As part of the Federal Trade Commission’s (FTC) regular rule and guidelines review process, it recently reviewed the rule governing the “Use of Prenotification Negative Option Plans” (Negative Option Rule). Under a “prenotification negative option” plan, consumers receive periodic announcements of upcoming merchandise shipments and have a set period of time to decline the shipment. If the consumer fails to decline the shipment, the company ships the merchandise and bills the consumer. The Negative Option Rule requires sellers to clearly disclose the terms of any such negative option plan before consumers subscribe.
In May 2009, the FTC announced that it was considering making changes to the Negative Option Rule and requested comments from the public and interested parties as part of the review process. Over two separate comment periods, the FTC received more than 100 comments from parties such as the Attorneys General of nearly two dozen states, the Direct Marketing Association, and the Electronic Retailing Association. After considering these comments, the FTC determined that the Rule was not in need of amendments. That said, the FTC has cautioned companies that they should be sure to review their policies to ensure they are in compliance with the Rule. In particular, the FTC notes that although there are different forms of negative option plans, the Rule specifically covers plans where consumers get periodic announcements of upcoming merchandise shipments, have a window of time to decline, and then receive the item if they do not refuse. It does not cover other types of plans, including continuity plans (regular shipments until cancellation), trial conversions (free period followed by full-price period absent cancellation), or automatic renewals (subscriptions renewed until cancellation). Despite the fact that the Negative Option Rule does not cover the other methods, the FTC has cautioned marketers to remember that Section 5 of the FTC Act still covers such plans. Additionally, such plans are covered by the “Restore Online Shoppers’ Confidence Act,” which puts in place certain requirements for all negative option plans.
Despite the FTC’s decision to keep the existing Negative Option Rule in place, the absence of new regulation isn’t exactly a green light to businesses to move ahead full speed with negative option plans. As indicated above, numerous state regulators submitted comments to the FTC about the Rule, suggesting strong interest and concern among some state regulators over the use of negative option plans. Consequently, companies using negative option plans should proceed with caution and be careful to abide by the terms of the Negative Option Rule.