webloyalty.com, Inc., settled an action with New York Attorney General. Under the terms of the settlement, the company will pay $5.2 million in penalties, costs and refunds, in addition to refunds to consumers who allegedly unknowingly enrolled in or did not authorize billing for Webloyalty discount clubs and programs.
Under the terms of the settlements, in addition to the financial terms, the companies will agree to permanently end their practice of obtaining consumers' billing information from online partner retailers; reform its online marketing practices to ensure consumers understand they are enrolling in a program offered by Webloyalty for which they will be billed; and make redemption forms for rebates immediately available to consumers online.
Separately, the Attorney General obtained settlements with five retailers who have partnered with Webloyalty. According to these settlements, the retailers will reform their marketing practices, permanently end the practice of providing consumers' billing information to companies that market discount clubs online, and collectively contribute more than $3.3 million to a fund that will pay for consumer education, refunds, and the costs of the investigation. The retailer settlements and amounts are as follows: Orbitz ($1,200,000); Shutterfly, Inc. ($952,200); MovieTickets.com, Inc. ($681,283); Ticketmaster, L.L.C. ($455,000); and Pizza Hut, Inc. ($78,750).
State of Iowa v. Vertrue, Inc.
(Iowa District Court for Polk County, Equity No.: EQ53486, Filed May 2006; Decision March 2010).
The lawsuit, which was filed in 2006, alleged that MemberWorks failed to conform its membership sales practices to the requirements of Iowa law, in particular the Iowa Buying Club Memberships Law. The lawsuit alleges that one of MemberWorks' primary methods of selling membership programs begins when a consumer makes a telephone call for a totally-unrelated purpose, such as a call to a credit card company's customer service department, or a call to order a product advertised on a TV infomercial. Before hanging up, the consumer unexpectedly receives a sales pitch for a "risk-free membership" of some kind. If the consumer accepts the membership on a free trial basis -- but then fails to affirmatively cancel the membership at the end of the trial period -- the consumer's credit card is charged. Iowa Attorney General alleged that some consumers don't anticipate or look for any charge, in part because they never provided their credit card number to purchase the membership; MemberWorks obtained the credit card number from the "partner" business that the consumer called in the first place.
After a two week bench trial, in March 2010, the court held that: 1) Vertrue violated Consumer Fraud Laws in "Sales" to 497,000 Iowans representing $36 million in revenue; 2) Consumers did not appreciate that credit card data was being shared when they signed up for discount buying club services; and 3) Vertrue had used deceptive and unfair techniques to enroll consumers in memberships and charge their credit cards, often without the consumers' knowledge. A damage phase will follow.
State of Washington AG
In August 2010, the State of Washington settled with Intelius, Inc. ("Intelius") and Adaptive Marketing, Inc. ("Adaptive") relating to their advance consent marketing practices. The Washington Attorney General's focused primarily on Intelius' partnership with Adaptive, a subsidiary of Vertrue, Inc., where Intelius offered Adaptive's products through a free-to-pay conversion offer. A free-to-pay conversion offer is a sales arrangement where the seller agrees to provide goods or services for free (or as defined by the State of Washington at a nominal cost) for an initial period, but then charges the customer on a reoccurring basis if the customer does not take affirmative action to cancel before the initial period expires.
Here, the Attorney General alleged that Intelius' post-transaction offers tended to mislead customers for three main reasons: (1) the offers appeared to be from Intelius and did not disclose that they were from Adaptive; (2) the terms of the offer were obscured and unclear; and (3) the consumer was not required to re-enter her billing information to accept the new offer, increasing the likelihood the consumer would incur charges she did not understand. The State alleged that it received thousands of consumer complaints alleging that Intelius enrolled consumers in its own and third-party recurring billing programs following transactions for Intelius's search services without the consumer's express informed authorization.
Under the terms of the settlement, Intelius agreed to pay $1.3 million dollars, with $300,000 paid as costs of investigation and the balance towards consumer redress, as well as agree to broad injunctive relief. For example, for third-party post-transaction online offers, Intelius must, among other things, require the consumer to provide complete account information at the time the offer is accepted. For all offers, it must fully disclose the name of the entity making the offer; disclose "clearly and conspicuously" all material terms of the offer; and not make material disclosures in fine print or in text that's only accessible by clicking a link. Furthermore, and perhaps oddly the settlement prohibits Intelius from contracting with the three major membership club program providers -- from Vertrue, Webloyalty and Affinion.
Conclusion
Given the Commerce Committee's focus on this issue, proposed federal legislation and state regulatory actions, including many against large recognizable brands, it is abundantly clear that any advanced consent marketing on the Internet needs to be carefully vetted. This extends to both the companies that sell these programs or services on the Internet as well as any companies that partnering with such companies.