United States: Negative Options: FTC Alleges ROSCA Violations For First Time

Remember ROSCA?  That's OK, the FTC just remembered it too.

It's the Restore Online Shoppers' Confidence Act and it was enacted about four years ago with a primary goal of ensuring clear and conspicuous disclosure of the terms and conditions of online "negative option" offers.

"Negative option" plans allow companies to ship goods and services to a consumer on an ongoing basis until she cancels her plan. Until she cancels, the consumer is deemed to have consented to the new goods and services - and the charges for them. Although such plans can be very convenient for consumers, they can also be problematic if consumers expected to sign up for a single order rather than a continuing order that self-renews. ROSCA was intended to address this problem by requiring marketers to get unambiguous consent for the "negative option" feature of their sales.

Restraining order. Earlier this month, a District of Nevada judge granted the FTC a temporary restraining order, preventing marketers of weight loss supplements from continuing to violate ROSCA, the FTC Act, and the Telemarketing Sales Rule, among others. The lawsuit alleged that the online marketers failed to clearly disclose the material terms of their "free" trial offers, which, much like the supplements themselves, did not function as advertised. When consumers signed up to try the supplements, they were automatically enlisted in a "negative option program" that shipped products to them every month at additional costs, as high as $210 per month, without their consent. ROSCA, which applies only to online sellers, was designed to ensure that consumers signing up for these plans really meant to do so by (1) requiring that material terms of online negative option offers be clear and conspicuous; (2) requiring a consumer's affirmative consent before charging his or her credit card; and (3) requiring that sellers provide simple ways for consumers to stop the charges. Here, the FTC's complaint alleged that the marketers violated ROSCA because they kept the terms and conditions muddy and hidden, burying them in 10 pages of hard-to-understand fine-print. The FTC also alleged that the marketers received no prior authorization before charging credit cards, and made the process of cancellation almost impossible.

Until now, the FTC had targeted allegedly deceptive online negative option offers, such as these, pursuant to its authority under Section 5 of the FTC Act; under the "Negative Option Rule," which applies to pre-notification negative option offers; and under the "Telemarketer Sales Rule", which applies to telephone offerors of negative option programs. Most states also have their own negative option laws and/or consumer protection laws, which are often as strict as, or stricter than federal laws or rules imposed by the FTC.

Going forward, online sellers can expect the FTC to add one more claim to that list: a violation of the ROSCA. Moreover, ROSCA gives the FTC a civil penalty option that it doesn't have under Section 5: the law authorizes the FTC to obtain penalties of up to $16,000 per violation.

So sellers, beware: if you're going to offer a negative option plan, make sure you 1) give clear and conspicuous disclosure of all material terms before getting a consumer's billing information; 2) get affirmative consent before charging a consumer's credit card (no pre-checked boxes!); and 3) provide an easy way to cancel the recurring payments.

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This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.

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Authors
Terri J. Seligman
Jeffrey A. Greenbaum
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