The Federal Trade Commission (“FTC”), and a large grocery delivery service recently agreed to resolve allegations that the company, among other things, offered consumers free trials of its paid membership program but failed to disclose certain material post-trial program terms. Below, we discuss the FTC’s allegations in detail, the terms of the proposed settlement, and why it’s important to comply with federal and state marketing regulations.
When Are Free Trials Not Free?
In its Complaint, the FTC alleged that Maplebear, Inc., doing business as Instacart, offered consumers 14-day free trials of its membership program, Instacart+, but failed to clearly and conspicuously disclose that: (1) the free trials automatically converted into paid annual subscriptions at the expiration of the free trial period; and (2) membership fees would be canceled and refunded only under limited circumstances, despite Instacart advertising that consumers they could “cancel anytime.”
According to the Complaint, the FTC claimed that Instacart:
- Failed to disclose to consumers that they would be charged $99 for a full year’s membership and when they would be charged after the free trial period ended;
- Failed to inform consumers that they were entitled to a refund only if they: (1) canceled their memberships within 5 days after the paid membership period began; and (2) had not placed any orders with their Instacart+ membership;
- Offered free delivery to consumers on their first orders but still charged consumers “service fees.” The FTC alleged that service fees added 7.5%-15% to total order costs, and that these fees were hidden from consumers until they reached the checkout stage;
- Received tens of millions of dollars from these service fees;
- Offered small credits to dissatisfied consumers despite advertising a 100% satisfaction guarantee; and
- Misled consumers into believing that they could receive only a credit rather than a refund by hiding the refund option from the “self-service” menu that consumers used to report problems with orders.
The terms of the proposed resolution with the FTC include, but are not limited to, prohibitions on misrepresenting: (1) amounts consumers will pay for its delivery services; (2) that consumers cannot receive refunds for unsatisfactory purchases; (3) the existence of a negative option; and (4) any material facts relating to the terms of the negative option feature (or free-to-pay conversion). As part of the proposed settlement with the FTC, Instacart agreed to pay a $60 million monetary judgment.
Free Trials And Automatic Renewals
Among other things, businesses must: (1) provide consumers with a simple mechanism to cancel negative option features and immediately stop recurring charges; (2) provide clear and conspicuous disclosures of the terms associated with the negative option program (here, the free-to-pay model); and (3) obtain prior express written consent from consumers for their transition from free trials to paid subscriptions. Note that, consent to any negative option feature must be acquired separately and apart from any other portion of the initial transaction.
Businesses offering free trial memberships that automatically convert to paid subscriptions upon the expiration of free trial periods must comprehensively review their state and federal compliance procedures. Hiring experienced counsel can mitigate the risks that companies face and ease the burden of keeping up with the laundry list of constantly evolving regulatory requirements. The attorneys at Klein Moynihan Turco (“KMT”) have significant experience with counseling clients on federal and state marketing regulation compliance and defending businesses against marketing law allegations.
If you or your business needs assistance with a federal or state marketing law matter, please e-mail us at info@kleinmoynihan.com, or call us at (212) 246-0900.
The material contained herein is provided for informational purposes only and is not legal advice nor is it a substitute for seeking legal advice from an attorney. Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.
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