The Federal Trade Commission recently reached a settlement agreement over charges against an online marketing operation accused of deceptively luring consumers into expensive subscriptions by offering “free trials” of teeth-whiteners and related products. According to FTC, the defendants obtained consumers’ billing information under the pretense of a nominal fee before unexpectedly charging them up to $200 per month. The order imposes a judgment of over $92 million on the defendants and bans them from engaging in negative option sales in the future.
Negative option marketing refers to the practice of billing a consumer on a periodic, recurring basis for a product or service until the consumer affirmatively opts out of the subscription. While negative option marketing is legal when conducted appropriately, regulators are willing to pursue companies that abuse this practice.
In this case, the various defendants were collectively operating a large-scale negative option marketing scheme consisting of at least 87 websites offering personal care products, including teeth-whiteners. According to FTC’s complaint, the defendant’s used promises of a one-time “trial” shipment for only a nominal fee plus shipping and handling in order to obtain their credit card information. The defendants would then automatically charge a monthly fee of nearly $100 for recurring product shipments until consumers affirmatively cancelled their enrollment. FTC noted that any disclosures about the actual charges incurred were hidden – for example, in a ten-line block of gray text against a white background at the bottom of the page. In some cases, the checkout process led consumers to another page featuring a “complete checkout” button that enrolled them in a separate $100 per month negative option subscription program – meaning that, under FTC’s allegations, many consumers were unwittingly charged $200 per month for two separate subscriptions.
FTC alleged violations of Section 5 of the Federal Trade Commission Act, which broadly prohibits “unfair or deceptive acts or practices in or affecting commerce,” and the Restore Online Shoppers’ Confidence Act, or “ROSCA,” which prohibits negative option sales over the internet unless the seller (i) clearly and conspicuously discloses all material terms prior to obtaining any billing information; (ii) obtains express, informed consent prior to making a charge; and (iii) provides a simple mechanism for consumers to stop recurring charges. The defendants settled the claims for $92,011,601, the amount consumers paid to the defendants. They also agreed to refrain from any future negative option marketing.
While legal if done correctly – as many online businesses do – negative option marketing does carry the potential for complaints from consumers who are surprised by monthly charges, and in some cases even regulatory enforcement. As this case makes clear, caution must be taken to develop negative option programs in a manner that is transparent, not misleading, and easy for consumers to navigate, and in a way that otherwise complies with all applicable laws and regulations, including the FTC Act and ROSCA.
Arent Fox’s Advertising & Promotions group will continue to monitor developments in this area. If you have any questions, please contact Sarah Bruno, Matthew Mills, Thorne Maginnis, or the Arent Fox professional who usually handles your matters.