Free-to-Pay Programs Attract Scrutiny

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New regulatory standards appear to be emerging governing the solicitation, sale and renewal of "free to pay" discount buying membership clubs. Many of the leading marketers of these programs have faced regulatory challenges that have resulted in settlement agreements governing their conduct.


Though these settlements are not uniform and are not binding on other marketers, they provide great insight into the type of disclosures that regulators think need to be made to comply with the law. Moreover, the Federal Trade Commission has circulated a draft business guide on continuity programs that may affect these and other similar continuity programs. Marketers offering such programs should check to ensure that they are in compliance.


Free-to-pay continuity programs. Free-to-pay continuity programs continue to proliferate direct marketing offers. These programs generally involve a free trial period that allows consumers to use the services of the program, such as a discount buying club or discount travel club, without charge.


After the expiration of the trial period (such as 30 days), if a consumer does not advise the company that she wishes to cancel, the consumer's previously provided credit card is automatically billed for the program. In addition, the consumer's credit card will be automatically billed annually for the renewals of the program unless the consumer cancels in a timely manner.


New regulatory standards? Because a consumer's account is billed if she does not cancel in a timely manner - as opposed to assenting affirmatively to the charge at the time of billing - free-to-pay continuity programs have the potential to generate consumer complaints.


Generally, the FTC Act and the states' "Little FTC Acts" require clear and conspicuous disclosure of the terms and conditions of the programs, including how much the consumer will be billed (specifying any additional charges for postage and handling), when the billing will take place, the refund policy and how a consumer may cancel without being charged. Regulators, however, have become even more specific in the types of disclosures they deem necessary to be in compliance with these laws.


Solicitation and sale requirements. Certain companies have entered into settlements that require additional steps to be taken in marketing and distributing the membership materials.


For example, one agreement requires a marketer to possess a taped verification of the consumer's consent to membership charges. The disclosures made during the verification are in addition to the initial disclosures in the sales script, which must also disclose the terms and conditions of the program. The taped verification must disclose that the consumer's account will be automatically charged at the end of the 30-day period and for each new year, that the previously supplied credit card will be billed for the program, that to cancel the consumer must call a toll-free number during the trial period to avoid automatic billing and it must include the consumer's affirmative consent to the automatic billing method.


An agreement with Nebraska requires one company to make a double refund if the taped verification is unavailable or if the marketer fails to demonstrate that adequate disclosures regarding the program were made.


Fulfillment materials sent to a consumer must clearly and prominently state on the first page of any enclosed materials that the consumer has agreed to join a membership program or a trial offer, that the marketer will automatically charge the consumer's account unless the consumer calls to cancel during the trial offer and that the marketer will charge the account the following year unless the consumer cancels in a timely manner.


Renewals. Minnesota required Memberworks to send consumers a renewal letter 30 to 60 days in advance of the renewal billing date. The agreement requires Memberworks to disclose in a renewal letter and on the envelope in 14-point, bold capital letters, "Upcoming Charge For Membership Renewal." The top half of the renewal letter must also state, "If You Take No Action, Your [Account Type] Will Be Charged To Automatically Renew Your Membership." The paragraph continues with the options that the consumer has on renewal, including providing a toll-free telephone number to call to cancel.


FTC involvement. A recent filing in the Triad bankruptcy discloses that the FTC has continued to focus on membership-type arrangements. Though the FTC's prohibition on unfair or deceptive acts or practices has always applied to these types of marketing programs, the FTC has circulated to various private groups a working draft of business guides titled "Act Now/Pay Later."


Though the FTC has not finalized or published these guides, the draft guides contain specific disclosure requirements in connection with automatic renewals, including whether automatic renewals of subscriptions or contracts will occur if the consumer fails to contact the seller; whether automatic renewals will occur without prior notification to the consumer; how often automatic renewals will occur; cost or range of costs for renewal; whether the credit card previously furnished to pay for the initial product or service can automatically be charged for renewal periods without further contact by the seller; how consumers can cancel to avoid automatic renewals; and any other relevant information regarding automatic renewals.


Where the FTC will be heading with this guide is unknown, but marketers engaged in these types of continuity programs should pay close attention.


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