Subscription merchants that take payment by Visa cards will have new acceptance, disclosure, and cancellation requirements imposed on their transactions beginning April 18, 2020. As Visa recently announced, the card brand is updating its rules for merchants that offer free trials or introductory offers as part of an ongoing subscription program.

The Visa rules follow on the heels of similar Mastercard rules that became effective earlier this year. However, while MasterCard’s rules focus on merchants selling subscriptions for physical goods, Visa’s rules apply to merchants selling either physical or digital products if the merchant offers a free trial or introductory offer that rolls into an ongoing subscription arrangement.

The new requirements are more specific than what the Restore Online Shoppers’ Confidence Act (ROSCA) prescribes, and while they don’t have the force of law, noncompliance could put a merchant’s credit card processing capabilities at risk. Here are some of the components of the new Visa rules:

Continue Reading New Requirements for Subscription Merchants Accepting Visa Cards

The Federal Trade Commission’s “Negative Option Rule” is up for review, and the FTC is steering toward stricter regulations for automatic renewal plans and subscription programs. The FTC completed its last regulatory review of the Negative Option Rule in 2014 and decided then to retain the rule in its current form. But, will this time be different?

The Rule Under Review

The rule under review is the “Rule Concerning the Use of Prenotification Negative Option Plans,” also referred to as the “Negative Option Rule.” However, the scope of the Negative Option Rule only covers prenotification plans, like book-of-the-month clubs, where the seller sends notice of a book to be shipped and charges for the book only if the consumer takes no action to decline the offer, such as sending back a postcard or rejecting the selection through an online account.

Continue Reading The FTC’s Negative View of Negative Options – Are Expanded Regulations Coming?

Positive online reviews have become essential for any business marketing goods or services over the internet, especially for trendy services like food delivery and custom health product sales. But the FTC’s newly-announced settlement with startup healthy snack service UrthBox reminds marketers that online praise must be freely given, not bought—even if the compensation offered isn’t monetary.

UrthBox, Inc., a San Francisco company offering direct-to-consumer snack deliveries on a subscription model, drew the FTC’s ire by maintaining an incentive program that offered free snack boxes to consumers who posted positive reviews on the BBB’s website. According to the FTC’s complaint, the plan was simple: when a consumer reached out to UrthBox, customer service representatives would offer to send free products to the consumer in exchange for a screenshot of a positive review. The program began with the customer service department at UrthBox, where representatives were paid bonuses based on the number of consumer complaints they were able to turn into positive online reviews. The impact was significant: where UrthBox’s BBB profile had only nine reviews (all negative) in 2016, by the end of the next year, the company boasted 695 reviews, 88% of them positive.

Continue Reading FTC’s Snack Service Settlement Reminds DTC Companies Not to Incentivize Reviews

As 2019 goes into full swing, it’s important for providers of payment processing services (referred to here as “acquirers”) and their merchants or submerchants to prepare for the various regulatory and industry changes coming this year. One such significant change comes in the form of Mastercard’s updated rules for negative option billing programs.

Set to take effect on April 12, 2019, Mastercard’s new rules will tighten consumer protection requirements for negative option merchants and their acquirers that process Mastercard transactions. Several laws such as the Electronic Fund Transfer Act, the Restore Online Shoppers’ Confidence Act, and various state laws already apply to negative option billing programs, but Mastercard’s new rules go even further. Among other things, the rules include a requirement for merchants to notify consumers at the end of a trial period before charging the consumer.

Applicability

Notably, the new rules cover any card-not-present transaction where the consumer purchases a subscription to automatically receive a physical product (such as cosmetics, healthcare products, or vitamins) on a recurring basis. Fully digital services are not covered.

This means the rules apply to free trial offers and most forms of negative option programs involving product sales. The negative option plan may be initiated by a free trial, nominally priced trial, or no trial at all. However, if a trial is used, special rules apply to ensure the consumer is aware of and consents to subsequent payments at the trial’s conclusion.

Continue Reading Mastercard Targets Negative Options In 2019 – Demands Transparency

Recently, we wrote about new faces at the FTC, which, for the first time in its history, has five new Commissioners in a calendar year. This unprecedented change has cast some uncertainty on how the FTC will approach consumer protection enforcement. Recent actions by the Commission, however, indicate that despite new leadership, the Commission’s focus will be largely unchanged. Unsubstantiated health claims and unauthorized billing appear to remain high on the FTC’s list of priorities.

Last week, the FTC won a preliminary injunction from the Central District of California regarding the sale of oral dissolvable film strips promising smoking-cessation, weight loss, and enhanced sexual performance—all past favorites of the FTC. The advertisements for all three products made objective claims concerning performance such as the “88% Success Rate” of the smoking-cessation product or the promise that you can “lose 10, 20, even 100 pounds without giving up your favorite foods or adding any exercise.” The FTC alleged these claims were false, misleading, or unsubstantiated. The FTC also challenged alleged phony testimonials and threw in a false “Made In The USA” claim.

In addition to the product claims, the Commission also alleged that the defendants allegedly charged consumers without their knowledge or consent through an automatic renewal plan violating the FTC Act, ROSCA, and EFTA. Automatic renewal or negative option plans have frequently been the subject of enforcement by the FTC as well as several states in recent years. It does not appear that the new Commission will be changing course.

Finally, the FTC also alleged that the defendants violated the Telemarketing Sales Rule by sending prerecorded outbound calls to induce the sale of their products. So, while there might be new faces at the top of the FTC, it appears that for many marketers, it’s business as usual.

The FTC has been waging a steady war against advertisers that use introductory offers that turn into subscription agreements. With the FTC threatening to seek full consumer redress and to impose joint and several liability, most companies and their principals cannot afford to litigate such cases and are forced to settle. In March 2015, the FTC sued DIRECTV, alleging that DIRECTV failed to properly disclose material terms of its introductory offer and its subscription agreements. DIRECTV chose to fight. Last August the case went to a bench trial. After the close of the FTC’s case, the judge suspended the trial so that DIRECTV could move for a judgment in its favor. Last week, the judge granted DIRECTV’s motion in part, tossing out large parts of the FTC’s case. The opinion provides insightful guidance on how to structure continuity offers and illustrates the difference between alleging something is deceptive and proving it.

In its complaint, the FTC alleged that DIRECTV failed adequately to disclose that: (1) introductory prices were limited to the first 12 months of 24-month subscriptions; (2) the subscriber is subject to a 24-month commitment; (3) early termination fees would apply if subscriptions were cancelled early; and (4) premium channels were free for three months and then would be automatically charged at the regular rate unless the subscriber called to cancel. The FTC alleged these deceptive statements were made in print, TV, and banner advertisements as well as the directv.com website. Based on these allegations, the FTC sought restitution of $3.95 billion based on DIRECTV’S alleged unjust gains from the deception.

Continue Reading A Victory for Introductory Offer and Subscription Advertisers: FTC Fails to Prove Deception Against DIRECTV

Opting OutWhat do golf and sex have in common? According to the old joke: They’re two things you don’t have to be good at to enjoy. Similarly, some men – ok, most men – tend to exaggerate their prowess at both. You can add one more common trait: The FTC scrutinizes online continuity offers for the accessories associated with both, as the FTC last week settled a case involving lingerie and we blogged previously about the FTC’s golf ball ROSCA case, which settled recently. One final note on the connectivity between golf and lingerie: Supermodel and actress Kelly Rohrbach appeared in lingerie on the AdoreMe site and played college golf.

On November 20th, the FTC filed suit in New York against an online seller of lingerie for violating the FTC Act and Section 5 of the Restore Online Shoppers’ Confidence Act (ROSCA). According to the complaint, AdoreMe generates most of its revenue from its “VIP members.” For $39.95 a month, VIP members receive discounted prices, but are not charged if they buy apparel within the first five days of each month or affirmatively click a button to skip that month. If a consumer forgets to click the button or buy something within the first five days, the amount becomes store credit that supposedly can be used at any time. However, according to the FTC, many consumers were surprised to learn that the store credit could not be used at any time. The FTC alleged that AdoreMe failed to disclose that if a consumer cancelled their VIP membership, their store credit would be forfeited. The FTC sought $1.3 million for the forfeited store credit.

Continue Reading Sex, Golf, and the FTC

financial lawMany time-strapped consumers count on household subscription services to simplify life. One quick purchase agreement with automatically renewing payments, and consumers can receive uninterrupted access to the latest streaming shows, months of lifestyle subscription boxes, or online cloud storage to back up all the family vacation photos. But sometimes consumers aren’t clear on how to unsubscribe or exactly what price they’ll pay after a discounted or free trial period. Thus, many states are enacting or updating their Automatic Renewal Laws (“ARLs”) to ensure consumer protection.

On the heels of increased class action filings under California’s current ARL (see e.g., Kruger v. Hulu; Wahl v. Yahoo! Inc.), the state continues to tighten the reins on automatic renewals and continuous service providers with newly enacted Senate Bill 313. California’s expiring ARL was enacted in 2010. It requires auto-renewing consumer contracts to clearly and conspicuously disclose terms, obtain affirmative consumer consent before imposing a charge, and provide an acknowledgment that contains the terms, the cancellation policy, and a simple cancellation method. California’s 2010 ARL was already broader and more specific than the federal Restore Online Shoppers’ Confidence Act, commonly known as ROSCA and enforced by the FTC. (Read more about ROSCA here.)

Continue Reading California Tightens Auto-Renewal Requirements

healthcare and fitness appsLast week, in an ironic twist of fate, the Federal Trade Commission (FTC) charged the operators of the Pact Mobile App, which paid consumers for keeping their fitness promises and charged consumers who missed their goals, for failing to honor its promises to consumers.

According to the FTC’s complaint, when consumers signed up for the Pact App (formerly GymPact), consumers provided the app with their payment card information and set a workout or fitness goal. When signing up, users specified an amount of money the app could deduct if the user missed a workout or fitness goal for the week. The charges ranged from $5 to $50 per missed activity. If, on the other hand, the user achieved the goal, Pact would pay them. To track consumers’ compliance with their goals, Pact required users to check in at gyms using their phones’ GPS. Pact also allowed consumers to set other goals, using the app’s VeggiePact and FoodLoggingPacts options.

Continue Reading Mobile App Settles Charges with FTC that it Broke Pact with Consumers

Risk-free trialIt’s no secret that automatic renewal (or continuity or negative option programs) are on many regulators hit lists. Regulators argue that consumers are often unaware that they have signed up for services or products for which they will be billed on a monthly basis unless and until they cancel, particularly when it involves a free trial period. In some cases cancellation may not always be easy and the billing descriptor that appears on the consumer’s credit card statement may differ significantly from the branded product or service name. Finally, otherwise busy consumers may simply forget about the upcoming renewal, particularly if the subscription term is lengthy.

Regulators have responded by bringing numerous law enforcement actions, many of which seek to heighten disclosure requirements. At the federal level many of these enforcement actions are based in part upon ROSCA, the Restore Online Shoppers Confidence Act. (See our previous posts on ROSCA here.) The Unsubscribe Act, introduced in the House of Representatives earlier this year, seeks to tighten legal requirements for such programs even further.

Continue Reading Congress Takes Further Aim at Negative Option Programs