Online Retailer Settles Multistate Enforcement Action Over Subscription And Advertising Practices

As recently reported by my partner Holly Melton, subscription practices remain a top priority for the FTC's Bureau of Consumer Protection. They are, apparently, also a top priority for state regulators, as a recently announced multistate settlement makes abundantly clear.

The settlement that thirty-three states plus the District of Columbia entered into with online clothing retailer TFG Holding (and its brands JustFab, ShoeDazzle and FabKids), alleges that TFG holding violated state consumer protection laws in a myriad of ways, including:

• Misrepresenting the price consumers could expect to pay for products advertised on the company's websites;
• Automatically enrolling consumers, without their consent, into a Membership Program that included a recurring charge of $49.95 per month without consumers' knowledge, consent, or authorization;
• Implementing and maintaining cancellation policies and practices that frustrated consumers' ability to cancel the VIP Membership Programs into which they were enrolled; and
• Failing to adequately disclose material facts to consumers, including that by purchasing products they would be enrolled in the VIP Membership Program.

The settlement requires TFG Holding, among other things, to provide a simple online mechanism for cancellation; honor consumer cancellation requests promptly; provide consumers the opportunity to request and obtain refunds; and to cease billing recurring charges to any customer who enrolled in the VIP program prior to May 2016 unless certain conditions apply. It also forbids the use of countdown times and other indicators of urgency unless the offers are, in fact, time limited. And, the settlement requires restitution payments to customers and a $1 million payment to the jurisdictions involved in the investigation to cover its costs.

It is noteworthy that the settlement also includes granular requirements for the company's negative option marketing. Specifically, TFG must disclose the fact that the consumer is enrolling in a membership program, what the amount and frequency of the charges will be, and the consumer's right to cancel. Those disclosures for online enrollments must be made three times: when the member program is first presented to the consumer, the first time the consumer is given the option to shop or make a purchase, and as part of the checkout process before the consumer submits payment information. For in person and telephone enrollments, the disclosures must be made orally at least as part of the checkout process, prior to enrollment. The company must also obtain the consumer's express informed consent after providing these disclosures. While the settlement does not mandate "separate consent" like the FTC's proposed (and currently defunct) rule, it does prohibit the use of a pre-checked box or any other mechanism "that otherwise does not require the consumer to take an affirmative action to enroll in a Membership program."

While the settlement expressly allows the company to make save attempts with consumers seeking to cancel, it is limited to two save attempts per cancellation request and it may not engage in a save attempt with any consumer who indicates that they do not wish to hear one. The company may, however, as part of the cancellation process, ask a consumer to check a box indicating the reason for cancellation (e.g., "too expensive," "no longer interested," etc.) The company must also provide easy-to-use account management tools.

What this settlement makes clear is that, notwithstanding the (perhaps temporary) demise of the FTC's negative option rule amendments, the protocols the regulators will require of subscription marketers track in large part what those rule amendments would have required. They also track many of the stricter requirements of some state laws, like California's. To repeat Holly's admonition, "the path forward is clear: provide transparent disclosures, obtain affirmative consent, and make cancellation as effortless as sign-up." Or be prepared to tangle with the regulators.

A final note: Truth in Advertising, Inc. (TINA) reports that "FabKids' deceptive pricing tactics and hidden subscription" were the focus of a previous TINA.org investigation and complaint. Unlike NAD, a self-regulatory forum whose routine monitoring actions are intended to bring companies into compliance to avoid regulatory action, TINA appears to have different objectives and different – and very public -- methods for trying to bring companies to heel. One more newsletter for advertising lawyers and marketers to keep an eye on.