[Federal Register Volume 63, Number 161 (Thursday, August 20, 1998)]
[Rules and Regulations]
[Pages 44555-44562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22446]
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FEDERAL TRADE COMMISSION
16 CFR Part 425
Trade Regulation Rule Regarding Use of Negative Option Plans by
Sellers in Commerce
AGENCY: Federal Trade Commission.
ACTION: Final rule.
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SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission'') has
completed its regulatory review of the Trade Regulation Rule regarding
the Use of Negative Option Plans by Sellers in Commerce (``the Negative
Option Rule'' or ``the Rule''). Pursuant to this review, the Commission
concludes that the Negative Option Rule continues to be of value to
consumers and firms, and is functioning well in the marketplace at
minimal cost. This document summarizes and discusses the comments
received in response to a request for public comment regarding the
overall costs and benefits of the Rule, and announces the Commission's
decision to retain the Rule in its present form. This document also
announces several technical, non-substantive amendments to clarify the
Rule and conform its language to amendments in the Federal Trade
Commission Act (``FTC Act'').
EFFECTIVE DATE: August 20, 1998.
FOR FURTHER INFORMATION CONTACT:
Edwin Rodriguez, Attorney, Federal Trade Commission, Washington, DC
20580, (202) 326-3147.
SUPPLEMENTARY INFORMATION:
Introduction
As part of a systematic review of its Rules and Guides, on March
31, 1997, the Commission solicited comments on whether there is a
continuing need for the Negative Option Rule, 61 FR 15135. It also
requested comments on the benefits and costs of the Rule to consumers
and firms, and whether the Rule should be changed to increase its
benefits or to reduce its costs or other burdens. The Commission sought
comments about any abuses occurring in the promotion or operation of
negative option plans that are not addressed by the Rule, and
alternatives--such as consumers education, industry self-regulation, or
rule amendment--for dealing with such abuses, including the benefits
and burdens any change would have on industry and consumers. The
Commission also sought comments on the effect on the Rule of changes in
technology or economic conditions, such as the use of e-mail and the
Internet. The Commission was also interested in learning about any
overlap or conflict with other federal, state, or local laws or
regulations.
The Commission received 19 comments in response to this request.\1\
[[Page 44556]]
These included comments from consumers, industry members, state and
local government representatives, and academicians. Below, the
Commission explains how the Rule regulates negative option plans,
summarizes and discusses the comments received, discusses the Rule's
application to negative option plans advertised on the Internet and by
other electronic means, and adopts technical, non-substantive
amendments to the Rule.
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\1\ The comments have been filed on the Commission's public
record as Document Nos. B21944500001, B21944500002, etc. The
comments are cited in this notice by the name of the commenter, a
shortened version of the comment number, and the relevant page(s) of
the comment, e.g., DMA, #018, at 5. All written comments submitted
are available for public inspection on normal business days between
the hours of 8:30 a.m. to 5 p.m. at the Public Reference Room, Room
130, Federal Trade Commission, 6th St. and Pennsylvania Ave., NW,
Washington, DC 20580. The commenters are: Jerome S. Lamet, Jerome S.
Lamet & Associates (``Lamet''), #001; Stephen L. Bair, Book-of-the-
Month Club, Inc. (``BOMC''), #002; A. Thomas Niebergall
(``Niebergall''), #003; Joseph A. Greenberg, Professor of Education,
George Washington University (``Greenberg''), #004; Owen R.
Phillips, Professor of Economics, University of Wyoming
(``Phillips''), #005; Charles Jacobina, Professor of Marketing,
George Washington University (``Jacobina''), #006; Lydia Proctor,
Ontario Ministry of Consumer and Commercial Relations (``Ontario''),
#007; Robert L. Sherman, Direct Marketing Association (``DMA''),
#008; William L. Oemichen, Administrator, Division of Trade and
Consumer Protection, Wisconsin Department of Agriculture
(``Wisconsin/Agriculture''), #009; A Courtney Yell, Director/Chief
Sealer, County of Bucks, Pennsylvania, Department of Consumer
Protection/Weights & Measures (``Bucks County''), #010; Robert J.
Posch, Jr., Vice President, Legal Affairs, Doubleday Direct
(``Doubleday''), #011; James E. Doyle, Attorney General, State of
Wisconsin Department of Justice (``Wisconsin AG''), #012; Barry Jay
Reiss, Senior Vice President, Business & Consumer Affairs, Columbia
House (``Columbia House''), #013; Clifton B. Knight, Jr., Senior
Vice President, Business Affairs, BMG Direct, Inc. (``BMG''), #014;
Mark T. Spriggs, Assistant Professor of Marketing, University of
Oregon, and John R. Nevin, Grainger Wisconsin Distinguished
Professor, School of Business, University of Wisconsin-Madison
(``Spriggs & Nevin''), #015; Anne Darr, DeHart and Darr Associates,
Inc. (``DeHart and Darr''), #016; Bruce A. Craig (``Craig''), #017;
Mark Bressler (``Bressler''), #018; D.B. Mansion, (``Mansion''),
#019. Three commenters submitted journal articles as comments. They
are: Phillips, #005, Negative Option Contracts and Consumer
Switching Costs, Southern Economic Journal, Vol. 60, No. 2 (October
1993); Spriggs & Nevin, #015, Negative Option Selling Plans: Current
Forms Versus Existing Regulations, Journal of Public Policy &
Marketing, Vol. 15, No. 2 (Fall 1996); and Craig, #017, Negative-
Option Billing: Understanding the Stealth Scams of the '90s, Loyola
Consumer Law Reporter, Vol. 7, No. 1 (Autumn 1994).
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II. Requirements of the Negative Option Rule
A. Negative Option Plans Covered by the Rule
The Commission issued the Negative Option Rule in 1973 to protect
consumers from potentially unfair or deceptive acts or practices in the
promotion and operation of prenotification negative option plans for
the sale of goods, such as the failure to disclose in promotional
materials the terms and conditions of membership.\2\ The Commission
promulgated the Rule under section 5 of the FTC Act, 15 U.S.C. 45,
which declares unfair or deceptive acts or practices in or affecting
commerce to be unlawful. The Rule became effective on June 7, 1974.\3\
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\2\ Regulations Pertaining to the Use of Negative Option Plans
(``Statement of Basis and Purpose'' or ``SBP''), 38 FR 4896.
\3\ In 1986, the Commission conducted a review of the Negative
Option Rule pursuant to section 610 of the Regulatory Flexibility
Act, 5 U.S.C. 610, to determine the impact of the Rule on small
entities. In a notice published on November 21, 1986, 51 FR 42087,
the Commission announced the results of that review, concluding that
``there is a continued need for the Rule; there is no reason to
believe that the Rule has had a significant economic impact on as
substantial number of small entities; and the rule should not be
changed.''
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The Rule regulates only a subset of all negative option sales--
those made under ``prenotification negative option plans'' for the sale
of goods. Because the Rule's coverage is often misunderstood, and
because the comments recommend extending the Rule to other negative
option selling techniques, or to the negative option sale of services,
the Commission believes some prefatory discussion of negative option
sales and the Negative Option Rule would be helpful.\4\
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\4\ Lamet, #001, stated at 1, that lawbook publishers have sent
him publication updates without first sending him prenotification
forms. He described this as a negative option abuse. Bucks County,
#010, stated at 1, that sellers of yearly calendars who do not
provide prenotification before shipping the calendars are violating
the Negative Option Rule. If the legal publications and the
calendars are sold by continuity plans, however, the Negative Option
Rule would not regulate the sales and would consequently not require
prenotification. As discussed below, the FTC Act and other laws
protect consumers from potentially deceptive practices regarding
continuity sales.
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Broadly speaking, a ``negative option'' is any type of sales term
or condition that imposes on consumers the obligation of rejecting
goods or services that sellers offer for sale. A negative option allows
a seller to interpret the failure of a consumer to reject goods or
services as the acceptance of a sales offer, when, under traditional
contract law, an affirmative response accepting the offer would be
necessary. A consumer must agree to allow the seller to interpret his
failure to reject goods or services as the acceptance of a sales offer.
If the consumer has not agreed to this condition, the shipment of goods
or the performance of services following the consumer's failure to
reject the goods or services may be unlawful under unordered
merchandise statutes and other laws, including Section 5 of the FTC
Act.\5\
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\5\ 15 U.S.C. 45, See Part IV.B., infra, for a discussion of the
prohibition against shipping unordered merchandise.
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Pursuant to their agreement with consumers, sellers may make
discrete, isolated negative option sales offers or periodic negative
option offers as a part of a program or plan. Sellers also may make
negative option offers incidentally, as a secondary part of a primary
contract for some other good or service. In this context, sellers may
make negative option offers at irregular intervals. Alternatively,
sellers may make negative option offers as the primary object of the
agreement with the consumer, for example, when a consumer subscribes to
a negative option plan. By subscribing to a negative option plan, a
consumer assumes the responsibility of affirmatively ``negating'' or
rejecting all subsequent sales offers for goods or services made under
the plan. Negative option plans usually involve the delivery of goods
or services at regular intervals.
There are different types of negative option plans; for example,
``prenotification'' negative option plans and ``continuity'' negative
option plans (which are more commonly referred to simply as continuity
plans). Under prenotification plans, sellers and consumers agree that,
for each sales offer, sellers will send consumers an announcement
describing the goods or services offered, along with a prenotification
form that subscribers can return to the sellers to reject the goods or
services. Under continuity plans (also known by terms such as
subscription shipments, library standing order arrangements, or annual
series arrangements), subscribers agree, when they join or subscribe,
to receive periodic shipments of goods or the performance of services
without receiving prior announcements from sellers describing the goods
or services, and without receiving prenotification forms.\6\ Depending
on the terms of the specific continuity or service sales plan,
subscribers may have the right to return goods or reject services they
decide they do not want.\7\
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\6\ A typical characteristic of continuity plans is that the
goods sold often relate to a single topic (e.g., a book series about
the Civil War) or are for items that are consumed or used up and
need to be replaced periodically (e.g., hosiery). Because of these
characteristics, costly returns are less likely. In contrast,
prenotification plans often span a wide array of topics (one month a
biography may be featured, another month a mystery). Because of the
high cost of mailing goods to subscribers and allowing them to
reject the goods they did not want, some sellers moved to sending
``announcements'' describing the goods they would be sending, along
with forms that subscribers could return to reject the items--hence,
the term ``prenotification.'' The Commission considered and rejected
assertions that it should ban prenotification negative option plans
as being inherently unfair. SBP, 38 FR at 4902-04.
\7\ The Commission notes that the provision of services differs
substantially in character from the selling of goods. In the sale of
goods, consumers are likely to consider purchases, even if made as
part of a continuity plan, as discrete occurrences. In some
instances, services may be performed periodically or seasonally, for
example, landscaping or pest control. But in many cases, consumers
may likely expect that a given service--household security or cable
television, for example--will continue uninterrupted until it is
canceled. Whether services continue uninterrupted or are performed
periodically, they are commonly regulated by service contracts or
plans, which in the context of this Notice could be characterized as
continuity plans for services.
Negative option techniques have been used in selling services.
For example, a cable television provider may separate a channel from
a group of channels previously offered as a ``bundle'' and offer the
channel separately to cable subscribers using a negative option. Or
a service provider--such as an Internet service provider--may make a
free trial offer for a service that becomes an extended service
contract unless the consumer exercises a negative option and
expressly rejects the service contract when the free trial period
expires. Service plans may also employ negative option contract
renewal provisions.
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In the case of both prenotification negative option plans and
continuity plans, sellers often market their plans by offering
introductory goods or services on a trial basis. A consumer who fails
to return the trail merchandise or who otherwise fails to cancel the
subscription by the time the trial period expires often is
automatically enrolled in the seller's plan.
[[Page 44557]]
As previously stated, the Negative Option Rule applies only to
prenotification plans for the sale of goods. In promulgating the Rule,
the Commission determined in its Statement of Basis and Purpose that it
was in the public interest to prescribe regulations for the operation
of prenotification negative option plans because various acts and
practices associated with these plans were found to affect consumers
adversely.\8\ The Commission also stated that the Rule does not apply
to negative option marketing arrangements under which marketers
optionally tender merchandise to subscribers without previously sending
a prenotification announcement. The Commission determined that negative
option selling plans, such as continuity plans, subscription shipments,
library standing order arrangements, or annual and series arrangements,
in which subscribers agree to receive goods without prenotification of
each shipment, warranted separate treatment by the Commission if and
when consumer complaints justified Commission attention.\9\
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\8\ The Commission found that: (1) Marketers of prenotification
negative option plans had failed to disclose adequately the
provisions of such plans to the detriment of their subscribers; (2)
subscribers had encountered difficulties in substantiating that they
were not given adequate time to respond to the negative option
notice supplied by the merchandiser; (3) marketers of
prenotification negative option plans had delivered unordered or
substituted merchandise in the place of merchandise specifically
ordered by subscribers, without their subscribers' prior consent;
(4) marketers of prenotification negative option plans had failed to
honor proper cancellation notices from contract-complete subscribers
and continued to send them merchandise; (5) subscribers had been
dunned or billed for unordered merchandise, and sellers had failed
to provide meaningful service to a large number of their subscribers
in connection with complaints involving operations, particularly in
regard to billing problems; and (6) marketers of prenotification
negative option plans had operated their entire systems in such a
manner as to place the burden for correcting ``errors'' on their
subscribers. SBP, 38 FR at 4899-4902.
\9\ Id. at 4908.
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B. Disclosures in Certain Kinds of Advertising
To ensure that consumers are not misled about the terms of these
plans before they subscribe, the Rule requires sellers to disclose the
material terms of the plans in ads that contain a means consumers can
use to subscribe. The Rule requires that sellers disclose clearly and
conspicuously the material terms of membership in any advertisement or
other promotional material that provides a method the consumer may use
to enroll in the plan, including the following disclosures: (i) The
aspect of the plan (the negative option) that requires subscribers to
notify the seller, in the manner provided for by the seller, if they do
not wish to purchase a selection, and that failure to notify the seller
signifies assent; (ii) any obligation assumed by subscribers to
purchase a minimum quantity of merchandise; (iii) the right of
contract-complete subscribers \10\ to cancel their membership at any
time; (iv) whether billing charges will include an amount for postage
and handling; (v) a disclosure indicating that subscribers will be
provided with at least ten days in which to mail any form to the seller
to reject merchandise; (vi) that the seller will credit the return of
any selections sent to a subscriber, and guarantee to the Postal
Service or the subscriber postage to return such selections to the
seller, when the subscriber does not have at least ten days in which to
return the prenotification form to the seller; and (vii) the frequency
with which the seller will send announcements and forms to the
subscriber and the maximum number of announcements and forms the seller
will send during a 12-month period.
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\10\ ``Contract-complete subscriber'' refers to a subscriber who
has purchased the minimum quantity of merchandise required by the
terms of membership in a negative option plan.
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C. Operation of Prenotification Negative Option Plans
The Rule also requires sellers to follow certain procedures in
operating prenotification negative option plans for the sale of goods.
Many prenotification negative option plans provide introductory offers
to encourage consumers to become members. The Rule requires that a
seller must ship any introductory and bonus merchandise due a
subscriber within four weeks after receiving an order, unless it is
unable to do so because of unanticipated circumstances beyond its
control. In such an event, the seller may make an equivalent
alternative offer, which the subscriber has the right to decline.
Subscribers may then cancel their membership provided they return to
the seller any introductory merchandise received.
Once a consumer becomes a subscriber, the Rule requires the seller
to mail an announcement to the subscriber in advance identifying any
merchandise the seller plans to send. The Rule also requires the seller
to mail the subscriber a form, with the announcement, instructing the
subscriber how to use the form to reject the merchandise. The form must
tell the subscriber that the merchandise will be sent unless the
subscriber tells the seller not to send it and must identify the date
by which the subscriber must return or mail the form back to the
seller. The Rule sets out timing provisions for the mailing of the
announcements and forms. At a minimum, the seller must give a
subscriber at least 10 days in which to return or mail a form to the
seller. When the subscriber orders merchandise, either by failing to
return the prenotification form or by affirmatively ordering a
selection, the seller may not substitute merchandise for the specific
merchandise ordered, unless the subscriber has expressly consented to
the substitution.
Under certain circumstances (e.g., when the subscriber does not
have at least 10 days to mail the prenotification form), a seller must
credit the return of any selection sent to a subscriber for the full
invoiced amount and pay for return postage. When the seller is aware
that these circumstances exist, it must notify subscribers that they
may return the merchandise with return postage guaranteed and receive a
credit to their accounts. Finally, the seller must terminate promptly
the membership of subscribers who request cancellation of membership in
writing after fulfilling any minimum purchase obligation under the
negative option agreement.
III. Summary of the Comments
A. Costs and Benefits of the Rule
Several comments state that the Rule establishes a balance between
the needs of consumers and industry, benefiting both.\11\ Ten of the 19
comments submitted support the Rule as is, without change.\12\ Several
comments state that the Rule has worked effectively in regulating
prenotification negative option plans.\13\ Eleven of the comments state
that there is a continuing need for the Rule.\14\ None of
[[Page 44558]]
the comments suggest rescinding the Rule.
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\11\ BMOC, #002, at 1; Jacobina, #006, at 1; DMA, #008, at 3;
Columbia House, #013, at 2; BMG, #014, at 1, 2; DeHart and Darr,
#016, at 1.
\12\ Lamet, #001, at 1; BOMC, #002, at 1, 2; Niebergall, #003,
at 1; Greenberg, #004, at 1; DMA, #008, at 3, 6; Doubleday, #011, at
1; Columbia House, #013, at 2; BMG, #014, at 1, 2; DeHart & Darr,
#016, at 1, 3; Mansion, #019, at 1. Niebergall, #003, at 1, stated
that full, first-class postage should not be required for the return
of prenotification forms by consumers when the post-card rate would
be sufficient. The Rule does not contain a first-class postage
requirement. Consumers may return prenotification forms using any
postage required by the U.S. Postal Service.
\13\ BOMC, #002, at 1, 2; Greenberg, #004, at 1-2; Doubleday,
#011, at 1; Wisconsin AG, #012, at 2; BMG, #014, at 2; DeHart &
Darr, #016, at 1.
\14\ Lamet, #001, at 1; BMOC, #002, at 1; Niebergall, #003, at
1; Greenberg, #004, at 1; DMA, #008, at 2; Doubleday, #011, at 1, 2;
Wisconsin AG, #012, at 2, 3, 4; Columbia House, #013, at 1-2; BMG,
#014, at 1, 2; Spriggs, #015, at cover letter p.1; DeHart and Darr,
#016, at 1.
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Several comments address the benefits to consumers from
prenotification negative option plans as a selling technique, as
opposed to benefits arising from the Rule itself. Five comments state
that negative option plans provide many benefits to consumers,
including the opportunity to build a long-term relationship with
sellers who provide a large array of product choices, greater
accessibility to products and shopping convenience, and expert advice
and recommendations about products.\15\ One comment states that
negative option contracts impose some costs on consumers, but
nevertheless possess economic efficiency advantages over standard
contractual relationships.\16\
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\15\ Jacobina, #006, at 1; DMA, #008 at 2; Doubleday, #011, at
1; BMG, #014, at 2; DeHart and Darr, #016, at 2.
\16\ Phillips, #005, at 305, 309 (negative option plans impose
two types of transactional costs on consumers--the cost of rejecting
goods offered by a seller, and the cost of canceling membership in a
negative option plan to end the product flow; despite these costs,
``negative option contracts, compared to positive option, are a more
efficient means by which to accept or reject pieces of a product
flow'' and are consequently weakly economically superior to positive
option agreements).
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Three comments state that the Rule does not impose any costs on
purchasers.\17\ Others state that the Rule protects consumers
adequately by requiring their consent,\18\ requiring disclosure of the
terms and conditions of membership,\19\ or providing guidelines for the
operation of negative option plans.\20\ One comment, however,
recommends that the Commission establish a design standard, setting
forth specific type-size requirements, to make the required negative
option disclosures clearer and more conspicuous to consumers.\21\
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\17\ BOMC, #002, at 1; DMA, #008 at 2; BMG, #014, at 2.
\18\ DMA, #008, at 2, 6; Wisconsin AG, #012, at 2.
\19\ Greenberg, #004, at 1; DMA, #008, at 2; BMG, #014, at 1, 2;
DeHart and Darr, #016, at 1.
\20\ Greenberg, #004, at 1; DMA, #008, at 2, 6; Wisconsin AG,
#012, at 2; Columbia House, #013, at 1; BMG, #014, at 1, 2; DeHart
and Darr, #016, at 1.
\21\ Bucks County, #010, at 1.
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Industry comments overwhelmingly support the Rule. They state that
the Rule functions in the best interests of sellers by providing well-
established, concrete guidance to industry that helps establish good
business practices.\22\ The Rule thereby contributes to consumer
confidence in negative option marketing and allows sellers to establish
continuing, repeat customers.\23\ A few industry members state that the
Rule enables them to establish national uniformity in marketing \24\
and helps them avoid customer service problems because the disclosure
requirements of the Rule educate consumers about the way
prenotification negative option plans work.\25\ Three comments state
that the Rule imposes considerable costs on industry, for example,
because of vagaries of delivery dates and deadlines.\26\ These
comments, however, do not recommend any changes to reduce costs; but
instead, conclude that the Rule benefits industry and recommend that
the Commission retain the Rule without any substantive change.\27\
According to one comment, significantly weakening the Rule could lead
consumers to lose confidence in negative option buying, which should
not be desired by the FTC, consumers, or the businesses which service
them.\28\
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\22\ BMOC, #002, at 2; DMA, #008, at 2, 5; Doubleday, #011, at
1; Columbia House, #013, at 1; BMG, #014, at 1; DeHart and Darr,
#016, at 2.
\23\ Jacobina, #006, at 1; DMA, #008, at 3; Doubleday, #011, at
1-2; Columbia House, #013, at 1; BMG, #014, at 1.
\24\ Doubleday, #011, at 1.
\25\ BMG, #014, at 1.
\26\ DMA, #008, at 3; Columbia House, #013, at 1; BMG, #014, at
2.
\27\ DMA, #008, at 3 (because the lifetime value of a repeat
customer is so important to sellers, these costs will make this
method of doing business worthwhile); Columbia House, #013, at 2
(Rule has achieved an acceptable and commendable balance between the
needs and concerns of industry and the need to protect the public
from unscrupulous and fraudulent practices); BMG, #014, at 2 (while
the costs of compliance with the Rule are substantial in staff time,
energy and dollars, the investment is worthwhile).
\28\ Doubleday, #011, at 2.
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B. Recommendations To Expand the Rule To Cover Marketing Techniques
Other Than Prenotification Negative Option Plans and To Cover Services
One comment recommends extending the Rule to cover continuity plans
for goods, and requiring prenotification for each shipment made under a
continuity plan.\29\ Another comment states that continuity plans for
goods should not be regulated in the same way that the Rule regulates
prenotification plans, but that sellers using continuity plans should
be required to disclose the material terms of membership before
consumers subscribe.\30\ One comment recommends amending the Rule to
declare that billing for unordered merchandise is an unfair
practice.\31\
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\29\ Wisconsin AG, #012, at 5-6.
\30\ Wisconsin/Agriculture, #009, at 2.
\31\ Wisconsin AG, #012, at 5.
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Several comments state that the negative option sales techniques
has been used in the sale of various services by some firms.\32\ A few
comments recommend expanding the Negative Option Rule to require that
service providers notify consumers each time they intend to provide
services, and notify consumers before they enroll consumers in service
plans after a free trail period expires, and before they renew service
contracts.\33\
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\32\ Phillips, #005, at 305; Ontario, #007, at 1; Wisconsin/
Agriculture, #009, at 2; Bucks County, #010, at 1; Spriggs & Nevin,
#015, at 227, Bressler, #018, at 1-2; Wisconsin AG, #012, at 1;
Craig, #017, at 6. These comments state that negative option
marketing has been used to sell cable television, Internet services,
inside telephone wire maintenance, telephone call waiting, lawn
care, pest control, home security, travel discount clubs, credit
card protection programs, and other services.
\33\ Wisconsin/Agriculture, #009, at 2; Bucks County, #010, at
1; Bressler, #018, at 1-2.
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None of the comments that support expanding the Rule addresses the
costs that such changes to the Rule might impose on firms. Further,
none submitted specific evidence (beyond a few examples) of the extent
of any current abuses in the use of negative option plans not covered
by the Rule or in the sale of services.
Some of the comments expressly oppose expanding the Rule, stating
that negative option marketing techniques that are different from
prenotification negative option plans should be addressed separately,
such as through a cooperative education project with industry that
could help educate the public about such techniques.\34\ One comment
notes that the Postal Reorganization Act (also referred to as the
``unordered merchandise statue''), 39 U.S.C. 3009, has already
addressed some problems with negative option selling of products.\35\
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\34\ DMA, #008, at 5; BMG, #014, at 2; DeHart and Darr, #016, at
2.
\35\ DeHart and Darr, #016, at 2.
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C. Commission's Determinations
Based on the comments received and on other information, the
Commission concludes that the Rule adequately balances the interests of
both consumers and firms that are subject to it. It appears that the
Rule is working effectively to protect consumers, without imposing
significant costs on industry members, small or large. Based on the
comments submitted, and other research and investigation performed by
the Commission's staff regarding negative option marketing, the
Commission has determined to retain the Rule in its present form.
First, the Commission has determined not to propose amending the
Rule to specify a design standard for the required disclosures, as
suggested by one commenter. The Commission believes that the
performance standard in the Rule, which mandates ``clear and
conspicuous'' disclosures, has worked
[[Page 44559]]
well. Although the Commission has used design standards in various
contexts, there is no evidence that such a standard is necessary for
promotional materials for prenotification negative option plans. The
clear and conspicuous standard allows sellers greater flexibility when
making the required disclosures, which is important in light of the
varied promotional materials used by sellers who operate
prenotification negative option plans.
Second, the Commission has determined not to propose expanding the
Rule to apply to additional types of negative option marketing
techniques, such as continuity plans, or to the sale of services. There
is insufficient evidence that unfair to deceptive acts or practices are
prevalent in the use of additional types of negative option marketing
techniques or in the sale of services, and application of the Rule to
these areas may not be justified. Requiring sellers to provide
consumers with prenotification before each shipment of merchandise
under continuity plans, or each performance of a service, or the
continuation of a service, may be unwarranted or unnecessary. For
example, in some cases continuity or service plans may distribute goods
or perform services for which consumers do not reasonably expect
prenotification before each instance of delivery or performance--e.g.,
the monthly shipment of volumes of an encyclopedia or a book series, or
providing home security services.\36\ In the case of services,
consumers may normally expect that many services will continue
uninterrupted until canceled. Requiring prenotification for each
billing cycle of such service plans is unreasonable. Even when services
are performed periodically or seasonally, prenotification before each
performance of a service may not be necessary if consumers have been
informed in advance about the material terms and conditions of the
service contract.
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\36\ E.g., Wisconsin/Agriculture, #009, at 2 (no compelling need
for regulation of contracts pursuant to which consumers make an up-
front decision to purchase, such as newspaper and magazine
subscriptions).
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If sellers adequately disclose the terms and conditions of
continuity and service plans to consumers, and if consumers agree to
these terms and conditions--including the receipt of merchandise or the
performance of services without prenotification--it is unlikely that
any consumer injury will result. The Commission has determined that, if
there is inadequate disclosure and injury occurs, existing laws and
regulations--such as the FTC Act, the unordered merchandise statute,
and state consumer protection laws and regulations--provide adequate
protections against unfair or deceptive negative option marketing
practices that fall outside of the purview of the Negative Option Rule.
As discussed in Part IV below, both the Commission and state Attorneys
General have brought enforcement actions against marketers that have
allegedly employed unfair or deceptive negative option marketing
techniques, such as the failure to disclose clearly and conspicuously
material facts about membership in continuity plans and other types of
sales plans or clubs. The Commission will continue to take action on a
case-by-case basis in any problem areas.
IV. Existing Alternatives to Expanding the Rule
A. The Federal Trade Commission Act
Section 5 of the FTC Act empowers the Commission to prohibit unfair
or deceptive acts or practices in or affecting commerce. The Commission
has promulgated trade regulation rules, such as the Negative Option
rule, when it has found that unfair or deceptive acts or practices in
specific industries were prevalent. For example, the systematic failure
on the part of sellers to make clear and conspicuous necessary pre-
purchase disclosures to consumers justified promulgation of the
Negative Option Rule. But the Commission does not need to adopt a trade
regulation rule to prosecute unfair or deceptive acts or practices.
Rather, the Commission can prosecute such practices, for example, the
failure clearly and conspicuously to disclose material facts about
continuity plans, as unfair or deceptive acts or practices that violate
section 5 of the FTC Act.\37\
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\37\ In determining whether a practice is deceptive, the
Commission must determine whether there is a misrepresentation,
omission, or other practice, that misleads consumers acting
reasonably in the circumstances and causes consumer injury. See
Federal Trade Commission Policy Statement on Deception, appended to
Cliffdale Assocs., Inc., 103 F.T.C. 110, 174-184 (1984); and Federal
Trade Commission Policy Statement on Unfairness, appended to
International Harvester Co., 104 F.T.C. 949, 1070-76 (1984).
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Under the FTC Act, the Commission may seek administrative or
federal district court orders against companies or individuals who
engage in unfair or deceptive practices, prohibiting future violations,
and providing other relief such as consumer redress, disgorgement of
ill-gotten gains, consumer notification, and civil penalties, in some
cases.\38\ The Commission has pursued cases challenging alleged unfair
or deceptive practices in the operation of continuity plans for both
goods and services. For example, the Commission has challenged
continuity plans under which merchandise was shipped without consumers'
prior consent to receive the merchandise.\39\ It has also required that
promotional materials for continuity plans disclose clearly and
conspicuously material facts about the plans--including the risks and
obligations that subscribers assume by subscribing to them.\40\ For
example, the Commission has required sellers who use continuity plans
to disclose the fact that consumers who become subscribers will receive
shipments of goods or will be billed for services without further
action by the consumer.\41\ These cases illustrate the Commission's
ability to prevent consumer injury associated with unfair or deceptive
negative option practices without expanding the Negative Option Rule.
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\38\ The Commission can seek civil penalties from companies that
violate administrative orders issued against them by the Commission,
and from companies not subject to previous administrative orders if
they have actual knowledge that the Commission has determined in
prior cases that certain acts or practices are unfair or deceptive
and they engage in those acts or practices. 15 U.S.C. 45(l) and
45(m)(1)(B).
\39\ See Synchronal Corp. 116 F.T.C. 1189, 1222 (1993) (consent
order prohibited respondents from selling any product through a
continuity program without first obtaining consumers' expressed
consent).
\40\ See FTC v. Hosiery Corp. of America, 3 Trade Reg. Rep.
(CCH) para. 22,187 (E.D. Pa. 1984) (in connection with continuity
plan for hosiery, federal district court consent decree required
company to pay a $200,000 civil penalty and to make clear and
conspicuous disclosure of conditions and obligations attendant upon
acceptance of free introductory offer); Grolier, Inc., 91 F.T.C.
315, 454-55, 483 n.37, 497 (1978) (Commission found that promotional
materials that did not tell consumers that they would receive a bulk
shipment of books, rather than single volumes, failed to disclose a
material fact about respondents' continuity plans; Commission
ordered respondents to disclose conditions and terms of continuity
plans, the method of sales or distribution and the subscriber risks
and obligations); Crowell Collier & Macmillan, Inc., 82 F.T.C. 1292,
1305 (1973) (order required respondents to disclose clearly and
conspicuously the conditions and terms of any program providing for
the delivery of books or other products or services serially, at
intervals, on an approval basis.)
\41\ See Synchronal, 116 F.T.C. at 1222 (Commission ordered
required the disclosure of all material terms and conditions of the
continuity program, including the fact that periodic shipments of
the product would be made without further action by the consumer, a
description of the product included in each shipment, the
approximate interval between each shipment, the billing procedure to
be employed, the minimum number of purchases required under the
program, if any, and a description of the terms and conditions under
which and the procedures by which a subscriber may cancel further
shipments).
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B. Unordered Merchandise
The Commission has also determined that there is no need to amend
the Rule to prohibit billing for unordered merchandise, as recommended
by one
[[Page 44560]]
commenter.\42\ Section 3009(a) of the Postal Reorganization Act of
1970, 39 U.S.C. 3009, declares that mailing, and billing for, unordered
merchandise constitutes a violation of section 5 of the FTC Act.\43\
Under this standard, sellers, other than charitable organizations
soliciting contributions, may not ship unordered merchandise to
consumers unless the recipient has expressly agreed to receive it or
unless it is clearly identified as a gift, free sample, or the like. In
addition, sellers may not try to obtain payment for or the return of
the unordered merchandise. Consumers who receive unordered merchandise
are legally entitled to treat the merchandise as a gift.
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\42\ Wisconsin AG, #012, at 5.
\43\ See 35 FR 14328 (1970). In a notice published on January
31, 1978, 43 FR 4113, the Commission stated that the standard under
section 5 of the FTC Act was not limited to unordered merchandise
sent by U.S. mail. The Commission explained that it might, for
example, prosecute as a violation of section 5 a nonmail shipment of
merchandise that fails to meet the standard of 39 U.S.C. 3009.
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Under the Negative Option Rule, shipments sent to subscribers of
prenotification negative option plans are not considered unordered
merchandise because subscribers have agreed to receive shipments of
merchandise unless they reject them by returning prenotification
forms.\44\ Shipping goods to consumers who have not expressly agreed to
take on the obligation of rejecting goods by means of a prenotification
form, however, violates the prohibition against sending unordered
merchandise.\45\ Similarly, shipments sent to subscribers of continuity
plans are not considered unordered merchandise because subscribers to
these plans agree to receive the shipments. Sending goods other than
those a continuity plan subscriber has agreed to receive, however, is
prohibited.\46\ Cases brought by the Commission indicate that sellers
who use prenotification negative option plans or continuity plans to
sell goods may not unilaterally impose a negative option, requiring
consumers to reject goods offered for sale; consumers must agree to
such a term, so that the shipping of goods without this consent
constitutes the shipping of unordered merchandise. The cases show that
the unordered merchandise statute and section 5 of the FTC Act provide
adequate authority for the Commission to protect consumers from
unordered merchandise.
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\44\ The Negative Option Rule provides, however, that all
shipments the seller sends to a subscriber--except for the first--
after the seller receives written notice that a subscriber who has
met his minimum purchase obligation wishes to cancel his membership,
is considered unordered merchandise.
\45\ E.g., Hachette Book Group USA, Inc, No. 39CV00116 (D. Conn.
1994) (settlement in which FTC charged that defendants failed to
notify consumers that they would receive yearbooks or supplements
unless they returned a mail cancellation card, failed to obtain
consumers' agreement to return cancellation cards if they did not
want the merchandise, and mailed merchandise and bills to consumers
who had not placed orders); Standard Reference Library, Inc., 77
F.T.C. 969, 976 (1970) (consent order prohibited respondents from
representing that consumers' failure to return rejection cards or
take any affirmative action to prevent the shipment of merchandise
constituted a request to receive merchandise where consumers had not
agreed to take on that obligation).
Spriggs & Nevin, #015, at 228, expressed concern that sellers
that enter into contracts with consumers may include provisions in
their contracts allowing them to make negative option offers to
consumers as a part of the contract even though the primary subject
matter of the contract is not related to the negative option offers.
In some cases, consumers may agree to receive the secondary negative
option offers because they have no choice but to do so if they wish
to receive the goods or services that are part of the primary
agreement. The Commission believes that such practices must be
evaluated on a case-by-case basis to determine whether they are
unfair or deceptive.
\46\ E.g., Field Publications Ltd. Partnership, No. H-90-932 PCD
(D. Conn. 1990) (settlement in which FTC charged that Field shipped
unordered books to subscribers who had agreed to receive another
series of books as part of a continuity plan; settlement required
Field to pay a $175,000 civil penalty).
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C. Negative Option Marketing of Services and Unordered Services
A few of the comments stated that the Negative Option Rule should
be amended to apply to services.\47\ As with product sales techniques
not covered by the Rule, the Commission can bring enforcement actions
against those who use unfair or deceptive acts or practices to promote,
sell or bill for services. For example, the Commission has brought
enforcement actions against companies that bill consumers for unordered
services \48\ and companies that use negative options to enroll
consumers automatically in service plans upon the expiration of free
trial offers, without disclosing this material condition clearly and
conspicuously to consumers.\49\ The Commission will continue to monitor
the marketplace to identify problem areas and bring enforcement actions
when appropriate.
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\47\ Wisconsin/Agriculture, #009, at 2; County of Buck, #010, at
1; Wisconsin AD, #012, at 5. Ontario, #007, stated at 1-2, that
Ontario has considered amending its Consumer Protection Act to
provide safeguards against the deceptive negative option marketing
of services. See also Dennis D. Lamont, Negative Option Offers in
Consumer Service Contracts: A Principled Reconciliation of Commerce
& Consumer Protection, UCLA Law Review, Vol. 42, No. 5 (June 1995).
\48\ Southwest Marketing Concepts, Inc., No. H-97-1070 (S.D.
Tex. May 29, 1998) (consent decree, settling claim that company
billed for unordered advertising, prohibited defendants from making
false or misleading representations in connection with the sale,
distribution, marketing or sponsorship of any advertisement); Image
Sales & Consultants, Inc., No. 1:97CV0131 (N.D. Ind. filed Jun. 9,
1998) (same); The Century Corp., No. 1:97CV0130 (N.D. Ind. Apr. 8,
1998) (same); Dean Thomas Corp., No. 1:97CV0129 (N.D. Ind. Jan. 19,
1998) (same); AKOA, Inc., No. CV 97-7084 (LGB) (C.D. Cal. Mar. 17,
1998) (consent decree prohibited company from billing for unordered
computer repair service contracts); Travel World International,
Inc., No. 88-113-CIV-FTM-15C (M.D. Fla. Nov. 2, 1989) (consent
decree prohibited defendants from using negative option billing for
renewals or initial purchases of any travel club membership,
vacation certificate, travel service, contract for vacation
services, or any other product or service); Trade Union Courier, 51
F.T.C. 1275, 1299-1300 (1955) (litigated order; newspaper billed for
ads without prior authorization); A&R Agency, 86 F.T.C. 103 (1975)
(consent order; same).
\49\ America Online, Inc., C-3787; Prodigy Servs. Corp., C-3788;
CompuServe, Inc., C-3789 (March 16, 1998) (consent orders required
online service providers, when offering a ``free trial'' with
automatic membership enrollment or renewal upon the expiration of
the free trial period, to disclose clearly and prominently any
obligation to cancel after the free trial period to avoid charges,
and to provide at least one reasonable means of canceling, to
prevent enrollment or renewal).
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Regarding cable television channel subscriptions, which some of the
comments mentioned as an area in which negative option selling has been
used,\50\ some states have brought legal action to challenge
potentially deceptive negative option practices. In this area, the
Cable Television Consumer Protection and Competition Act of 1992
(``Cable Act of 1992'') \51\ provides protections by prohibiting
negative option billing for ``any service or equipment that the
subscriber has not affirmatively requested by name,'' and by directing
the Federal Communications Commission (``FCC'') to issue implementing
regulations. No evidence has been submitted to the FTC to indicate that
the Cable Act of 1992 and the FCC's regulations are not sufficient to
protect consumers from unfair or deceptive acts or practices in the use
of negative option marketing techniques in connection with the sale of
cable television services.\52\
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\50\ Phillips, #005, at 304; Ontario, #007, at 1; Wisconsin/
Agriculture, #009, at 2; Wisconsin AG, #010, at 1-2; Spriggs &
Nevin, #015, at 227; Craig, #017, at 6-8.
\51\ Pub. L. No. 102-385, 106 Stat. 1460 (codified in scattered
sections of 47 U.S.C.). See 47 U.S.C. 543(f) for prohibition against
negative option billing for cable television.
\52\ Time Warner Cable v. Doyle, 66 F.3d 867 (7th Cir. 1995)
(FCC regulations pursuant to the Cable Act of 1992 permit a limited
range of negative option billing and preempt state consumer
protection statutes prohibiting negative option billing to extent
they interfere with the execution of the FCC's rate rules); Time
Warner Entertainment Co. v. Federal Communications Comm'n, 56 F.3d
151, 192-96 (D.C. Cir. 1995) (Cable Act of 1992 does not explicitly
prohibit states from enforcing negative option billing regulations;
issue whether Act preempts state negative option consumer protection
laws insofar as they affect rate regulation is a factual question
peculiar to the state law at issue).
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[[Page 44561]]
D. State Laws
The states also enforce consumer protection laws that protect
consumers against unfair or deceptive negative option marketing
techniques or other marketing techniques that may not be covered by the
Commission's Negative Option Rule.\53\ Like the FTC Act, many of these
state statutes include general, and far-ranging, prohibitions against
unfair or deceptive acts or practices.\54\ As evidenced by cable
television and other cases, states are actively enforcing these state
statutes.\55\ The dual system of state and federal consumer protection
laws should help limit the proliferation of deceptive negative option
marketing techniques.
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\53\ DMA, #008, at 4, commented that state negative option laws
are sometimes inconsistent with the Commission's Negative Option
Rule. DMA therefore proposed making the Rule preempt inconsistent
state laws.
The Rule does not preempt state laws that regulate negative
option marketing except to the extent that such laws directly
conflict with the provisions of the Rule. Laws that provide
consumers greater protection than that provided by the Rule do not
necessarily conflict with the Rule even if they are inconsistent.
Doubleday, #011, noted at 1, that the effectiveness of the
Commission's Negative Option Rule has helped avoid a proliferation
of conflicting state laws.
\54\ Pennsylvania Consumer Protection Law, 73 P.S. 201-1, et
seq.; Indiana Deceptive Consumer Sales Act, Ind. Code 24-5-0.5-1, et
seq.; Texas Deceptive Trade Practices-Consumer Protection Act, Texas
Bus. & Comm. Code Ann. 17.41, et seq.
\55\ E.g., Hosiery Corp of America (multiple cites), e.g., No.
CVOC9704299D (4th Judicial District of the State of Idaho, Ada
County, Aug. 2, 1997) and No. 97-08373 (261st Judicial District of
Travis County, Texas, July 23, 1997) (company signed Assurance of
Discontinuance/Assurance of Voluntary Compliance settling
allegations by eleven states that it failed to disclose clearly and
conspicuously material conditions of free offer and continuity plan
for hosiery).
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E. Industry Self-Regulation
Finally, industry self-regulation may provide an additional
mechanism to police deceptive negative option marketing techniques that
are not covered by the Commission's Rule. It is in the interest of the
direct marketing industry to have products and services meet the
consumer's expectations so that a company can establish a long-standing
relationship with the consumer. The Direct Marketing Association,
recognizing that consumers misled by direct marketing promotions may be
reluctant to respond to such promotions in the future, has established
a process for handling complaints about ethical business practices.
Examples of matters handled by DMA's Committee on Ethical Business
Practices include an offer made for a continuity program in which
material details of the offer were not as conspicuous as other parts of
the offer.\56\
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\56\ Case Report From The Direct Marketing Association's
Committee on Ethical Business Practice, Vol. 1, No. 4 (December
1997).
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V. The Negative Option Rule and New Technologies
Because many companies that operate negative option plans are now
posting promotional materials on the Internet to solicit membership,
the Commission solicited comment on the effect of changes in technology
on the Rule, including the use of e-mail and the Internet. The
Commission received five comments on this issue.\57\ The comments
stated that subscribers to prenotification negative option plans can
now order or reject merchandise by telephone, e-mail, and the Internet,
rather than by returning prenotification forms by mail.\58\ The
comments also stated that the Rule is ``media neutral'' or easily
adaptable to these technologies.\59\
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\57\ DMA, #008, at 5; Columbia House, #013, at 1; BOMC, #002, at
1-2; Doubleday, #011, at 1; BMG, #014, at 2.
\58\ Columbia House, #013, at 1.
\59\ BOMC, #002, at 1-2; DMA, #008, at 5; Doubleday, #011, at 1;
Columbia House, #013, at 1; BMG, #014, at 2.
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The Negative Option Rule covers all promotional materials that
contain a means for consumers to subscribe to prenotification negative
option plans, including those that are disseminated through newer
technologies, such as the Internet, e-mail, or CD-ROM.
Promotional materials posted on the Internet, distributed via e-
mail, or on CD-ROM must therefore, make all the disclosures required by
the Rule in a clear and conspicuous manner. Sellers that operate
prenotification negative option plans using these technologies must
also comply with all other Rule requirements. The Commission is
currently considering issues related to the Internet and other new
technologies with respect to the Negative Option Rule, as well as other
Commission rules and guides, including the factors it would consider in
evaluating the effectiveness of advertising disclosures. The Commission
will provide more information about the Rule's application to these new
technologies at a later date.
VI. Technical, Non-Substantive Amendments to the Rule
The Commission has determined to adopt technical, non-substantive
amendments to the Negative Option Rule. First, the Commission deletes
the Note after section 425(b)(5). The Note simply referenced a separate
proposed trade regulation rule involving billing practices arising out
of the administration of customer accounts by credit card issuers and
other retail establishments. That proposed rule was indefinitely
postponed, and then withdrawn when it was superseded by the Fair Debt
Collection Practices Act, 91 Stat. 874, 15 U.S.C. 1692-1692o, as
amended. The reference is therefore obsolete. Second, the Commission
amends two paragraphs of Section 425.1 of the Rule by changing
references to ``in commerce'' to read ``in or affecting commerce'' to
conform the language of the Rule with the current language of section 5
of the FTC Act, 15 U.S.C. 45, and by changing references to ``an unfair
method of competition and an unfair to deceptive act or practice'' to
``an unfair or deceptive act or practice'' to conform the language of
the Rule to the language of section 18 of the FTC Act, 15 U.S.C. 57a.
Finally, the Commission amends the title of the Rule to read ``Use of
Prenotification Negative Option Plans'' to make the title more
accurately describe the Rule's coverage.
Because these amendments are purely technical and non-substantive,
they are exempt from the rulemaking procedures specified in section 18
of the FTC Act.\60\ Further, because the amendments simply delete an
obsolete and unnecessary Note, conform the language of the Rule to the
FTC Act, and clarify the Rule's coverage in the title of the Rule, the
Commission has determined that notice and comment are unnecessary under
the Administrative Procedure Act (``APA''). The Commission, therefore,
has omitted notice and comment for good cause as provided by section
553(b)(B) of the APA, 5 U.S.C. 553(b)(B). The amendments are effective
today. Because the amendments are technical, and non-substantive,
section 553(d) of the APA, 5 U.S.C. 553(d), which requires publication
or service of a substantive rule not less than 30 days before its
effective date, does not apply.
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\60\ 15 U.S.C. 57a(d)(2)(B), 16 CFR 1.15(b).
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VII. Regulatory Flexibility Act
Because these amendments are exempt from the notice and comment
provisions of section 553(b) of the APA, the Regulatory Flexibility Act
(``RFA''), 5 U.S.C. 601 et seq., does not apply. Nevertheless, the
Commission has considered whether the amendments could have any effect
on small entities. These technical, non-substantive amendments do not
change the substantive requirements of the Rule in any manner, and do
not impose any new requirements on sellers, large or small.
Accordingly, this notice does not
[[Page 44562]]
contain a regulatory analysis under section 604 of the RFA, 5 U.S.C.
604.
VIII. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq.,
requires government agencies, before promulgating rules or other
regulations that require ``collections of information'' (i.e.,
recordkeeping, reporting, or third-party disclosure requirements), to
obtain approval from the Office of Management and Budget (``OMB''), 44
U.S.C. 3502. The Commission currently has OMB clearance for the Rule's
information collection requirements (OMB No. 3084-0104). The amendment
will not impose any additional information collection requirements, so
OMB approval is unnecessary.
List of Subjects in 16 CFR Part 425
Trade practices.
Text of Amendments
PART 425--USE OF PRENOTIFICATION NEGATIVE OPTION PLANS
1. The authority citation for part 425 continues to read as
follows:
Authority: 15 U.S.C. 41-58.
2. The heading of Part 425 is revised to read as set forth above.
Sec. 425.1 [Amended]
3. In Sec. 425.1, the Note following paragraph (b)(5) is removed.
4. Section 425.1 is amended by revising the introductory text of
paragraphs (a) and (b) to read as follows:
Sec. 425.1 The rule.
(a) In connection with the sale, offering for sale, or distribution
of goods and merchandise in or affecting commerce, as ``commerce'' is
defined in the Federal Trade Commission Act, it is an unfair or
deceptive act or practice, for a seller in connection with the use of
any negative option plan to fail to comply with the following
requirements:
* * * * *
(b) In connection with the sale or distribution of goods and
merchandise in or affecting commerce, as ``commerce'' is defined in the
Federal Trade Commission Act, it shall constitute an unfair or
deceptive act or practice for a seller in connection with the use of
any negative option plan to:
* * * * *
By direction of the Commission.
Benjamin I. Berman,
Acting Secretary.
[FR Doc. 98-22446 Filed 8-19-98; 8:45 am]
BILLING CODE 6750-01-M
