Buy now, pay forever: Beware negative option plans
FTC decides not to change rules for automatic renewals, free trials that aren't free
Have you ever signed up for a "free" trial that ended up being anything but free? Or have you ever been charged for something you didn't realize you had signed up for?
If so, you were likely the victim of a controversial sales practice called negative option marketing. Negative option ads follow a simple principle: they assume that if you don't say no, you mean yes.
Often, customers sign up for something like a free credit report or a trial shipment of vitamins, enter their credit card information and then get hit with months and months of charges because they don't realize they have to cancel, can't figure out how to cancel or they just forget. Other times, they click a button to do a survey or get a free report and don't see the fine print that says they're signing up for a service with a cost.
A Visa survey in 2009 found that 29 percent of American consumers had unauthorized recurring card charges from negative option plans. The Federal Trade Commission, Better Business Bureaus and consumer groups from across the country have gotten hundreds of complaints about the practice.
"A lot of the people who complain are irate," says Jeannette Kopko, senior vice president of communications with the Better Business Bureau in Dallas. "They really feel misled and taken advantage of when they realize they have these charges on their account. If there really was a clear and conspicuous disclosure, there wouldn't be such a pattern of complaints."
Negative option plans take many different forms. Here are some common ones:
- You sign up to get a "free trial" of e-cigarettes or teeth whitener, and you're automatically enrolled to receive regular shipments of the product (which you must pay for), unless you opt out.
- You pay for an annual subscription for a magazine, and when it runs out, the magazine automatically renews your subscription and charges you.
- A book club sends you an offer for a book of the month. If you don't call and decline it within a specified time limit, the club sends you the book and charges you for it.
- You buy an airline ticket online and don't notice a box that is pre-checked for travelers insurance. The next thing you know, you're being charged every month for the service.
Kimberly Rotter of San Diego says she was duped by a negative options offer after signing up for a free trial with an Internet dating site. "I canceled before it ended, but apparently I did not cancel early enough," she says. "Their fine print was extremely fine and I missed the part that said cancellations had to be a certain number of days in advance of the renewal date, so they charged me."
Rotter complained to her credit card issuer, provided documentation, and the issuer reversed the charge. But she was banned for life from the dating site. The lesson, according to Rotter: "Anytime you give your credit card number, comb through the fine print carefully to find out what the cancellation policy is," she says. "Just assume it's tricky."
FTC declines to act
The Federal Trade Commission announced in July 2014, after five years of deliberation, that it would not make any changes to its rules related to negative option plans, even though attorneys general from more than a dozen states and many frustrated consumers had asked the agency for more regulation. Written in 1973, the current rules apply only to one narrow type of negative option plan, the ones that notify you that they will send you a specific item (like a book) unless you opt out.
NEGATIVE OPTION OFFERS:
HOW NOT TO GET DUPED
The FTC decided not to expand its negative option rules partly because a law Congress passed in 2010 called the Restore Online Shoppers' Confidence Act (ROSCA) included some of the protections consumers had asked for.
Still, some consumer advocates are frustrated that the FTC isn't using ROSCA to go after more companies. "It was so evident there needed to be change that Congress stepped in and enacted an entirely new law," says Bonnie Patten, executive director of Truth in Advertising, a nonprofit group. "But here we are four years later, the FTC has never used that new law, and negative option offer abuse is rampant."
FTC officials acknowledge there have been no public cases involving ROSCA, but said the commission has started to put resources into its enforcement. They noted that the agency has applied another law that prohibits deceptive marketing to successfully shut down a number of scammers that were using negative option ads.
"We just got a multi-million dollar court victory in one case," says Robert Anguizola, assistant director in the division of marketing practices. "We do go after these people. If we're shutting them down, I'm not sure why it matters what statute we used."
The Brand Activation Association, a division of the Association of National Advertisers, and the Association of Magazine Media argued against any changes to the FTC's negative options rule. They say there are already enough safeguards to protect consumers, and that free trials and automatic renewals are beneficial for customers.
"Obviously, there are always people who abuse things, but we represent legitimate brands," says Ed Kabak, the Brand Activation Association's chief legal officer. "Our concern was overregulating. Consumers can benefit from free trials and getting continuous shipments. They're convenient for everyone."
The rules: What merchants are supposed to do
Because of ROSCA, the rules companies must abide by are now fairly clear, at least for offers on the Internet. The law requires sellers who market a negative option offer online to meet the following criteria:
- Terms must be "clearly and conspicuously disclosed" before they get your billing information.
- They must obtain your "express informed consent" before they charge your financial account.
- They must provide a "simple mechanism" you can use to stop any recurring charges on the account.
In addition, some states have enacted even more stringent laws applying to these types of plans. In California, for example, companies must give customers a heads up before they automatically renew a subscription or contract, including a disclosure of the full terms and instructions on how to cancel.
"If you look at all the laws, it would appear that they may be adequate but we'll never know unless the FTC and state agencies start using them more," Patten says. "They really need to bring more enforcement actions."
While many merchants are following the laws, others still pre-check consent boxes (which is now prohibited), bury details of the offer in fine print that's several clicks away and make cancellations or returns difficult.
|NEGATIVE OPTION OFFERS:
WHAT TO DO IF YOU WERE DUPED
In a recent investigation of negative options offers peddled by e-cigarette manufacturers, Truth in Advertising found many of the companies were difficult or impossible to reach by customers trying to cancel. In addition, the companies promised free samples but required you to cancel before you even got the product, or said you had to pay for the sample if you opened the packaging. One customer who filed a complaint with the FTC wrote:
"The paperwork that came with the kit states that [to return the kit] ... the kit must be in reusable condition. How can you return a kit in reusable condition when you have to open the package and put the cigarette in your mouth [to sample it]?"
Several e-cigarette companies are now facing fines and have been cited by Utah consumer protection officials for deceptive advertising.
New rules for phone calls?
Meanwhile, the FTC is now asking for comment on the portion of its rules regarding telemarketing sales, and that includes negative options offers made by phone.
The disclosures required are already fairly strict when a telemarketer calls a consumer with an offer, says Susan Grant, director of consumer protection at the Consumer Federation of America. But inbound calls -- when a customer calls about a product after seeing it in a television, print or radio ad -- are not as regulated.
"We would argue that the tiny, tiny print at bottom of a TV ad or the terms that are mentioned briefly in a fleeting radio advertisement aren't enough to allow consumers to make informed decisions," Grant says. "We want merchants to have to provide that information again before a consumer is enrolled in a negative option offer where they're going to start getting charged every month."
The public comment period on the FTC's telemarketing sales rule ends Nov. 13. Have a comment or an opinion? You can file it via the FTC's public comment form.
- Consumer watchdog agency considers deleting complaints from website – CFPB acting director John M. 'Mick" Mulvaney said deleting public database of consumer complaints about companies is an option ...
- CFPB rollback of payday loan protection draws criticism – Consumer advocates decry lack of enforcement actions and reopening of payday loan regulation by consumer watchdog agency led by Trump appointee ...
- Credit card APRs to rise as Federal Reserve raises rates again – Credit card APRs will rise after the government's interest rate setting committee decided to raise its benchmark rate by 0.25 percent to keep inflation in check ...