"In contrast to previous economic eras,
intellectual property will be the primary source
of new wealth in the 21st century."
- Gregory A Piccionelli, 1989
 
AREAS OF PRACTICE
• Internet Matters
• Music & Other Entertainment Matters
• Intellectual Property Rights Enforcement
• Crowdfunding Matters
• Freedom of Expression Matters

New Senate Legislation Would Ban Certain Internet Sales Practices

JULY 2010

On May 19, 2010, Senator John D. Rockefeller, Chairman of the U.S. Senate Committee on Commerce, Science, and Transportation, introduced legislation that may have a very significant impact on Internet retailers, particularly those offering services or goods via what is termed a “negative option” offer, a sales method that is very commonly used by adult online merchants.

 

For those unfamiliar with the practice, negative option sales generally refer to offers in which goods or services are sold to a consumer automatically unless the consumer takes some specific action to decline the sale in advance of billing. This sales method covers a variety of techniques and can take just about any form where a consumer must take an affirmative action to say “no” to an offer (such as un-check a pre-checked box) to prevent a sale. Some common examples of negative option sales currently in use in the online adult entertainment industry involve sales of memberships after free or reduced cost “trial” memberships, cross-sales of memberships to additional sites, sales of upgraded or premium services, and sales of additional live chat minutes.

 

Senator Rockefeller’s proposed legislation is entitled the ‘‘Restore Online Shoppers’ Confidence Act’’ (“ROSCA”). If passed ROSCA would provide the Federal Trade Commission (“FTC”) with specific authority and a new mandate to prosecute certain abusive online marketing practices. Interestingly, and I suspect, not coincidently, many of the bill’s prohibited activities comprise the same kinds of practices addressed by new rules recently promulgated by Visa and Mastercard regarding cross-sales and cardholder data security.

 

According to the Senator’s website the new legislation will protect online consumers by:

 

  • Prohibiting companies from using misleading post-transaction advertisementsby requiring them to clearly disclose the terms of the offers to consumers, and to obtain consumers’ billing information, including full credit or debit card numbers, directly from the consumers.

 

  • Prohibiting Internet retailers and other commercial websites from transferring a consumer’s billing information,including credit and debit card numbers, to post-transaction third party sellers. 

 

  • Requiring companies that use “negative options” on the Internet to meet certain minimum disclosure and enrollment requirements, so consumers will not end up paying recurring fees for goods and services they did not intend to purchase. ”

 

According to the text of the proposed law, ROSCA would make it unlawful for any third-party seller to charge a consumer’s credit card for a good or service without providing clear disclosures regarding the terms of the offer and receiving the consumer’s express informed consent to billing. To obtain such consent under ROSCA would require the consumer to provide both the billing information and an affirmative means of consent to the transaction (such as by clicking on an unchecked box).

 

ROSCA would also prohibit the practice of merchants disclosing and transferring a consumer’s billing information to any third party seller for use in any Internet-based sale of goods or services from the third-party seller. Thus, the proposed law closely tracks new rules recently imposed by Visa and Mastercard regarding cross-sales and credit card data privacy protection.

 

ROSCA would also impose clear limitations on the use of negative options in Internet-based sales by making it unlawful to charge a consumer through an Internet-based negative option program unless: (a) there is clear and conspicuous disclosure of all the material terms of the offer and the identity of the entity making the offer prior to the sale; (b) the consumer has provided express informed consent to the merchant to bill the consumer; (c) the merchant provides a simple process to cancel billing by bothInternet and telephone means; and, (d) the merchant provides a notice of billingto the consumer at least 10 days prior to eachbilling intervalin recurring billing situations.

 

The full text of Section 3 of ROSCA, which sets forth the Act’s specific prohibitions against certain Internet sales practices, is provided at the end of this article.

 

Senator Rockefeller introduced ROSCA with bipartisan support on the same day that the Committee on Commerce released the second of two reports regarding companies that allegedly used aggressive tactics to sell online consumers services. At the same time Senator Rockefeller’s office published information about the bill on his website. Included on the website is the following quote from the Senator:

 

“Tricking West Virginians into buying goods and services they do not want is despicable.  It’s not ethical, it’s not right, and it is not the way business should be done in America.  My Committee’s investigation uncovered these misleading practices and, as a result, these companies have been forced to change their ways.  That’s good for all of the West Virginians and the millions of Americans who shop online, and it’s the kind of work I will continue to do as Chairman of the Commerce Committee. This legislation will ban these deceptive online sales practices once and for all.”

 

If passed the legislation authorizes the FTC to use all of that federal agency’s formidable powers provided to it by the FTC Act to enforce ROSCA.

 

The introduction of ROSCA is yet another indication that the federal government is stepping up actions against online businesses engaged in false or deceptive trade practices. This should come as no surprise for regular readers of my articles, or any attendees at last year’s XBiz forum where I arranged for FTC representative Steve Cohen to meet with adult industry webmasters about likely areas of FTC enforcement. In fact, in the July 2009 issue of XBiz World my article entitled “Move Over DOJ, It’s The FTC’s Turn To Regulate Adult” pretty much predicted the shift of enforcement focus we now see underway.

 

I wrote the aforementioned article and arranged for Mr. Cohen’s appearance at the XBiz Summer ’09 forum not only because of the anticipated shift of federal enforcement activity with respect to the adult online industry from the DOJ to the FTC, but because of my concern that many of the competitively driven aggressive marketing methods we see today might well “lead well-intentioned but uninformed webmasters into problems with the FTC”. With introduction of ROSCA, these concerns have now taken on a renewed and greater urgency.

 

Having represented a fair number of adult Internet business clients before the FTC in the round of actions under the last democratic administration, I can tell you that while FTC complaints are civil actions and not criminal prosecutions, each was a very unpleasant experience for the targeted defendants. In one case we handled, for example, at the time our firm was engaged by the client, the client’s business was already being run by an outside receiver appointed by a federal judge at the request of the FTC. We resolved the case favorably for our client, thankfully. But some companies (not any of our clients, fortunately) did not fare as well in that round of FTC actions. Some were effectively shut down by the FTC. Needless to say that I take the possibility of a new round of FTC actions against Internet companies very seriously, and sincerely hope that all online adult entertainment companies do the same.

 

While there is no guarantee that ROSCA will ever become law in its current form, the fact that the bill has been introduced with bipartisan support by the Chairman of the Senate Committee on Commerce, Science, and Transportation is good reason why online adult entertainment merchants should monitor developments regarding ROSCA closely.

 

Additionally, as I have stated in previous articles, and at trade shows during the last year, it is a good time for webmasters to get ahead of the enforcement curve and invest the required effort to become familiar with the FTC regulations applicable to their business practices if they have not done so already. To do this, a good place to start is the FTC website at www.ftc.gov. I have found it to be an unusually informative government website.

 

But as good as the FTC website is, it is no substitute for a professional evaluation of your business practices by an experienced attorney to evaluate your business practices for compliance with FTC regulations.

 

Selected portion of Senator Rockefeller’s proposed law:

 

SEC. 3. PROHIBITIONS AGAINST CERTAIN UNFAIR AND DECEPTIVE INTERNET SALES PRACTICES.

 

(a) REQUIREMENTS FOR CERTAIN INTERNET-BASEDSALES.—It shall be unlawful for any post-transactionthird party seller to charge or attempt to charge any consumer’s credit card, debit card, bank account, or other financial account for any good or service sold in a transaction effected on the Internet, unless—

 

(1) before obtaining the purchaser’s billing information, the post-transaction third party seller has clearly and conspicuously disclosed to the purchaser all material terms of the transaction, including—

(A) a description of the goods or services being offered;

(B) the fact that the post-transaction third party seller is not affiliated with the initial merchant, which may include disclosure of the name of the post- transaction third party in a manner that clearly differentiates the post transaction third party seller from the initial merchant; and

(C) the cost of such goods or services; and

 

(2) the post-transaction third party seller has received the express informed consent for the charge from the consumer whose credit card, debit card, bank account, or other financial account will be

charged by—

(A) obtaining from the consumer—

(i) the full account number of the account to be charged; and

(ii) the consumer’s name and address and a means to contact the consumer; and

(B) an additional affirmative action from the consumer, such as clicking on a confirmation button or checking a box that indicates the consumer’s consent to be charged the amount disclosed.

 

(b) PROHIBITION ON DATA-PASS USED TO FACILITATE CERTAIN DECEPTIVE INTERNET SALES TRANSACTIONS.—It shall be unlawful for an initial merchant to disclose a credit card, debit card, bank account, or other financial account number, or to disclose other billing information that is used to charge a customer of the initial merchant, to any post-transaction third party seller for use in an Internet-based sale of any goods or services from that post-transaction third party seller.

 

(c) LIMITATIONS ON USE OF NEGATIVE OPTIONFEATURE IN INTERNET-BASED SALES TRANSACTIONS.—It shall be unlawful for any person to charge or attempt to charge any consumer for any goods or services sold in a transaction effected on the Internet through a negative option feature, unless—

(1) before obtaining the purchaser’s initial agreement to participate in the negative option plan, the seller has clearly and conspicuously disclosed all material terms of the transaction, including—

(A) the name of the entity offering the goods or services;

(B) a description of the goods or services being offered;

(C) the cost of such goods or services;

(D) notice of when billing will begin and at what intervals the charges will occur; and

(E) the length of any trial period, including a statement that the consumer’s account will be charged unless the consumer takes affirmative action and the steps the consumer must take to the avoid the charge;

 

(2) the seller has obtained the express informed consent described in subsection (a)(2) from the purchaser before charging or attempting to charge the purchaser’s credit card, debit card, bank account, or other financial account on a recurring basis;

 

(3) the seller enables the purchaser to stop recurring charges from being made to the purchaser’s credit card, debit card, bank account, or other financial account through a simple process that is avail

able via—

(A) the Internet; and

(B) telephone; and

 

(4) not less than 10 days prior to the initiation of each charge to a purchaser’s credit card, debit card, bank account, or other financial account, the seller has sent the purchaser an e-mail (at an e-mail account provided by the consumer) that clearly and conspicuously discloses—

(A) that a charge will be made to the consumer’s credit card, debit card, bank account, or other financial account;

(B) the amount of the charge and a description of the goods and services for which the consumer will be charged; and

(C) instructions for stopping recurring charges in accordance with the requirements of 24 paragraph (3).

 

 

This article is not intended to be, nor should be considered to be, legal advice. I strongly urge you to seek the counsel of a qualified and experienced adult entertainment attorney familiar with the legal matters discussed in this article.

 

 

1Gregory A. Piccionelli is an intellectual property and adult entertainment attorney with substantial experienced in a broad spectrum of Internet matters. He can be reached at Piccionelli & Sarno at (805) 497-5886 or greg@piccionellisarno.com.

 

 

 

Go to top