By D. John Hendrickson

If there has been any doubt among marketers and their legal counsel regarding the landscape for so-called negative option and continuity marketing programs in the coming year, recent developments in regulatory enforcement evidence a trend toward enhanced scrutiny and oversight of these programs.

Just last week, AdoreMe, Inc. agreed to a settlement of Federal Trade Commission charges that the company engaged in deceptive acts or practices in the marketing and operation of its VIP monthly membership program.  Structured as a negative option program, customers were charged a membership fee of $39.95 per month unless, within the first five days of each month, the customer either completed a purchase or clicked an online button to “skip” buying that month. As explained on the company’s website, “If you do not make a purchase or skip the month by the 5th, you’ll be charged a $39.95 store credit that can be used anytime to buy anything on Adore Me.”

The FTC alleged that, instead of allowing members to use the store credits “anytime,” AdoreMe engaged in a practice of taking away the unused credit amounts from consumers who either cancelled their memberships or initiated chargebacks with financial institutions to dispute their transactions.

Moreover, according to the FTC, the company also violated the Restore Online Shoppers Confidence Act (“ROSCA”) by failing to provide consumers with a simple mechanism to stop recurring charges and instead limiting the manner in which a cancellation request could be submitted, understaffing its customer service department, and otherwise utilizing an unnecessarily drawn-out cancellation request process.

Under the terms of the settlement, AdoreMe agreed to return more than $1.3 million to customers, cease making any misrepresentations in connection with its negative option program, and provide a simple way for consumers to stop recurring charges.

In addition, and of particular importance to online marketers, the settlement prohibits AdoreMe in the future from using a customer’s billing information to obtain payment without first obtaining the customer’s express informed consent, and it specifically describes how such consent must be obtained:

“For all written offers (including over the Internet or other web-based applications or services), [AdoreMe must] obtain consent through a check box, signature, or other substantially similar method, which the consumer must affirmatively select or sign to accept the Negative Option Feature, and no other portion of the offer [emphasis added].”  

This provision is significant.  Most online marketers with continuity programs utilize a single checkbox on the check-out page, placed above the submit button, whereby the customer confirms its agreement to the terms of the product purchase, including the negative option or continuity component and the website terms and conditions.  In a departure from this practice, the order language above reflects an enforcement policy preference for two checkboxes – with one of those boxes being a stand-alone confirmation mechanism for the negative option or continuity program terms.

Should we be surprised?  Not really. In August, Beachbody, LLC, a prominent direct response marketer of fitness workout programs and related products, agreed to change its website and sales practices pursuant to a settlement negotiated in People of the State of California vs Beachbody, LLC.  The State alleged, among other things, that Beachbody had failed to adequately inform its customers about the terms and conditions of its auto ship programs.  Beachbody agreed to pay $3.6 million in penalties and restitution and also agreed to the terms of a permanent injunction requiring that Beachbody obtain evidence of a customer’s consent to the auto-ship terms through a separate checkbox (or similar mechanism) that does not include other terms and conditions.  This was believed to be the first injunction in California requiring a separate checkbox to ensure that consumers knowingly consent before they are enrolled in auto-renewals programs.

Monetary implications aside, the City of Santa Monica’s Consumer Protection Division, which negotiated the terms of the settlement, stated that the most important element of the settlement was the requirement of a separate checkbox to confirm the consumer’s affirmative consent to the negative option or continuity program. “A separate checkbox is the key,” said. “Otherwise, it’s too confusing. Companies have too many ways to hide the auto‐renewal terms.”

On the legislative front, Senate Bill 313 was recently passed by both legislative chambers in California and signed by Governor Brown. The bill amends Section 17602 of the Business and Professions Code and, among other things, prohibits companies from “[c]harging the consumer’s credit or debit card, or the consumer’s account with a third party, for an automatic renewal or continuous service without first obtaining the consumer’s affirmative consent to the agreement containing the automatic renewal offer terms or continuous service offer terms.”

The law goes into effect July 1, 2018. While the new language does not specifically state that a stand-alone checkbox (or other similar method of obtaining affirmative consent) is required for continuity programs, the legislative intent behind the amendment is the premise that consumers are not adequately informed about the material terms of continuity programs and that a higher standard of disclosure going forward should be required.

There is no reason to expect that the coming year will provide more leniency for marketers of negative option or continuity programs. Indeed, at a conference held last month in New York conducted by the National Advertising Division of the Council of Better Business Bureaus, the FTC announced its intention to give increased attention to violations of ROSCA in 2018. With all of this in mind, marketers who utilize these programs should prioritize developing protocols for the clear presentation of all program terms.  The regulatory mandate for enhanced disclosure provides an opportunity for marketers to raise the bar with respect to their advertising practices and their customer service. And in light of evolving consumer demand for increased transparency in marketing, this might just turn out to be a good thing for everyone.

Legal disclaimer:  This article is not intended to constitute legal advice or to create an attorney-client relationship.  We trust you knew this anyway.