FTC CHALLENGES “NEGATIVE OPTION” MARKETING TACTICS
The Federal Trade Commission recently filed suit in the United States District Court for the District of Georgia under the Federal Trade Commission Act (“FTCA”), Telemarketing Consumer Fraud and Abuse Prevention Act and Truth in Lending Act against Preferred Alliance, Inc., d/b/a VacantSun Travel Discounts and GenesisCard, for violations of Section 5 of the FTCA, the Telemarketing Sales Rule and Regulation Z. The complaint alleges “deceptive and unfair acts or practices” and seeks permanent injunctive relief, rescission of contracts, restitution, redress, disgorgement and other equitable relief.
The suit relates to the sale of defendant’s buying club memberships by third‑party telemarketers through the use of a negative option. A “negative option” involves an offer to sell goods or services under which the consumer must take affirmative action to reject the goods or services or cancel the agreement and the consumer’s failure to reject the goods or services or cancel the agreement is interpreted by the seller as the consumer’s acceptance of the goods or services. The complaint alleges that sales were made through “upselling,” whereby a third party telemarketer, after selling its own product to the consumer and obtaining payment information, solicits the purchase of additional goods or services, in this case, defendant’s buying club memberships. During the upsell, the telemarketers offered defendant’s buying club membership as a “free” trial membership or a “free” gift. For those consumers who actually were sold the membership, the complaint further alleges that the telemarketer failed to inform consumers (i) that failure to cancel the membership at the end of the trial period would result in automatic enrollment in the buying club, (ii) that the $99.95 annual membership fee would be charged to the credit or debit card number provided by consumers in connection with purchases of the telemarketer’s (not defendant’s) goods or services and (iii) of the manner in which consumers must cancel the trial membership. Additionally, the complaint alleged that defendant obtained consumers’ credit or debit cards numbers without the consumers’ consent, charged fees before the expiration of the trial membership, and failed to issue, or to issue in a timely manner, promised refunds.
According to the FTC Press Release, Howard Beales, Director of the FTC’s Bureau of Consumer Protection expressed the FTC’s position stating that “[t]elemarketers need to be sure that consumers agree to be charged, and what account will be charged – even if they have an account number from another transaction. . . [i]f you charge consumers without their permission, [the FTC will] charge you with committing a fraud.”
Judy Scheiderer and Margaret Stolar