The Federal Trade Commission (FTC) recently announced settlements with two online companies for allegedly misleading customers about automatic membership renewal costs. On September 2, 2020, the FTC announced that Age of Learning, Inc., d/b/a ABCmouse, will pay $10 million to settle charges that the company enrolled thousands of consumers in a negative option scheme to which they did not consent, and also misrepresented its cancellation process. Fewer than three weeks later, on September 22, the FTC announced that online supplement manufacturer NutraClick LLC and two of its individual officers settled with the FTC for $1.04 million over allegations the company violated an earlier consent order that required it to fully disclose the terms of its negative option membership program to customers.
The FTC charged both companies (and the individual defendants in the NutraClick case) with violating two laws: (1) Section 5 of the FTC Act, which prohibits misleading or deceptive statements; and (2) Section 4 of the Restore Online Shoppers’ Confidence Act (ROSCA), which bans online negative options unless the seller (a) clearly discloses all material terms of the deal before obtaining a consumer’s billing information, (b) gets the consumer’s express informed consent before making the charge, and (c) provides a simple mechanism for stopping recurring charges. The FTC also charged NutraClick with violating the Telemarketing Sales Rule, which prohibits deceptive telemarketing acts (the company advertised its “free trials” via text as well as online).
ABCmouse is a membership-based online educational company that offers reading, math, and other scholastic content for children two to eight. According to the FTC’s complaint, from 2015 through at least 2018, the company failed to adequately disclose key terms of its membership program, as required by ROSCA. The company also allegedly neglected to inform customers that their yearly membership, priced at $59.95, would automatically renew for another year at the same price unless users cancelled. And, while the company promised “easy cancellation” in its ads, the reality was anything but. Not only was the cancellation process overly complicated, hundreds of thousands of consumers who had purchased a membership and attempted to cancel later learned they were still enrolled.
The FTC 2020 complaint against NutraClick alleged that the company violated a 2016 order that required the company to disclose the material terms of its membership programs to customers. According to the FTC’s 2016 complaint, NutraClick advertised “free” samples of beauty products and nutritional supplements, but by ordering these samples, customers were unwittingly enrolled in a membership program and charged recurring monthly fees ranging from $29.99 to $79.99 unless they cancelled within 18 days. The FTC claimed that while NutraClick’s websites did contain statements about the monthly membership fee, the statements were not “clear and conspicuous,” as required by ROSCA. Because it was not upfront with its customers about its billing practices, more than 70,000 consumers reportedly complained about NutraClick’s practices.
In addition to the $10 million monetary judgment, the ABCmouse stipulated final order requires the company to disclose all information related to its negative option plans and clearly explain key terms, obtain consumers’ informed consent before enrolling them in automatic billing, and provide an easy means of cancellation. The stipulated final order against NutraClick permanently bans the company from engaging in any negative option marketing. NutraClick was also ordered to pay $1.04 million in a separate proposed contempt order.
The Commission voted 4-0-1 to authorize staff to file the complaint and proposed order against ABCmouse. Commissioner Rebecca Slaughter did not participate, and Commissioner Chopra issued a separate statement in which he pointed to ABCmouse’s “unlawful dark patterns” of deceptive negative options and “unethical” and “illegal” behavior, characterizing the company as a “roach motel.” Commissioner Chopra mentioned a number of tools at the FTC’s disposal to “root out the kinds of tricks and traps” employed by ABCmouse, including ROSCA, the FTC Act, and the CAN-SPAM Act, which prohibits deceptive headers and requires marketers to give consumers an easy way to opt out of future emails.
The FTC continues to pay close attention to online negative option schemes. Brands should be careful to adhere to the terms of ROSCA before enrolling customers in membership programs and charging recurring membership fees.