November 22, 2017

negative-option-lawsuit
Negative Option Lawsuit Settles.

The Federal Trade Commission (“FTC”) has announced that online lingerie marketer AdoreMe, Inc. (“AdoreMe”) has settled claims alleging that its deceptive negative option enrollment and cancellation practices violated both Section 5 of the FTC Act and the Restore Online Shoppers’ Confidence Act.  The underlying complaint in the negative option lawsuit alleged improper use of a negative option continuity plan, where consumer credit cards were billed $39.95 a month on a recurring basis until consumers attempted to cancel their subject plans.  The complaint explains that the defendants failed to include clear and accurate disclosures concerning the terms and conditions of their negative option plans and made it difficult for customers to cancel their memberships.

What Else Did the FTC Deem Violative of Applicable Law?

Alleged Problems with AdoreMe Negative Option Plans and Associated Disclosures

AdoreMe sells lingerie online and obtains most of its revenue from its VIP membership program.  Among other things, this program purportedly provides customers with discounts on their respective initial purchases, free shipping and exchanges, and “VIP only” apparel.  Consumers were enrolled in the VIP program on a negative option basis.  Consumers were then billed $39.95 for a “store credit” each month unless, within the first five days of each month, they either made a purchase from AdoreMe or visited the AdoreMe website or mobile app and affirmatively clicked a button to elect to “skip” buying that month.  As set forth in its complaint, the FTC alleged that AdoreMe “misrepresented that consumers could use accumulated store credits ‘anytime’ to purchase goods from Defendant and failed to provide simple, or even reasonable, ways for consumers to permanently stop Defendant’s recurring charges.”

The negative option lawsuit sought, inter alia, a permanent injunction barring the defendants’ advertising practices and damages, including rescission or reformation of consumer contracts, restitution, refunds of monies paid by consumers and disgorgement of monies obtained through the subject improper marketing practices.

The Negative Option Lawsuit Settlement

This week, the FTC announced a settlement with AdoreMe, pursuant to which the defendant:

  • Is permanently restrained and enjoined from misrepresenting the terms and/or costs of its continuity plans and any “free” offers;
  • Is subject to strict requirements for obtaining express informed consent from consumers before enrolling them in any negative option plan; and
  • Must pay fines totaling more than $1.3 million.

An interesting aspect of the settlement agreement is the requirement that all prospective online customer orders must be accompanied by immediate written confirmation of the subject transactions by email.  The confirmation emails must: 1) contain a subject line reading “Order Confirmation” along with the name of the applicable product purchased; and 2) clearly and conspicuously disclose, among other things:

  • The total cost of the purchase, the date that the initial charge will be submitted for payment and, where applicable, the frequency of such charges;
  • How to avoid recurring charges; and
  • A simple cancellation mechanism to stop recurring charges.

In addition, confirmation emails may not contain any upsells or additional product or service advertising of any kind.

Are Your Marketing Practices Compliant?

As demonstrated by this negative option lawsuit, the FTC continues to aggressively prosecute claims of deceptive continuity plan and “free” offer marketing.  Any hidden, potentially misleading or insufficient disclosures may place marketers at serious risk of legal action.  As such, marketers who wish to avoid a potential lawsuit or regulatory investigation should carefully review the FTC’s Guide Concerning Use of The Word “Free” and Similar Representations and consult with experienced counsel regarding their marketing practices.  If you are interested in learning more about continuity plans, or need to review your marketing practices or disclosures, please email 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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Putting the Positive in Negative Option Billing

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