Putting the Positive in Negative Option Billing

With a name like “negative option billing” it should come as no surprise that this practice has received a lot of negative attention lately from the Federal Trade Commission (“FTC”), various state attorneys general and other regulatory bodies. Despite this trend, marketers and consumers alike have found this billing method to be a convenient and useful payment option over the years. With proper and prominent disclosures, a reasonable price point, an equitable refund policy and a responsive customer service department (complete with a user-friendly cancellation policy), there’s no reason to think that negative option billing cannot continue to be a respectable business model for years to come.

First, some background for those unfamiliar with this billing method. The phrase “negative option” billing (also referred to as “continuity” or “recurring” billing) refers to a billing method whereby the customer is automatically charged on a periodic and recurring basis for goods or services ordered up until the point that the customer cancels his or her membership or account. The most frequent model involves a monthly charge, though shorter and longer intervals are sometimes offered.

“Free-to-pay conversion” billing (a close cousin) refers to a billing method whereby the customer is offered a free trial period for a given product or service, and if the customer does not cancel before the end of the trial period, the consumer is charged the applicable product or service fee. Frequently, free-to-pay conversion models convert to negative option billing after the applicable trial period expires.

Given the fact that both of these models involve a process whereby the consumer is billed at a later time without obtaining subsequent consent or payment information from the consumer after the initial interaction, there is a heightened level of scrutiny surrounding the suitability and comprehensiveness of the disclosures required during the initial consumer/business operator sign-up event.

Last May, the U.S. Senate Committee on Commerce, Science, and Transportation launched an investigation into various companies, including Webloyalty, Vertrue and Affinion, in response to an avalanche of complaints alleging that consumers were being enrolled in negative option billing programs without obtaining informed consumer consent. The common feature of these complaints was that consumers were being enrolled in the applicable programs without consumers providing their credit card information directly to the program providers. The process worked as follows: after first completing an Internet-based transaction using a credit card, a pop-up window would appear on the consumer’s computer screen featuring a different product offered by a separate company, as well as an incentive to sign-up. After the consumer entered his or her e-mail address only (not credit card information) in response to this second offer, the consumer’s credit card would be billed for the underlying product offering because, unbeknownst to the consumer, his or her credit card information was provided by the first company to the second company. Earlier this month, the Commerce Committee extended its probe to include Visa, MasterCard and American Express, seeking answers as to how these programs were tolerated by credit card companies that are normally vigilant about preventing such abuses.

This past November, a settlement in excess of $1 million was reached between the FTC and online business operator Commerce Planet, Inc. in connection with a negative option billing program that was packaged with a “free” offering. The FTC alleged that consumers were not made aware that they were enrolling in the negative option program when obtaining the free offering, and that the Commerce Planet refund policy and practices were excessively difficult and onerous for aggrieved consumers to successfully navigate.

These are just two recent examples of regulatory action in this space, though they are by no means isolated instances. The level of scrutiny that these practices are receiving looks like it is only going to increase as regulators attempt to weed out the industry’s few bad actors. Should you engage in these billing methods, it would be prudent to ensure that you conform to the requirements of law, as well as industry best practices. Below is a rough guide to help you do just that.

First and foremost: disclosure, disclosure, disclosure. And, just to be certain, some more disclosure. It is absolutely vital that the price point of your product or service, the applicable billing schedule, the cancellation method (complete with an 800 number for customer service) and the description of how the charges will appear on the consumer’s credit card statement are all clearly and conspicuously displayed directly above the “call to action” (usually the order “submit” button). Do not hide this information in the fine print at the bottom of the sign-up page.

Further, a link to the applicable Terms of Service and Privacy Policy must appear above your order “submit” button so that the consumer is made aware of the material terms prior to consummating the transaction. To reiterate, do not relegate these links to the fine print at the bottom of the sign-up page.

While it is important to ensure that the consumer is made aware of the price prior to purchase, that is not the only price-related issue that you should be concerned with. Regulators have also increasingly shown an interest in products and/or services that are marketed via negative option and/or free-to-pay conversion methods where the applicable price of the product and/or service bears little rational relation to the value of the actual product and/or service provided. For example, if you are charging $60 a month on a recurring basis for access to a database of government auctions that is made available for free by the government, you are asking for trouble.

Last, but not certainly not least, it pays to ensure that your customer service department is easy to access, responsive and that a process is in place to facilitate cancellations with as little hardship for the consumer as possible. It doesn’t hurt to have a liberal refund policy either. The more responsive and accommodating you are, the more likely it is that the consumer will feel respected and made whole. Healthy customer relations remains the cornerstone of any successful business, whether or not you employing negative option billing mechanisms as part of your business.

When done right, recurring billing methods provide a convenience for both businesses and their customers by doing away with the need to revisit the purchase/payment process each month for a product or service that the consumer plans to use for an extended period of time. Likewise, if the details of the offer are communicated adequately to customers, free-to-pay conversion programs provide consumers with the valuable opportunity to try out a product in advance before committing to a purchase. On their own, neither of these billing methods is suspect or unethical. Marketers that use these vehicles need to make sure that the consumer is well informed as to the material terms of the offer, that the fee correlates to the value of the product or service and that the means to cancel is easy and hassle free. If properly implemented, negative option billing can provide value to both sides of the transaction.

Please note that this is only a brief overview of some of the legal issues surrounding negative option billing programs. Remember to obtain guidance from a licensed and experienced legal professional prior to offering such billing options as part of your marketing campaigns.


David Klein

David Klein is one of the most recognized attorneys in the technology, Internet marketing, sweepstakes, and telecommunications fields. Skilled at counseling clients on a broad range of technology-related matters, David Klein has substantial experience in negotiating and drafting complex licensing, marketing and Internet agreements.

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