When it comes to your online billing practices, you need also
need to avoid deceptive practices. Liability can be triggered for
deception under both FTC and state consumer protection statutes. Some
states have specific statues dealing with deceptive online billing
practices, as will be discussed. Of course, you need to figure out what
activities are considered deceptive if the first place to avoid
liability.
Most deceptive billing practices consist of negative option marketing plans, back-end sales without disclosure ("data pass" transactions) and deception with free trial offers.
Is Your Business Engaging In Negative Option Marketing Plans?
If you plan on engaging in negative option marketing practices you will need to comply with the FTC's Negative Option Rule and comply with state laws governing these practices. The term "negative option feature" is defined by the FTC broadly and refers to a category of transactions in which a customer's failure to take an affirmative action, either to reject an offer or cancel an agreement, is considered by the seller as assent to be charged for some goods or services. If you engage in these practices, FTC laws require that ads for subscriptions clearly and conspicuously disclose material information about the terms of the offer. (Failing to disclose important information is always considered a deceptive practice under the FTC Act and/or state consumer protection statutes).
The FTC considers the following to be negative option plans: (1) prenotification negative option plans, (2) continuity plans, (3) automatic renewals, and (4) free-to-pay or nominal-fee-to-pay conversion offers.
A "prenotification negative option plan" (e.g., book or music clubs) is where sellers send periodic notices offering goods to consumers. If a consumer takes no action, the seller sends the goods and charges the consumer. In "continuity plans", consumers agree in advance to receive periodic shipments of goods or provisions of services, which they continue to receive until they cancel the agreement.
In "automatic renewal plans", the seller (e.g., a magazine, newsletter, etc.) automatically renews a consumer's subscription/membership when it expires and charges for it, unless the consumer cancels the subscription/membership.
Finally, there are "free-to-pay or nominal-fee-to-pay offers" where consumers receive goods or services for free or for a nominal fee, for a trial period. After the trial period ends, sellers automatically begin charging a fee (or higher fee) unless consumers cancel or return the goods.
In addition, some negative option offers include "up-selling" or "bundled offers." An up-sell occurs when a consumer completes a primary transaction and then receives a solicitation for an additional product or service. A bundled offer occurs when a seller packages two products or services together so that they cannot be purchased separately.
Here are the FTC's 5 Principles to complying with the Negative Option Rule:
You may use email to communicate with consumers. But, if consumers don't understand that notices are sent by email, they may not respond and may incur charges they don't want. Thus, you should clearly inform your customers about how any notices will be sent before they enroll in any negative option type plan.
Offering Hidden Continuity Plans & Free Trial Offers
Caution! You cannot sell continuity type plans (i.e. recurring memberships or subscriptions) in conjunction with using a free trial offer to deceptively misinform your customers. Hiding free trial language or using a pre-checked box indicating acceptance of a free trial that leads to a continuity plan is illegal. For example, hiding free trial language in the terms and conditions or on the order page below the credit card information and where a customer has to scroll down and uncheck a box. Failure to do so leads to "acceptance" of a trial offer for some continuity plan for which the customer will be billed unless he or she cancels. Of course, by the time the customer figures out what is going on, they could have been charged with a few recurring monthly fees before cancellation.
Worse, some businesses make it impossible to cancel during the trial period because of faulty contact information (nonexistent phone numbers, e-mails that bounce, etc.). The FTC has really cracked down on these types of practices and considers them to be deceptive. Avoid them at all costs.
Negative Option Billing Plans Guidelines:
Most deceptive billing practices consist of negative option marketing plans, back-end sales without disclosure ("data pass" transactions) and deception with free trial offers.
Is Your Business Engaging In Negative Option Marketing Plans?
If you plan on engaging in negative option marketing practices you will need to comply with the FTC's Negative Option Rule and comply with state laws governing these practices. The term "negative option feature" is defined by the FTC broadly and refers to a category of transactions in which a customer's failure to take an affirmative action, either to reject an offer or cancel an agreement, is considered by the seller as assent to be charged for some goods or services. If you engage in these practices, FTC laws require that ads for subscriptions clearly and conspicuously disclose material information about the terms of the offer. (Failing to disclose important information is always considered a deceptive practice under the FTC Act and/or state consumer protection statutes).
The FTC considers the following to be negative option plans: (1) prenotification negative option plans, (2) continuity plans, (3) automatic renewals, and (4) free-to-pay or nominal-fee-to-pay conversion offers.
A "prenotification negative option plan" (e.g., book or music clubs) is where sellers send periodic notices offering goods to consumers. If a consumer takes no action, the seller sends the goods and charges the consumer. In "continuity plans", consumers agree in advance to receive periodic shipments of goods or provisions of services, which they continue to receive until they cancel the agreement.
In "automatic renewal plans", the seller (e.g., a magazine, newsletter, etc.) automatically renews a consumer's subscription/membership when it expires and charges for it, unless the consumer cancels the subscription/membership.
Finally, there are "free-to-pay or nominal-fee-to-pay offers" where consumers receive goods or services for free or for a nominal fee, for a trial period. After the trial period ends, sellers automatically begin charging a fee (or higher fee) unless consumers cancel or return the goods.
In addition, some negative option offers include "up-selling" or "bundled offers." An up-sell occurs when a consumer completes a primary transaction and then receives a solicitation for an additional product or service. A bundled offer occurs when a seller packages two products or services together so that they cannot be purchased separately.
Here are the FTC's 5 Principles to complying with the Negative Option Rule:
- Disclose the material terms of the offer in an understandable manner. The existence of the offer, the offer's total cost, the transfer of a consumer's billing information to a third-party (if applicable) and how to cancel the offer;
- Disclosures should be clear and conspicuous (follow the guidelines in this book);
- Disclosure must occur before payment;
- Obtain the customer's affirmative consent to the offer (you cannot rely on a pre-checked box to signify acceptance);
- Do not impede cancellation of an offer or make cancellation burdensome.
You may use email to communicate with consumers. But, if consumers don't understand that notices are sent by email, they may not respond and may incur charges they don't want. Thus, you should clearly inform your customers about how any notices will be sent before they enroll in any negative option type plan.
Offering Hidden Continuity Plans & Free Trial Offers
Caution! You cannot sell continuity type plans (i.e. recurring memberships or subscriptions) in conjunction with using a free trial offer to deceptively misinform your customers. Hiding free trial language or using a pre-checked box indicating acceptance of a free trial that leads to a continuity plan is illegal. For example, hiding free trial language in the terms and conditions or on the order page below the credit card information and where a customer has to scroll down and uncheck a box. Failure to do so leads to "acceptance" of a trial offer for some continuity plan for which the customer will be billed unless he or she cancels. Of course, by the time the customer figures out what is going on, they could have been charged with a few recurring monthly fees before cancellation.
Worse, some businesses make it impossible to cancel during the trial period because of faulty contact information (nonexistent phone numbers, e-mails that bounce, etc.). The FTC has really cracked down on these types of practices and considers them to be deceptive. Avoid them at all costs.
Negative Option Billing Plans Guidelines:
- Provide the required disclosures in your website agreement and require your customers to accept the agreement by clicking on an I ACCEPT button or by checking a box before charging the customer's account;
- Send your customers an email notice prior to charging his/her account that also provides a simple mechanism for canceling the plan and all future charges under the plan.
This article was written by Philip A. Nicolosi, J.D. Mr. Nicolosi
provides legal services through his law firm, Phil Nicolosi Law, P.C.,
focusing on startup and small business law, Internet & technology
law and commercial transactions.
Mr. Nicolosi serves as a trusted advisor to numerous startups and small to medium sized businesses. This includes representation for a wide range of business law matters including business organization, corporate/LLC governance, regulatory law, contracts and transactions and most other matters outside of litigation. Mr. Nicolosi provides guidance with e-commerce, Internet marketing and technology-related legal matters. He also assists startup technology companies with seed financing, venture capital and exit transactions.
Mr. Nicolosi serves as a trusted advisor to numerous startups and small to medium sized businesses. This includes representation for a wide range of business law matters including business organization, corporate/LLC governance, regulatory law, contracts and transactions and most other matters outside of litigation. Mr. Nicolosi provides guidance with e-commerce, Internet marketing and technology-related legal matters. He also assists startup technology companies with seed financing, venture capital and exit transactions.
