Membership Clubs Stay Under Scrutiny

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Membership programs, particularly those in which the initial offer is presented as "free" or for a nominal amount, continue to garner regulatory scrutiny. Recent actions by California, Connecticut and Maine against "discount buying clubs" promoted by Chase and offered by Trilegiant, as well as continued Federal Trade Commission actions highlight the risks associated with such programs, not only to the club provider but also to the marketing partner.


"Free to pay" and "nominal to pay" conversions. Many membership programs are offered by marketers as an upsell to an existing order. Such programs let marketers offer a program or service on a trial basis, with the consumer required to expend only a nominal amount ("nominal to pay") or nothing at all ("free to pay") to try it.


For example, a customer buying a catalog item by telephone may be offered a free 30-day trial in a discount travel club after the order is placed. If the customer accepts the offer, she will have a limited time to advise the club that she does not want the service. Otherwise, the credit card used to make the catalog purchase will be billed at the stated regular price. An alternative approach, one that got Chase into trouble, is to send a consumer a promotional check, whereby depositing the check results in a club enrollment. Future payments are deducted from the depositor's checking account.


Because the consumer often agrees to try the program for an extended time and must act affirmatively if he does not want to be billed, once the consumer sees the charge, these programs tend to generate complaints.


One of the 2003 amendments to the FTC's Telemarketing Sales Rule restricted the marketing of "free to pay" upsell offers. The use of checks has been expressly approved by the Federal Communications Commission in the context of soliciting long-distance service customers, though important disclosure obligations are attached to such use.


Recent enforcement actions. Recent enforcement actions brought on both the federal and state level highlight the importance of vetting marketing materials before the selling process begins. This is true not only for the provider of the services, but the business that offers the club as an ancillary upsell.


In June, one of the world's largest publishers and distributors of children's books, Scholastic Inc., settled an FTC claim that it deceptively enrolled consumers into its book-club programs. The FTC alleged that Scholastic's direct mail and telemarketing campaigns offered consumers two related book clubs that operated on different terms and that these terms were not sufficiently disclosed to consumers at the time of enrollment.


Scholastic agreed to change its program and pay $710,000 as a penalty. Scholastic also agreed to write off a significant amount of consumer debt that had been incurred in the membership programs as well as send a notification letter to its customers.


In addition to the action against Scholastic, some states have taken issue with the use of promotional checks, surveys and telemarketing transactions that failed to sufficiently disclose to consumers the obligations they were taking on when accepting the offer.


For example, Trilegiant, an established membership-based provider of travel, health, shopping, entertainment and consumer protection services, and its marketing partners have been the subject of regulatory enforcement activity by a number of states. Trilegiant marketed its clubs under at least 19 names through surveys, telephone solicitations or the sending of complimentary checks that all obtained consumer consent to enroll.


In March, Trilegiant settled an action brought by the Florida attorney general. The Florida complaint alleged that Trilegiant's membership terms were insufficiently disclosed so that consumers were unaware that their actions resulted in their enrollment. The case settled for $400,000.


California went one step further by suing not only Trilegiant, but also its marketing partner Chase. California alleged that Trilegiant's programs were marketed deceptively to Chase's customers through the use of solicitations that included promotional checks that consumers were urged to cash as a "reward for being a valued Chase customer."


According to the complaint, the solicitation failed to adequately disclose to the consumer that by cashing the check, the consumer became a program member who would be billed for an annual membership if she failed to cancel by a specified date.


A similar lawsuit was filed against Trilegiant by Connecticut's attorney general, and Maine's attorney general has announced its intent to sue Trilegiant and Chase.


These recent actions make clear that marketers must ensure that materials used to promote a membership club contain all material terms and conditions of the offer. Marketers also must consider that consumers may not fully understand that by accepting the offer - either by depositing the check or agreeing to a free trial period - they will be enrolled in a club unless they affirmatively cancel the membership within a certain time.


It is the marketer's duty to ensure the key terms and conditions are fairly disclosed in a manner in which a reasonable consumer will understand.


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