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General

Negative option billing enforcement actions, false advertising, and endorsements


The Federal Trade Commission ("FTC") continues to bring enforcement actions against companies that engage in false advertising and deceptively enrolling consumers in ongoing sales plans without express informed consent – a practice known as "negative option" marketing.

On October 24, 2018, the FTC announced that a federal district court in California temporarily enjoined three defendants and the companies they controlled from enrolling consumers in any ongoing sales plan without the consumer's express informed consent. A negative option feature is where "the consumer's silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer." Federal law already prohibits this type of sales practice under the Restore Online Shopper's Confidence Act (ROSCA) which prohibits charging consumers for goods or services sold in Internet transactions through a negative option feature unless the seller:

  • clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer's billing information

  • obtains the consumer's express informed consent before making the charge

  • provides a simple mechanism to stop recurring charges.

According to the FTC's Complaint, once customers purchased any of defendants' products, they were often enrolled in "auto-ship continuity plans" wherein they would be shipped merchandise each month and their credit cards would be charged without their consent, in violation of Section 5 of the FTC Act and in violation of ROSCA.

According to the FTC, the defendants also deceptively marketed their over-the-counter homeopathic drug products with statements that were false or deceptive, specifically:

  • 88% effective rate to stop smoking

  • clinical data "done by some of the greatest medical and scientific institutions anywhere," including "the New England Journal of Medicine, which ranks our product ten times more effective than nicotine-replacement therapy to stop smoking"

  • lose weight "without giving up your favorite foods or adding any exercise" with representation supported by "studies"

  • "made in USA."

Section 5(a) of the FTC Act, prohibits "unfair or deceptive acts of practices in or affecting commerce" and misrepresentations or deceptive omissions of material fact constitute such prohibited acts. Section 12 of the FTC Act prohibits false advertising which is likely to induce the purchase of food, drugs, devices, services, or cosmetics. The false statements about the efficacy of the products were alleged by the FTC to violate Sections 5 and 12, as were the statements that the products were made in the USA, and that they were sold with money back guarantees. In addition, some of the "consumers" appearing in advertisements, were actors, not people who had had success with the product and, thus, the false endorsements and testimonials were likewise deceptive.

Finally, the defendants made it difficult for customers to cancel and did not honor their "money-back" guarantee. The defendants made illegal robocalls, and made deceptive earnings claims about a multi-level marketing scheme all in violation of the FTC Act, the Restore Online Shopper's Confidence Act (ROSCA), the Electronic Fund Transfer Act, and the Commission's Telemarketing Sales Rule.

This recent enforcement highlights the importance of deploying sound marketplace practices. To comply with federal law, companies should require consumers to take an affirmative step, such as clicking an unpopulated box "I agree," for example, to demonstrate their consent to supplemental goods or services. Similarly, companies should not rely on pre-checked boxes, which consumers may neither notice nor read before completing their order, as evidence of consumers' consent. Consistent with recent trends, FTC also continues to bring enforcement against false advertising, particularly in connection with medical claims.

If you have any questions about how this recent enforcement action may impact your company's use of claims in advertising or negative option sales, please contact your Baker McKenzie attorney or any of the contacts below.

Contributor: Rebecca Lederhouse