FTC Brings First Case Under Federal Negative Option Law
What’s Making News?
The Federal Trade Commission (FTC) recently brought its first case under the Restore Online Shoppers’ Confidence Act (ROSCA), a 2010 federal law that prohibits online sellers from charging consumers in an Internet transaction unless the seller has clearly disclosed all material terms of the transaction and obtained consumers’ express informed consent.
In a complaint filed in US District Court in Nevada, the FTC alleged that a company called Health Formulas, LLC, as well as a number of related entities and individuals, deceptively marketed and sold dietary supplements, weight loss products, and various other products under brand names such as “Pure Green Coffee Bean Plus,” “Pure Garcinia Cambogia Extract,” and “Black Bull.” The defendants’ marketing materials claimed that their weight loss products would “burn fat without diet or exercise” and help users “shed pounds fast.” The marketing materials also featured purported testimonials from consumers and “medical experts” that allegedly supported the claims of rapid and substantial weight loss.
According to the complaint, the defendants would entice consumers to visit their websites by advertising a month’s supply of their products to try for free or by making a buy-one-get-one (BOGO) free offer. When consumers signed up for the offer, the defendants requested payment information, purportedly to pay shipping and handling fees for the one month’s free supply. However, according to the FTC, when consumers provided their credit or debit card information, they were automatically enrolled into membership programs with so-called “negative option features.” These programs charged consumers on a recurring basis for monthly product shipments until the consumer took affirmative action to cancel. Unexpected charges ranged from $60 to $210 per month.
The FTC noted that the defendants repeatedly failed to disclosed material terms of the transaction. For example, the defendants failed to clearly disclose that the “free trial” period would last for only 14 days and that additional charges would be imposed after the trial period. The defendants’ websites also failed to disclose the steps that consumers were required to take to avoid recurring monthly payments. Although the payment terms were referenced in the website terms and conditions, the FTC noted that consumers were not required to read the terms and conditions prior to purchase and that the terms were not readily available on the defendants’ websites.
The FTC alleged that by charging consumers in a negative option billing plan while failing to disclose the material terms of the transaction or obtain the consumers’ consent, the defendants violated ROSCA. The FTC also brought charges under the FTC Act, the Electronic Funds Transfer Act, and the Telemarketing Sales Rule. The District Court issued a preliminary injunction against the defendants on October 20, 2014, and the FTC is seeking a permanent injunction.
All companies that transact business over the Internet should be familiar with the requirements of ROSCA. In particular, companies should ensure that they clearly and conspicuously disclose all materials terms of Internet transactions — especially those involving negative option billing features. Namely, companies should ensure that they provide all material terms, including a description of the product and the cost, and require consumers to check a box or provide other assurance that they have read such terms before engaging in any negative option billing. Companies must also comply with the FTC’s Negative Option Rule, which requires, among other things, specific procedures regarding the timing of product offers and cancellation options. Given that these billing schemes are reviewed under both federal and state law, it is important that companies are aware of these requirements and that they carefully structure any program involving a negative option billing feature.