FTC v. Commerce Planet: Can a Website that Fully Discloses Charges to Be Made to Consumer Credit Cards Be Faulted for Unfair or Deceptive Conduct?
Online merchants often believe that if they make a full disclosure of all key terms in their contracts with consumers, including specifying all charges to be made to user credit cards, that they will be exempt from FTC or state consumer law enforcement actions. Unfortunately, this faith often has little basis. Recent FTC enforcement actions have often found online contracts the contain full disclosures to still be deceptive, if key terms are buried in fine print or if they are contradicted by other statements made by the vendor.
A case in point is the recently-settled enforcement action, FTC v. Commerce Planet, Inc., C.D. Cal., No. 8:09-cv-01324. Commerce World is (or was) a Santa Barbara-based firm that sold kits showing customers how to make money selling products on eBay and other online auction sites. Commerce Planet sold these kits through pop-up ads, sponsored links on search engines, and email.
According to the FTC complaint, customers who clicked on links in these ads were taken to Commerce Planet's website. Once at the site, they were invited to "activate FREE 7-DAY trial -- just pay S/H." Customers who clicked on that link were taken to a second web page which offered them a "free online auction kit" and asked them to fill in their name, shipping address and phone number. Consumers who did so and clicked "Ship my Kit!" were taken to a third page where they were asked to choose a shipping method -- either Regular for $1.95 or Expedited for $7.95 -- and fill in their credit card information. Consumers who then clicked on the "Ship My Kit!" button authorized their credit cards to be charged.
On the second web page, below the "Ship My Kit!" button was language which stated that "By submitting this form you are agreement to the Privacy Policy and Terms of Membership of this Web Site . . . ." The Terms of Membership link took customers to a separate page which stated: "If you do not contact our customer service to cancel your . . . membership within 7 days, you will automatically be charged a monthly membership fee of $59.95, and you will be charged this monthly fee every 30 days thereafter until you cancel your membership."
This type of contract (which is commonly used for health club memberships) is called a "negative option" contract. According to the FTC, in addition to the disclosures on the Terms of Membership page, the second page of the Commerce Planet website contained language indicating that the transaction "involves a negative option" and that consumers "may be liable for payment of future goods and services . . . for $59.95 per month.
So the website fully disclosed the $59.95 monthly charge in two separate places! So how could the FTC fault Commerce Planet?
According to the FTC, what made this disclosure false and deceptive was that "it was possible for consumers to complete the entire transaction with ever having seen it." Consumers were not required to click on the Terms of Membership link that contained a clause with the disclosure. And the disclosure on page 2 of the website "appeared below the bottom on the screen." The FTC claimed that in numerous instances, consumers first became aware that they had enrolled in the negative option plan when they saw the charges on their monthly credit card statement.
The settlement papers filed by the FTC on November 16, 2009, for this case provide further insight into the Commerce Planet practices that the FTC considered deceptive and unfair. These included misrepresenting, "expressly or by implication":
• That a product is offered on a free or trial basis, if the consumer will be charged a fee unless the consumer "takes affirmative action to cancel";
• The amount that a consumer will be charged or billed;
• That a consumer will not be charged or billed;
• The timing or manner of any charge or bill; and
• The length of any trial period that consumers receive before being charged or billed.
As part of the settlement, the defendants agreed to "clearly and conspicuously" disclose all material terms of future offers with negative option features. For online communications with customers, "clear and conspicuous" disclosure means that the message is presented "simultaneously in both the audio and visual portions of the communication." The disclosure must be unavoidable and presented prior to the consumer incurring any financial obligation. Audio messages must be understandable and visual messages must be presented in a font and location "sufficiently noticeable for an ordinary consumer to read and comprehend." The defendants also agreed to obtain the "express informed consent" of consumers to be charged for a product before making future sales.
And one more thing -- the defendants agreed to fines of $19.7 million each. These fines were suspended due to the defendants poverty and three defendants agreed to pay fines ranging from $100,000 to $230,000, plus the proceeds of an anticipated loan for a few hundred thousand more. For the many additional details of this and the other terms discussed in this post, see [cite].
The take-away from the Commerce Planet case is that when you sell to consumers online, don't be coy. Don't create banner headlines claiming that a product or service is free, if other terms and conditions of the sale mean that most customers will wind up paying for it. Don't make disclosures about charges you intend to make to consumer credit cards hard to find.
If you have any questions about how FTC or state law consumer regulations affects your online marketing, please contact me.
David D. Johnson is a business lawyer whose practice focuses on litigation and other issues relating to digital media and consumer electronics companies. David can be contacted at (310) 785-5371 or DJohnson@jmbm.com.
