Will New Law Curb Negative Option Abuses?

For years marketers have taken advantage of something called "negative option marketing" to sell products to consumers without their knowledge. Finally, Congress has passed legislation designed to rein in abuses.

Almost overlooked in the flurry of year-end legislation is the "Restore Online Shoppers' Confidence Act," which protects online consumers from unfair and deceptive sales tactics on the Internet. It was passed in response of years of complaints like this one:

"Trilegiant frauduently charged my credit card as Great Fun 9 times for $12.99," Gene, of Chicago, Ill., told ConsumerAffairs.com in 2008. "I did not apply for any services from them. I have lost $117 to this fraud."

Burden is on the consumer

Negative option means the consumer is required to take action to terminate a sale or a relationship. Otherwise, they keep getting charged. Sometimes they don't even know there's a relationship. Usually it happens when they make some kind of unrelated transaction using their credit card.

The practice reached critical mass with the advent of the Internet. Suddenly it was easy and cheap to reach millions of consumers with a special offer or a "free" trial. At the end of an online transaction, for example, they might be offered a $10 off coupon on their just completed purchase.

By accepting the offer, they agreed to be enrolled in a "membership club" offering discounts on travel, for example. But the terms appeared in tiny print or were left out altogether. The consumer accepting the $10 off coupon had no idea that their credit card would be charged $9.95 per month until they called to cancel their "membership."

Basic abuses

The new law tries to address the most basic negative option abuses that have plagued consumers for years. It requires companies that offer goods or services on other companies' websites to meet certain requirements before charging consumers' financial accounts.

The new law also prohibits companies from transferring their customers' billing information to companies that are offering goods or services on their websites. This is a key reform, since most consumers accepting a "free offer" have no idea the company making the offer has the ability to charge their credit card.

"At the Attorney General's Office, we've fought hard to stop companies from fleecing online shoppers through tactics known as 'post-transaction marketing' and 'negative-option billing,'" Washington Attorney General Rob McKenna wrote in a recent op-ed piece for the Puget Sound Business Journal.

McKenna says he's investigated and sued some of the worst offenders, including Washington state-based Intelius. He says he's proposed state legislation to protect consumers, and when the bill died in committee, he lent his support to the Congressional effort that resulted in the new law.

Under the new federal law, McKenna says negative-option marketers will also need to beef up their disclosures to consumers. And consumers must give their informed consent before being billed.