Advertising Law Blog

In January 2007 the Federal Trade Commission (FTC) hosted a workshop to discuss negative option marketing. The workshop focused particularly on Internet-based negative option offers, because they were relatively new and presented distinct issues regarding the form, content, and timing of disclosures.

Negative Option Marketing

There are four types of plans that fall into the negative option marketing category - prenotification negative option plans; continuity plans; automatic renewals; and free-to-pay or nominal-fee-to-pay conversion offers. First, in prenotification negative option plans, such as book or music clubs, sellers send periodic notices offering goods. If consumers take no action, sellers send the goods and charge consumers. Second, in a continuity plan, consumers agree in advance to receive periodic shipments of goods or provision of services, which they continue to receive until they cancel the agreement. Third, in an automatic renewal, a magazine seller, for example, may automatically renew a consumer's subscription when it expires and charge for it, unless the consumer cancels the subscription. Finally, sellers also structure trial offers as free-to-pay, or nominal-fee-to-pay, conversions. In these plans, consumers receive goods or services for free (or at a nominal fee) for a trial period. After the trial period, sellers automatically begin charging a fee (or higher fee) unless consumers affirmatively cancel or return the goods or services.

FTC Actions

Think All Publishing. In June 2008, the parties settled the litigation, which bars the defendants from making misrepresentations, including misrepresenting that items are "free" when they aren't. It requires that the defendants disclose all the terms and conditions of any negative option offer. It bars the defendants from charging consumers for products or services without their consent, and without first disclosing the terms of any refund or cancellation policy. It also bars future violations of the Unordered Merchandise Statute. In addition, the settlement prohibits the defendants from sharing their customer lists, and contains bookkeeping and record keeping provisions to allow the agency to monitor their compliance. Finally, under the terms of the settlement, the defendants will pay approximately $2,167,500 in consumer redress.

Ultralife Fitness. In December 2008 a Utah-based operation that the Federal Trade Commission alleged lured online customers with free samples of a purported weight-loss supplement in a scheme to obtain their credit or debit card information was ordered to pay $9.9 million to settle FTC charges of deceptive and unfair marketing, and of violations of federal regulations governing the electronic transfer of funds.

According to the FTC's complaint, the defendants, operating through their umbrella company Ultralife Fitness, Inc., lured customers by promising to send, for a specified trial period, free samples of the dietary supplement Hoodia, which they claimed caused weight loss. The FTC's complaint also alleges that customers provided their credit or debit card information with the understanding that it would be used only to cover shipping and handling costs of the free Hoodia samples. However, customers later discovered that they were enrolled without their consent, into continuity programs - one for periodic shipments of Hoodia (at a cost of approximately $50 a month) and another for fitness instruction (at a cost of approximately $30 a month). The complaint states that the defendants withdrew funds or assessed fees before consumers received the Hoodia, after the Hoodia was received but before the trial period ended, and even when the consumer never received the Hoodia supplement.

Also according to the FTC's complaint, in addition to providing inadequate notice of enrollments in the continuity plans, the defendants failed to give consumers adequate notice of fees, costs, and cancellation polices; and failed to inform them that their financial account information would be used to pay for the continuity plans. The Web site's order pages made no reference to this information; instead, it was buried in nearly 12 pages of text in the site's "terms and conditions" section. Further, the link to the terms and conditions section did not convey the relevance or significance of the information.

Under the terms of the proposed settlement, the defendants are ordered to pay $9.9 million, which is the total estimated consumer injury. However, based on the defendants' inability to pay, all but $150,000 of that judgment is suspended. Each of the three individual defendants is responsible for paying $50,000 of the $150,000 owed to the FTC.

The Report

The FTC's report summarizes the workshop and also identifies five principles for marketing online negative option offers based upon recent FTC cases. The report identifies five principles the staff developed to guide marketers in complying with Section 5 of the FTC Act when marketing online negative option offers.

1. Marketers should disclose the material terms of the offer in an understandable manner. The material terms of negative option offers include: the existence of the offer; the offer's total cost; the transfer of a consumer's billing information to a third party (if applicable); and how to cancel the offer. Marketers should avoid making disclosures that are vague, unnecessarily long, or contain contradictory language.
2. Marketers should make the appearance of disclosures clear and conspicuous. To make online negative option disclosures clear and conspicuous, marketers should place them in locations on web pages where they are likely to be seen, label the disclosures (and any links to them) to indicate the importance and relevance of the information, and use text that is easy to read on the screen.
3. Marketers should disclose the offer's material terms before consumers pay or incur a financial obligation. Marketers should disclose an offer's material terms before consumers agree to purchase the item. Consumers often agree to an offer by clicking a "submit" button; therefore, disclosures should appear before consumers click that button.
4. Marketers should obtain consumers' affirmative consent to the offer. Marketers should require that consumers take an affirmative step to demonstrate consent to an online negative option offer. Marketers should not rely on a pre-checked box as evidence of consent.
5. Marketers should not impede the effective operation of promised cancellation procedures. Marketers should employ cancellation procedures that allow consumers to effectively cancel negative option plans. Marketers should not engage in practices that make cancellation burdensome for consumers, such as requiring consumers to wait on hold for unreasonably long periods of time.

Following the five principles will maximize the likelihood of compliance with Section 5, although whether a particular negative option offer violates Section 5 will depend on an individualized assessment of the advertisement's net impression and the marketer's business practices.