Tragic (Legal) Mistake 4: Continuity Programs: In the FTC Crosshairs

By Chip Cooper, Esq.

Your membership site can land you in the FTC’s cross-hairs. Even if the FTC doesn’t breathe down your neck, continuity programs can run afoul of various state laws. And the penalties for non-compliance are steep. Warning: If you have automatically renewed offers or continuous subscriptions, your business is now highly regulated. This includes website memberships, online content with fees for access and newsletters. This is especially true if anyone on the membership list lives in California.

Continuity or Negative Option Plans

Continuity plans are those that have continuous subscriptions or automatically renewed payment for services. Continuity plans are also called negative option plans. The term negative option plan is used because you remain on the plan and billed for the products and services until you specifically opt out. This can be a problem if you don’t inform them that you don’t want their Elvis special or continue to get billed while waiting for them to process the cancellation.
Continuity plans started to receive heavy FTC oversight when people began complaining about ten CDs for a dollar deals that turned into a $20 a month plan that they could not cancel. This is in addition to the ongoing complaints that people were forced to pay for something they did not want or only received refunds after they mailed back the item.

The key feature of continuity plans is that the charges are either automatically renewed indefinitely or continue for a specified, predetermined time.

You might think you aren’t subject to these rules because you aren’t selling CDs for a penny now to overcharge someone for CDs for the next three years. However, continuity programs take many forms, including several models used by internet marketers and online entrepreneurs.

Common types of continuity plans used by online businesses include:

Membership sites

Membership sites may charge for membership or be free. Many manufacturers have free membership sites while marketing to members and increasing their sales by promoting special offers to members. Membership sites may charge an annual fee to remain a member or charge for a premium level of membership or services. For example, the basic access to LinkedIn is free, but the premium version popular with jobseekers requires payment. Many gaming sites are membership sites. A few games may be free, but paid membership is required to access most of the games. One definition of a membership website is that the website is the destination and product. Mistakes those setting up memberships make include lacking content, charging too much for the limited content and not having a plan to make money off their marketing to members.

Subscription sites

Subscription sites may offer content only to those who sign up. However, subscription sites tend to offer more than the online content. They may be able to download PDFs not available on the website or receive print newsletters in addition to online content. Subscription based sites are commerce based, specifically designed to increase product sales and provide a service to subscribers.

Software as a service

Software as a service is any software for which the consumer must make regular payments to continue using the software. Adobe triggered an uproar when it switched to the Software as a Service or SaaS model. No longer could someone buy an Adobe CD and install the software, owning it forever. Now they had to pay an annual or bi-annual fee to Adobe to use software they’d always used. IT firms like SaaS because it generates a continual income stream. They also say it makes new software rollouts simple because only the software app on the cloud has to be updated.

Continuity Plans and ROSCA

ROSCA or the Restore Online Shopper’s Confidence Act of 2010 was passed in response to consumer complaints of internet scams in the form of continuity plans. ROSCA contains three main rules for continuity plans:

Continuity plans must clearly and conspicuously disclose the terms of the program before they can bill for it.
They must obtain express informed consent before they charge the consumer.
Cancelling the plan must be simple.

The FTC enforces the provisions of ROSCA, and violations of the act are treated like unfair or deceptive marketing practices.

Nominal Fee to Pay Offers

The FTC has been busy enforcing ROSCA. In one case, the FTC settled for $359 million dollars, while the other was litigated with a penalty of $18 million. Both of these ROSCA cases involved nominal fee to pay offers. Consumers in both cases signed up in response to an offer with a low cost item, usually only the cost of shipping and handling for the first item. However, paying for shipping and handling gave the company the customer’s credit card information.

After the free trial or free with shipping item sent, the initial offer was followed by an upsell. And when the free trial was over, the consumer’s credit card was regularly charged until the customer cancelled the offer.

Lesson: If you are going to set up a nominal fee to pay offer, then your nominal fee offer as well as the upsell must have the required ROSCA disclosures.

The Federal Trade Commission has clearly stated that even if the consumer is informed later or if the consumer accepts the nominal fee offer, it is considered a deceptive marketing practice if ROSCA disclosures are not provided with the call to action.

California SB 340 – California False Advertising Act

SB 340 amends the California False Advertising Act, addition new requirements to that state’s laws on continuity plans.

A clear and conspicuous display of written terms must be shown near the request for consent. A check box next to a link to the terms isn’t good enough.

An acknowledgement of renewal terms, the cancellation policy and instructions how to cancel must be shown.

A clear and conspicuous notice of material changes to the plan and how to cancel if the consumer doesn’t like the changes must be given.

California’s SB 340 is similar to ROSCA, but there are a few differences. The challenge for online entrepreneurs and internet marketers is how to comply with both laws.

Note: If you offer a continuity plan and accept customers from California, you must meet both ROSCA and SB340.

Recommendations to Avoid Being Creamed by Continuity Programs

Offer terms in written form, clearly separate by size, type and/or color of the surrounding text. Place it above the call to action.

Place the terms in written form either above the place where consumers enter billing information or on a prior page. Make sure they have to read it before they sign up.

Collect express, informed consent. This can be done with a required checkbox for “I agree to these terms” or an “I agree button” before someone can submit their billing information.

Send an email acknowledgement after the consumer has given consent. Send an acknowledgement of the consent to the customer, as well as a copy of the offer’s terms, your cancellation policy and information on how to cancel it.

Retain copies of these sent messages. It is legal protection in case someone says they were never given the terms of the agreement.

Have a simple and easy to use cancellation mechanism.

Process cancellations promptly. Never let them sit in an inbox while the customer gets billed for one more month.

Send notice to all consumers when there is a modification to the terms. Send them clear and simple explanations of the terms and information on how to cancel if they don’t like the terms.

If someone must spend at least a minimum amount before they can cancel the membership, state such up front.

What Happens if You Violate ROSCA or SB 340?

What are the penalties if you violate ROSCA or California’s SB 340?

• FTC penalties for ROSCA violations are up to $16,000 per violation.
• California’s penalties can reach $2,500 per.

Summary

Membership websites are popular because they provide a continual source of income from members. Unfortunately, this revenue stream has been so badly abused by scammers that the Restore Online Shopper’s Confidence Act and California’s SB 340 were passed. Continuity plans are now a highly regulated industry, and the price for non-compliance is high.

Here’s How To Make Sure You, Your Business & Website Is FTC Compliant

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Disclaimer: This article is provided for informational purposes only. It’s not legal advice, and no attorney-client relationship is created. Neither the author nor FTC Guardian, Inc. is endorsed by the Federal Trade Commission.