June 2009 – Channel Crossing: Legal

FTC Seeks Public Comments on Agency’s Negative Option Rule

By Linda A. Goldstein

Amid growing pressure from the states to regulate newer forms of negative option marketing like free-to-pay conversions, continuity programs and automatic renewals, heavy enforcement action by the Federal Trade Commission (FTC) targeting such programs and increased class action litigation, marketers who utilize these forms of marketing now face what may be the biggest threat ever–the prospect of specific FTC regulation.

In 1973, the FTC promulgated a rule known as the Pre-notification Negative Option Rule (the Negative Option Rule), which was designed to regulate a very specific type of negative option that was common at the time. A Pre-notification Negative Option is a plan or program under which consumers agree in advance to receive future shipments of goods, the seller notifies the consumer 10 days in advance of shipment of the identity of the particular item that will be shipped and the consumer has 10 days following receipt of that notice to decline the shipment. These types of programs were extremely common in the publishing and record industries.

Pursuant to its standard rule review procedures, the Negative Option Rule was reviewed by the Commission in 1986 and in 1997. No changes were made to the Rule as part of the 1986 review and only minor changes were made as a result of the 1997 review.

EXPANSION OF THE RULE
Now, however, there are many different types of programs that fall under the broad definition of negative options, many of which are a staple in the arsenal of direct response marketing offers. The FTC specifically notes in its comments to the Rule review that the use of negative option marketing has greatly expanded to include such offers as continuity programs, trial conversion offers and automatic renewals. In the FTC’s view, all of these programs fall under the umbrella of “negative option marketing” and accordingly, the FTC is now seeking comment on whether and to what extent the Negative Option Rule should be modified to specifically cover these newer marketing formats.

As part of this rulemaking procedure the FTC has asked a number of very specific questions that appear to be pointed directly in the direction of the kinds of negative option marketing used by direct response marketers. For example, the FTC specifically asks whether there are any potentially unfair or deceptive practices concerning negative option marketing that are not covered by the Rule that are occurring in the marketplace and whether there have been consumer complaints relating to such programs indicating a potential for consumer injury. It is likely that state regulators and consumer activist groups will argue strongly that the Rule should be expanded to include free trial conversions, continuity programs and automatic renewals. It is likely that the FTC will also point to its own strong record of enforcement actions and workshops on negative option marketing to support an expansion of the Rule.

In the event that the Rule is expanded to include these other negative option marketing methods, there is also a risk that the FTC may impose specific and detailed disclosure requirements. The current Pre-notification Negative Option Rule contains very detailed disclosure, notice and consent requirements that many marketers have historically found very difficult to comply with. The current Notice of Rule Review asks specifically whether the Rule should define “clearly and conspicuously” more precisely. If the FTC were to follow the same model it applied to Pre-notification Negative Option Rule, the consequences for direct marketers could be significant. Moreover, it is worth noting that the Pre-notification Negative Option Rule was promulgated when print was a dominant medium. It would be quite difficult to make the same level of disclosures in more current forms of solicitation such as telephone and electronic.

The FTC issued this Notice of Proposed Rulemaking in connection with its Budget Request and without much fanfare. Comments on this issue must be filed by July 27, 2009. The industry must take this issue seriously and respond with very thoughtful and pointed comments to avoid unnecessary regulation in this area.

The industry has been quite active in promulgating self-regulatory guidelines, which deal with recommended disclosures and methods for obtaining consent. Hopefully, the FTC will consider these initiatives when contemplating whether extension of the rule is necessary or warranted and determine that self-regulation combined with the agency’s existing enforcement authority is sufficient. Nonetheless, this rulemaking procedure combined with the FTC’s current efforts to strengthen the testimonial and endorsement guidelines could combine to create significant new challenges for marketers.

Linda A. Goldstein is a partner and chair of the advertising, marketing and media division at Manatt Phelps & Phillips LLP in New York. She can be reached at (212) 790-4544.