New FTC Rules May Reduce Free-Trial, Continuity Offers

Stern new rules governing “free-to-pay” or negative-option offers strike some marketers as paternalistic and may lead to a decrease in free-trial offers, industry experts said.

The Federal Trade Commission slapped new requirements on marketers that use negative-option offers — those that interpret a failure to cancel as acceptance of an offer, either in a free trial or in a continuity program — along with pre-acquired account information. The changes are part of an FTC effort to reduce consumer complaints that charges appear on their bills that they did not authorize, often a result of confusion when they accept free-trial and continuity offers.

Many free-trial and continuity marketers use pre-acquired account information rather than get the information from the consumer directly, particularly in upsell situations when they don't want to ask consumers for their billing information twice. Under the new FTC rules, negative-option marketers that use pre-acquired account information will have to obtain at least the last four digits of the consumer's account number before issuing charges and make an audio recording of the entire call.

To some marketers, the rules appear to be an attempt by the FTC to protect consumers from themselves and the tendency to react on the spot to good marketing, or, in other words, a crackdown on impulse buying.

“As someone who owns 47 lipsticks, 20 of which have never been used, I resent the idea that we're taking that element of marketing and somehow discarding it,” said Elissa Myers, president/CEO of the Electronic Retailing Association. “To some extent, that attitude permeates this rule.”

However, Myers noted that the FTC's rule is less harsh than the one originally proposed, which was a total ban on the use of pre-acquired account information in negative-option marketing. In the end, the cost will be borne by consumers who will lose out on opportunities to try goods and services for free before they buy.

“The industry will adapt to it,” Myers said. “We think it is going to hurt industry. We're going to continue to argue against it. But at this point, the rule is in effect.”

Negative-option marketers also face new disclosure rules, including clear disclosures that they will be billed unless they cancel and instructions on how to cancel, and “all material terms and conditions of the negative-option feature,” said Linda Goldstein, a New York marketing attorney and chairwoman of the ERA. The second disclosure condition is troubling because it is vague.

“That's a problem because that's going to open the possibility for lots of enforcement activity,” Goldstein said. “It leaves the commission with lots of discretion as to what is a material term and condition.”

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