The Federal Trade Commission is conducting a review of its "negative option" rules, a process that could lead to tougher regulations on the practice that critics say often turns "no" into "yes."
Simply put, negative option turns the sales transaction around. Instead of the merchant having to "sell" you a product or service, it starts with the assumption that you've already bought it. It's up to you, the consumer, to contact the merchant and cancel the order if you don't want to complete the transaction.
The Columbia Record Club and various "book-of-the-month" clubs were pioneers of negative option marketing. The hook was an offer of five or ten books or records for free or at a heavily discounted price.
By accepting the offer, the consumer agreed to "join" the club and receive regular shipments of other books or records at the full price, unless the consumer took the "negative option," telling the company it did not want to receive that month's offering. As you might expect, negative option has been abused as its use has become more prevalent.
The commission's rule currently regulates this rather traditional type of negative option marketing -- so-called prenotification negative option plans for the delivery of merchandise. In this type of negative option marketing, consumers receive periodic announcements that merchandise will be delivered unless they decline the items within a set time.
But negative option marketing is also how consumers end up enrolled in memberships that get charged to their credit cards, often without their knowledge or consent. These transactions don't always fall under existing FTC rules.
In 2001, the Federal Trade Commission cracked down on negative option abuses, suing nine companies for charging customers' credit cards for products or services without gaining their express approval.
The new rule that's currently open for public comment would require sellers to clearly and conspicuously disclose the material terms of a prenotification negative option plan to consumers before they subscribe and to follow certain procedures in operating the plan. The rule enumerates seven material terms that sellers must disclose clearly and conspicuously.
In addition, the rule requires sellers to follow certain procedures, including:
• abiding by particular time periods during which sellers must send introductory merchandise and announcements identifying merchandise the seller plans to send;
• giving consumers a specified time period to respond to announcements;
• providing instructions for rejecting merchandise in announcements; and honoring promptly written requests to cancel from consumers who have met any minimum purchase requirements.
The FTC's notice asks standard rule review questions, including whether there is a continuing need for the rule, its benefits and costs, and what modifications, if any, should be made to account for changes in market-relevant technology or economic conditions.
In addition, the notice solicits comments on whether the Commission should expand the Rule to address additional types of negative option marketing. The notice contains information about how the public can submit comments, which are due by July 27, 2009.
The proposed rule and instructions on how to comment are available online.
Read more: "Negative Option: When No Means Yes"