On July 25, the FTC announced that it would retain its Prenotification Negative Option Rule (“Rule”) without modification after completing a regulatory review of the Rule.  Numerous state and local law enforcement agencies had submitted comments urging the FTC to expand the scope of the Rule.  The FTC declined to do so, and instead adopted a wait-and-see approach regarding the impact of the Restore Online Shoppers Confidence Act (ROSCA) and possible revisions to the Telemarketing Sales Rule (“TSR”).

The Rule covers those negative option plans that notify a consumer that she will purchase a good unless the offer is declined within a set period of time.  For those of you old enough to remember such things, think Columbia House Record Club.  The Rule enumerates seven material terms of the purchase plan that sellers must clearly and conspicuously disclose; and also provides guidance on how a consumer is notified regarding each installment. 

In May 2009, the FTC announced it was conducting a regulatory review of the Rule and sought comments including comments on whether the Rule should be expanded to cover other types of negative option offers.  In its announcement declining to expand the Rule, the FTC discussed the legislative, regulatory, and guidance background for Negative Option Marketing.  In January 2009, the FTC issued a Staff Report setting forth compliance guidance on all types of Negative Option Marketing.  In December 2010, Congress enacted ROSCA, which requires that for negative option offers made online, the seller must:  1) clearly and conspicuously disclose all material terms before obtaining a consumer’s billing information; 2) obtain the consumer’s express informed consent before charging the consumer; and 3) provide a simple method of cancellation to stop recurring charges.  ROSCA also restricts the ability of marketers to transfer data to third parties for post-transaction upsells.  Both the FTC and the State AGs may enforce ROSCA.  In its announcement, the FTC also noted that it was in the process of considering a rule to ban certain alternative payment methods under the TSR as well as contemplating a full review of the TSR.  The TSR contains provisions dealing with “free to pay” conversions in outbound telemarketing calls and upsells.

Numerous state and local consumer protection agencies urged the FTC to expand the Rule to cover more or all negative option transactions.  Industry groups argued such an expansion was not necessary.  Ultimately, the FTC declined to expand the Rule, stating that ROSCA appeared to be adequate to deal with online negative option offers and that if telemarketed offers require additional regulations, amendments to the TSR might be considered.  The FTC noted that unfair, deceptive, and otherwise problematic negative option marketing practices continue to cause substantial consumer injury.  So, for now, the regulatory landscape has not changed, but negative option marketing will continue to draw close scrutiny from the FTC in both law enforcement activity and rule-making so marketers who use this marketing tool should do so with care.