I Subscribed to What? What Online Subscription-Based Marketers Need To Tell Their Consumers

by Foley Hoag LLP - Trademark, Copyright & Unfair Competition
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I am certainly not the only person who has been lured into purchasing a too-good-to-be-true, deeply discounted product online, only to learn that what I actually purchased was a subscription to buy more stuff.  Kate Hudson’s athletic wear company Fabletics hooked me about a year ago when I saw a cute workout outfit advertised on social media for only $25.00.  I purchased the outfit on Fabletics’ website, only to discover months later that I had become a “proud” member of the Fabletics “VIP” program.  Despite its fancy name, all it means is that I was paying, unbeknownst to me, $49.95 a month to receive a monthly shipment of more workout clothes.  Despite my VIP status, I never actually received my monthly gear because I was unaware I was a member, and hence I never returned to the website to pick out my monthly items.  This allowed Fabletics to continue to charge me each month, until I noticed the charges almost 5 months later on my bank statements. The company eventually issued me a refund after I complained, but I wondered how I could have been duped, and whether this type of marketing and sales tactic was even permissible.

Cancel or Pay – The Negative Option

The Federal Trade Commission (FTC), the government agency tasked to enforce truth-in-advertising laws, calls this kind of subscription-based sales “negative option marketing.”  Negative option marketing allows sellers to interpret a customer’s failure to take an affirmative action to either reject or cancel a payment plan, as an agreement to be charged for goods or services, even if the consumer does not need them.  Negative option marketing can pose serious financial consequences to consumers if they are unaware of the sales terms and continue to be billed for products without their knowledge.

There are four kinds of plans that fall into the negative option category:

  1. Continuity plans (Fabletics’ model), where consumers agree in advance to receive periodic shipments of products or services until they cancel the agreement.
  2. Prenotification negative plans, which allow marketers to send periodic notices to consumers offering goods or services, like a book or CD. If the consumer takes no action, the product ships and you are charged.
  3. Automatic renewal plans, which is exactly how it sounds. A magazine publisher, for example, may automatically renew a consumer’s subscription when it expires and charge them for it, unless the consumer cancels the subscription or auto renewal option.
  4. Trial offer plans, which may be structured as free-to-pay, or nominal-fee-to-pay. Consumers receive goods for free or at a nominal price during a trial period. After the trial period ends, the marketer usually then charges a much higher fee unless the consumers affirmatively cancel the subscription or returns the products.

With the increase in online shopping, online subscription-based marketing programs are booming.  Because many online shoppers become “click-happy” (like me) and try to navigate through webpages quickly without paying sufficient attention to lengthy notices, they often miss the fine print in the terms of the agreement disclosing that they will be billed monthly until they cancel. Further, in some cases, realizing that you are being billed monthly is not easy.  In my case, I did not even receive my monthly gear from Fabletics because I did not return to the website to select my options.  Receiving a shipment of workout clothing with an invoice would have made me realize I entered into a monthly subscription program and I would have cancelled immediately.  Likewise, the billing description on your monthly bank or credit card statement may differ greatly from the website where you purchased the goods or the branded product, making it harder to recognize the monthly fees. Further, cancelling the subscription is not always easy.  Sometimes marketers do not include a telephone number to call for cancelling the subscription or the telephone wait time is lengthy.

Ensuring a Positive Experience with Negative Options

To avoid these problems and protect consumers, in 2010 Congress enacted the Federal Restore Online Shoppers Confidence Act (ROSCA). ROSCA prohibits negative option online marketers from charging or attempting to charge consumers for products or services unless the marketer does the following: (1) clearly and conspicuously discloses the material terms of the subscription or program before obtaining the consumer’s billing information; (2) obtains the consumer’s express consent to take part in the subscription program and be charged under those terms; and (3) provides a simple mechanism for the consumer to cancel the subscription and to stop recurring charges. The Act gives the FTC and state attorney generals an additional basis to target companies engaged in unfair and deceptive marketing practices.

The FTC, which has authority to enforce provisions of ROSCA against marketers who violate the rules, has provided the following guidance in a report, to help online negative option marketers clearly and conspicuously disclose the material terms of their transactions:

  • Place negative option disclosures in locations on their websites where they are likely to be seen.
  • Clearly label disclosures to indicate the importance and relevance of the information.
  • Pay attention to the text for the disclosure to make sure it is easy to read online, keeping the audience in mind. For example, the text should be large enough to read and prominent.
  • Use terms that are easily understandable, concise and avoid using overcomplicated legal jargon.
  • Ensure that other graphics on the screen do not compete with the disclosure for the consumers’ attention.
  • Avoid the “kitchen sink mega disclosure” (i.e., a long, dense recitation of text that requires consumers to scroll repeatedly to read all of the information or that requires a lot of clicking).
  • Avoid audio-only disclosures (since the volume may be down on one’s computer) or pop-up disclosures (since consumers may have pop-up blocker software installed on their computers).
  • Disclose the material terms right before consumers hit the “purchase” or “submit” button.

Negative Option Enforcement

Despite these recommendations, some marketers have run afoul with ROSCA and the FTC’s recommendations, and the FTC has brought numerous actions under ROSCA and the Federal Trade Commission Act against online negative option marketers.  For example, the FTC ordered NextClick Media LLC to pay $3.4 million for deceptive “free trial” of smoking cessation patches and debiting consumers’ bank accounts monthly without informed consent.  Moneymaker was ordered by the FTC to pay $9.9 million to settle charges that, as part of a payday lending promotion, it enrolled consumers without their consent in a continuity program, unfairly billing them and failing to refund payments.

Well-known online marketers, like Blue Apron, Adore Me, and Fabletics have also faced scrutiny concerning their negative option programs. In fact, the National Advertising Division (NAD), the advertising industry’s self-regulatory body charged with monitoring and evaluating truth and accuracy in advertising, recently recommended that Fabletics modify its advertising to clearly and conspicuously disclose the material terms and limitations of its VIP membership program.

When it comes down to it, consumers should  understand  when they will be paying for the option to purchase workout clothes every month, especially if you are like me and you already have the guilt of paying a monthly fee for a gym membership that you don’t utilize as much as you should. Who needs that kind of guilt!

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Foley Hoag LLP - Trademark, Copyright & Unfair Competition | Attorney Advertising

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