FTC Obtains $10M Settlement for Negative Option Marketing

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On September 1, 2020, Age of Learning Inc., d/b/a ABCmouse (“ABCmouse”), agreed to pay $10 million to settle an enforcement action brought by the Federal Trade Commission (“FTC”) for engaging in alleged illegal marketing and billing practices. According to the FTC, ABCmouse, which operates a membership-based online learning tool for children, enrolled unsuspecting consumers in negative option marketing programs without their consent by failing to inform parents that their subscriptions would renew automatically.  

What did the FTC allege?

Failure to Properly Disclose Automatic Renewal

Pursuant to the terms of a typical negative option marketing plan, a consumer’s silence constitutes consent to an offer. While negative option campaigns may be acceptable when done correctly, businesses must be careful to clearly disclose all material terms to consumers prior to sign up. According to the FTC’s complaint, ABCmouse charged parents $59.95 per year for access to their online learning tools. ABCmouse failed to disclose that the plans would automatically renew at the same price after twelve (12) months and how consumers could cancel. During sign up, consumers were promised “Easy Cancellation,” but the reality was much different. Many consumers reported unsuccessfully attempting to cancel plans despite multiple such phone calls or emails to ABCmouse. ABCmouse instead forced consumers to find and navigate a confusing, multi-step cancellation process. The FTC’s investigation revealed that over the last three (3) years, “hundreds of thousands of consumers visited [ABCmouse’s] cancellation path but remained enrolled.”

FTC Negative Option Marketing Investigation and Settlement

After years of failing to adequately disclose its automatic renewal and billing policies, ABCmouse received a Civil Investigative Demand in 2018 from the FTC that caused it to update its enrollment information and disclose to consumers the material aspects of its negative option marketing plan. However, ABCmouse still buried the notice of automatic plan renewal in small font under a prominently displayed button labeled “Easy Cancellation.” It seems that ABCmouse had known about consumer complaints regarding automatic renewal and a confusing cancellation process for years prior to the FTC’s investigation. In fact, a 2015 internal review confirmed that many consumers had complained about the lengthy cancellation process, and some employees had even recommended making cancellation easier for consumers. 

As readers know, legitimate negative option marketing can come in several different forms, such as prenotification plans, continuity plans, automatic renewals, and free-to-pay conversion programs.  Here, ABCmouse failed to follow FTC guidance in structuring its automatic renewal plan, and did not clearly and conspicuously disclose upfront (and prior to billing), all material terms, such as minimum purchase obligations and cancellation policies. Worse still, the FTC’s investigation revealed that ABCmouse had been aware of these issues for years and failed to act. Even after ABCmouse learned of the FTC’s investigation in 2018, it failed to take meaningful steps to rectify the issue.

ABCmouse’s actions provide a cautionary tale for businesses. The FTC and state attorneys general aggressively pursue negative option marketers that fail to clearly and conspicuously disclose all material terms of their programs. ABCmouse’s failure to address its marketing and cancellation deficiencies almost certainly contributed to the steep $10 million fine and injunctive provisions that the FTC imposed upon it.  To prevent similar consequences, it is important that businesses engaged in negative option marketing work with experienced marketing attorneys to guide them through state and federal consumer protection laws before launching any complex marketing campaigns. If you need assistance reviewing your negative option marketing practices or are facing an FTC investigation, 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 obtaining 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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Photo by Giorgio Trovato on Unsplash

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