April 2007 - Legal File

Getting Consumers to Join the Club

By Jeffrey D. Knowles and Maura M. Martin

They’re on TV, in print and on the Internet: Ads for “clubs” and other programs that offer to keep a fresh supply of books, movies, music, discount coupons, skincare products, flowers, coffee and desserts in consumers’ mailboxes or at their doorsteps. When they join one of these plans, consumers agree to receive merchandise or services automatically at regular intervals unless and until they tell the merchant to stop. Companies marketing these plans should not look to the Federal Trade Commission (FTC) to provide clear guidance on the marketing of these plans. Instead, the Commission applies its “reasonable consumer” standard to test disclosure of terms and conditions. Because of the reasonable consumer test, marketers need to be especially diligent while disclosing terms and conditions or risk facing an FTC complaint.

Businesses and consumers reap a number of benefits from “club” programs. However, an increasing number of consumer complaints about these programs have led the FTC to show a renewed regulatory interest in continuity plans. In January 2007, the FTC hosted an all-day workshop to analyze the marketing of goods and services through “negative option” marketing.

The FTC’s definition of “negative option” is broad. It covers a variety of offers, including pre-notification negative option plans, continuity plans, free trial conversion plans, automatic renewal plans and membership or club programs. The electronic retailing industry also refers to these programs as “advance consent” plans.

There is much discussion over what steps marketers should take to make adequate disclosures and obtain the consumer’s express informed consent in the online and mobile marketplaces, where the use of colors, font size, screen size, scrolling, links, pop-ups and “submit” buttons each affect how consumers absorb information about a particular offer. Indeed, almost one-half of the full-day FTC workshop focused on making effective disclosures online. The discussion involved how and where to place important disclosures on website advertisements and order pages and to obtain express informed consent.

A key point of disclosure is the point at which consent is obtained and the financial obligation is incurred (e.g., the page where the consumer hits a “submit” button to place an order). Techniques like pop-ups and pre-checked consent boxes may spell trouble for some marketers. Marketers also should consider screen size limitations, including the fact that online solicitations might not be distinctly presented on one page, but rather are part of a continuous, multi-step ordering process.

Another concern about continuity marketing involves the use of pre-acquired account information. Consumers have voiced concerns about their financial account information being exchanged among companies without consumers’ knowledge. So when one company (company A) offers a free trial offer for its product but doesn’t ask for credit card information, the consumer accepts-believing that company A has no way to charge him or her. The consumer does not realize that company A already has his or her credit card information, which it acquired from company B without the customer’s consent, and that his or her account automatically will be charged or debited after the trial period ends unless he or she takes some affirmative action to avoid the charges.

The FTC has condemned the sharing of consumer financial information without the consumer’s consent. Specifically, in the telemarketing context, the Telemarketing Sales Rule explicitly prohibits sharing unencrypted financial account information for marketing purposes in exchange for consideration.

There are a number of existing laws, regulations and guidelines that cover the marketing of negative option programs. In addition to Section 5 of the FTC Act, the FTC’s Policy Statement on Deception provides guidance on how to disclose material terms and conditions of an offer. The Telemarketing Sales Rule addresses negative option programs by requiring that all material terms and conditions of a negative option program be made when selling such programs over the telephone, and provides valuable guidance as to the FTC’s views generally on free trial offers and the use of pre-acquired account information. With respect to online marketing, two FTC publications-Advertising and Marketing on the Internet and Dot Com Disclosures-provide further guidance for disclosing the terms and conditions of an offer online.

Generally, the FTC requires that all material terms and conditions of a negative option offer be clearly and conspicuously disclosed to the consumer before the consumer agrees to the offer.

The Electronic Retailing Association (ERA) has published ethical guidelines for advance consent and negative option marketing that are available on its website at www.retailing.org. These guidelines recognize notice and consent as the two fundamental principles underlying all forms of “advance consent” plans.

Jeffrey Knowles manages Venable LLP’s Government Division and heads the firm’s Advertising and Marketing Practice Group. Knowles is the immediate past chairman of the ERA Board. He can be reached at (202) 344-4860. Maura M. Martin is an attorney with Venable. She can be reached at (202) 344- 4522.


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