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FTC Targets Negative Option Schemes in Two Multimillion Dollar Settlements

The Federal Trade Commission (FTC) recently announced settlements with two online companies for allegedly misleading customers about automatic membership renewal costs. On September 8, 2020, Age of Learning, Inc., d/b/a ABCmouse, agreed to pay $10 million to settle FTC charges that the company enrolled thousands of consumers in a negative option scheme to which they did not consent, and also misrepresented its cancellation process. Fewer than two weeks later, on September 21, online supplement manufacturer NutraClick LLC and two of its individual officers settled with the FTC for $1.04 million over allegations the company violated an earlier consent order that required it to fully disclose the terms of its negative option membership program to customers.

The FTC charged both companies (and the individual defendants in the NutraClick case) with violating two laws: (1) Section 5 of the FTC Act, which prohibits misleading or deceptive statements; and (2) Section 4 of the Restore Online Shoppers’ Confidence Act (ROSCA), which bans online negative options unless the seller (a) clearly discloses all material terms of the deal before obtaining a consumer’s billing information, (b) gets the consumer’s express informed consent before making the charge, and (c) provides a simple mechanism for stopping recurring charges. The FTC also charged NutraClick with violating the Telemarketing Sales Rule, which prohibits deceptive telemarketing acts (the company advertised its “free trials” via text as well as online).

ABCmouse is a membership-based online educational company that offers reading, math, and other scholastic content for children eight to twelve. According to the FTC’s complaint, from 2015 through at least 2018, the company failed to adequately disclose key terms of its membership program, as required by ROSCA. The company also allegedly neglected to inform customers that their yearly membership, priced at $59.95, would automatically renew for another year at the same price unless users cancelled. And, while the company promised “easy cancellation” in its ads, the reality was anything but. Not only was the cancellation process overly complicated, hundreds of thousands of consumers who had purchased a membership and attempted to cancel later learned they were still enrolled.

The FTC complaint against NutraClick alleged that the company violated a 2016 consent order that required the company to disclose the material terms of its membership programs to customers. According to the 2016 order and 2020 complaint, NutraClick advertised “free” samples of beauty products and nutritional supplements, but by ordering these samples, customers were unwittingly enrolled in a membership program and charged recurring monthly fees ranging from $29.99 to $79.99 unless they cancelled within 18 days. The FTC claimed that while NutraClick’s websites did contain statements about the monthly membership fee, the statements were not “clear and conspicuous,” as required by ROSCA. Because it was not upfront with its customers about its billing practices, NutraClick received more than 70,000 consumer complaints.

In addition to imposing a $10 million fine, the ABCmouse stipulated final order requires the company to disclose all information related to its negative option plans and clearly explain key terms, obtain consumers’ informed consent before enrolling them in automatic billing, and provide an easy means of cancellation. The stipulated final order against NutraClick permanently bans the company from engaging in any negative option marketing, and the FTC imposed a $1.04 million in a separate proposed contempt order.

The Commission voted 4-1 to authorize staff to file the complaint and proposed order against ABCmouse. Commissioner Rohit Chopra dissented and issued a separate statement in which he pointed to ABCmouse’s “unlawful dark patterns” of deceptive negative options and “unethical” and “illegal” behavior, characterizing them as a “roach motel.” He called for the FTC to use all the tools at its disposal to punish ABCmouse, including enforcing the CAN-SPAM Act, which prohibits deceptive headers and requires marketers to give consumers an easy way to opt out of future emails. Commissioner Chopra was also the Commission’s lone vote against the settlement with NutraClick, but he did not issue a statement in that case.

The FTC continues to pay close attention to online negative option schemes. Brands should be careful to adhere to the terms of ROSCA before enrolling customers in membership programs and charging recurring membership fees.

© 2020 Keller and Heckman LLPNational Law Review, Volume X, Number 272
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About this Author

Sheila Millar, Keller Heckman, advertising lawyer, privacy attorney
Partner

Sheila A. Millar counsels corporate and association clients on advertising, privacy, product safety, and other public policy and regulatory compliance issues.

Ms. Millar advises clients on an array of advertising and marketing issues.  She represents clients in legislative, rulemaking and self-regulatory actions, advises on claims, and assists in developing and evaluating substantiation for claims. She also has extensive experience in privacy, data security and cybersecurity matters.  She helps clients develop website and app privacy policies,...

202-434-4646
Tracy Marshall, Keller Heckman, regulatory attorney, for-profit company lawyer
Partner

Tracy Marshall assists clients with a range of business and regulatory matters.

In the business and transactional area, Ms. Marshall advises for-profit and non-profit clients on corporate organization, operations, and governance matters, and assists clients with structuring and negotiating a variety of transactions, including purchase and sale, marketing, outsourcing, and e-commerce agreements.

In the privacy, data security, and advertising areas, she helps clients comply with privacy, data security, and consumer protection laws, including laws governing telemarketing and commercial e-mail messages, contests and sweepstakes, endorsements and testimonials, marketing to children, and data breach notification. Ms. Marshall also helps clients establish best practices for collecting, storing, sharing, and disposing of data, and manage outsourcing arrangements and transborder data flows. In addition, she assists with drafting and implementing internal privacy, data security, and breach notification policies, as well as public privacy policies and website terms and conditions.

As to intellectual property matters, Ms. Marshall helps clients protect their copyrights and trademarks through registration, enforcement actions, and licensing agreements.

She also represents clients in proceedings before the Federal Communications Commission and Federal Trade Commission.

Ms. Marshall is a Certified Information Privacy Professional (CIPP/US) through the International Association of Privacy Professionals (IAPP) and a contributing author of Beyond Telecom Law Blog and Consumer Protection Connection.

Education: Washington and Lee University (B.A., 1997); American University, Washington College of Law (J.D., 2002).

Admissions: District of Columbia; Maryland

Memberships: American Bar Association

202-434-4234
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