FTC makes negative option marketing a priority

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WASHINGTON - The Federal Trade Commission held a workshop in Washington Jan. 25 titled "Negative Options: An FTC Workshop Analyzing Negative Option Marketing" in an effort to understand the issues, stimulate a dialogue and interact with interested parties.

Negative option marketing requires a prospect, who has given his or her express informed consent to purchase products or services, to take action in order to cease receiving the product or service in the future. As lives have become busier, and time and convenience have become paramount, this form of marketing has become even more popular.

Lydia Parnes, FTC's director of the Bureau of Consumer Protection, opened the workshop, stressing the importance of finding the correct balance between the benefits and risks of negative option marketing.

There was a clear recognition of the benefits of increased convenience and economic efficiency for both consumers and businesses with the use of negative option marketing.

The original form of negative option marketing is the prenotification negative option plan (the classic book and record clubs). This is where a consumer is sent a notice in advance of receiving the product and has the opportunity to tell the seller that it does not want the product.

More common today are continuity plans, where a consumer has agreed in advance to receive product on a regular basis, but no pre-notice is sent before the product is sent (such as fruit of the month clubs).

Another type of plan is when a consumer agrees in advance to receive a trial offer with a conversion to a paid term, which may further include a later automatic renewal (such as a magazine subscription with a free trial offer).

Ms. Parnes said there is risk with negative option marketing, such as when a marketer fails to do the following: disclose or adequately disclose the material terms of the offer; secure express informed consent to the offer; and/or provide adequate cancellation procedures.

The FTC has taken a number of enforcement actions over the years, including an action announced on the day of the workshop, where the agency attacked companies that have failed in one or more of the areas just outlined.

It is clear that the FTC recognizes that there is nothing inherently wrong with negative option marketing. But the consumer must be told what the material terms are; expressly consent to those terms; be given what he or she has been promised to receive; and an effective opportunity to cancel as outlined in the offer.

The FTC pointed out that it has the authority under Section 5 of the FTC Act to take action against negative option marketers who fail to comply with the precedent that has been established by case law.

In addition, guidance for marketers is expressed in the FTC's "Dot Com Disclosures," which gives specific information for marketers who use the Web when they offer and advertise their plans. The Telemarketing Sales Rule outlines what needs to be done when negative option marketing and telemarketing are combined.

The original 1973 FTC Rule on Prenotification Negative Option Plans provides very specific guidance on what needs to be done when prenotification plans are offered. This body of law, rules, cases and commentary provides sufficient guidance to the marketer, and adequate protection for the consumer, such that there is no, in this author's opinion, need for any additional action to be taken by the FTC.

One of the clear themes expressed at the workshop was that there are substantial self-regulatory bodies that outline the action that needs to be taken when offering negative option marketing.

Presentations by the Electronic Retail Association, the National Advertising Division of the Council of Better Business Bureau, the Magazine Publishers Association and the Direct Marketing Association all supported the proposition that there are effective self-regulatory programs in place that provide guidance to industry, protection to consumers, and an enforcement process against violators.

The FTC has recognized that self-regulation is a critical component of the overall process of supporting compliance with the law, and ensuring that business recognizes its obligations and complies with best practices.

There were a number of academicians from the nation's top law schools and research institutions who reported on new research that showed how consumers interact with the computer, what consumers may read when online, and the differences in consumer action based on the demographics of the audience.

The research stimulated much discussion, and helped those participating and attending to focus beyond the traditional legal analysis of what the law requires, to more of what should or could be.

The FTC's focus was very much on the online marketing and advertising of negative option programs. This represents a concerted decision by the FTC to stay ahead of the curve, and indicates the FTC's interest in the medium.

Consumer groups, specifically representatives of Consumer Watch, the National Consumers League and Consumer Affairs.com, participated in the workshop. These groups recognized the benefits to consumers and businesses of negative option marketing.

The concerns discussed were the same three areas expressed by Ms. Parnes.

There is a need to ensure that consumers are told all of the material terms in a clear and conspicuous manner, that consumers' express affirmative consent is actually obtained and that cancellation procedures are not only offered, but are easy and effective.

One representative said that the ease with which a consumer can cancel a program should match or exceed the ease with which a consumer signs up for that program.

Lesley Fair, an attorney with the FTC's Bureau of Consumer Protection , presented on how to make disclosures clear and conspicuous. She emphasized an absolutely critical point: Not all terms of an offer need be disclosed; only those terms that are material and necessary to prevent an advertised offer from being deceptive. The tools available to a marketer to make disclosures clear and conspicuous are flexible and varied, and there is no one way to accomplish that goal.

Finally, in a hypothetical example of a negative option marketing plan, there was spirited debate on how to effectively make disclosures and apply the lessons of the workshop.

In a practical interaction, the participants were able to show what needs to be disclosed; where it should be disclosed; when it should be disclosed; and how it should be disclosed. This allowed the attendees to leave the forum with helpful hints on what can be done to comply with the law.

So, what's next? What will the FTC do? The FTC is open to receive further comments for it to consider. The FTC will review all of the comments and the information submitted at the workshop and determine what action, if any, it will take next.

It is likely that the FTC will issue a report based on what it has learned that will be helpful in understanding what is important to the FTC. Will the FTC take additional action, such us issue a formal guide to business, or additional action? It is too premature at this juncture to tell.

One certain fact is that the FTC is very interested in negative option marketing. It will monitor businesses and their practices, and will listen to consumers. It will keep its attention focused on the industry's attempts to self-regulate itself. With the massive changes in technology, media and marketing, the FTC will do what it needs to ensure that it does find the right balance of stimulating competition and protecting consumers.

Ronald R. Urbach is a partner and co-chair of New York-based Davis & Gilbert's advertising, marketing and promotions law department. Reach him at rurbach@dglaw.com.

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