New Law Cracks Down On Deceptive Third-Party e-Commerce Practices

The FTC will enforce the law.

What the Law Targets

The law is aimed at deceptive online sales schemes in which third-party billers that receive consumers' credit- and debit-card information from Web sites on which the consumers do business and then charge shoppers for goods and services they were unaware they had purchased.

Those third parties continue the charges until consumers cancel the billings ' called “negative-option” plans because the “seller” considers consumers' silence, such as not canceling a sales agreement they're unaware of, as having accepted the “offer.”

The name of the law, the Restore Online Shoppers' Confidence Act, is a bit misleading, e-commerce counsel say. While thousands of Internet shoppers' confidence may have been shaken by online scams, e-commerce continues growing, with studies showing that most consumers trust secure, established Web sites.

As the FTC explains on its Web site, the law extends three “important” protections to people shopping online.

First, it is unlawful for a post-transaction third-party seller ' a seller who markets goods and services online through an initial merchant after a consumer has initiated a transaction ' to charge, or attempt to charge, a consumer for any good or service sold in an online transaction, unless:

• The seller clearly discloses to the consumer all the material terms of the transaction; and
• The seller has obtained the consumer's consent before charging [his or her] credit card, bank account or other financial account.

That consent includes sellers obtaining directly from the consumer the full financial account number to be charged.

Second, online sellers cannot transfer a consumer's financial account number to a third-party seller.

Third, ROSCA prohibits a seller from charging, or attempting to charge, a consumer for any good or service with a negative-option feature (the consumer doesn't act specifically to cancel an agreement that he or she is not aware was entered) in an online transaction, unless:

• The seller clearly discloses to the consumer all the material terms of the transaction;
• The seller has obtained the consumer's consent before charging [his or her] credit card, bank account or other financial account; and
• The seller provides a simple way for the consumer to stop charges.

Rockefeller led a bipartisan effort to put the law in place after a 2009 Senate report revealed that three companies ' Affinion, Vertrue, and Webloyalty ' employed aggressive and confusing sales tactics at the end of consumers' transactions at reputable Web sites.

The Senate report found that the companies' separate offers on “partner” Web sites seemed linked to original transactions, which, in essence, shoppers thought were sustained by clicking a “next” or “continue” button prior to confirming their intended transactions. But consumers were unwittingly agreeing to enroll in online-shopper clubs, the Senate report states.

Typically, after the transfer of consumers' credit-card data, third parties billed $10 or $20 a month for shopper club memberships, usually after an alleged 30-day free trial. The billing continued until consumers learned about it and canceled.

A statement on Rockefeller's Senate Web site says he acted after legislators heard complaints from thousands of consumers about “rip-offs” in such schemes.

Some Reaction

e-Commerce lawyers welcomed the law. They, after all, know about the “few bad apples” that cast a shadow on the reputation of the majority of upstanding and law-abiding Web retailers. These attorneys, though, welcomed the law.

“[Ninety-nine] percent of Internet marketers won't have a problem obeying this law to begin with because they aren't screwing over customers using the deceptive tactics banned by the law,” Mike “The Internet Lawyer” Young posted on his blog (see, http://mikeyounglaw.com/internet-lawyer).

Young notes that the law will have an impact on shifty online sellers, but not on sites that employ honest sales practices.

Is the new law something e-commerce counsel should be telling their clients about?

“Absolutely,” says Cyrus Wadia, an e-commerce lawyer at Cooper, White & Cooper, in San Francisco. “It's a bill that requires all marketers to have transparency in Internet sales transactions, forbidding the use of a consumer's financial information in the hidden sale of back-end products after the main transaction has been completed.”

Wadia adds that while “most reputable online retailers likely don't engage in the affiliate tactics that are proscribed by this bill,” some suspect post-transaction firms may try the tactics on reputable sellers' Web sites, so all e-tailers could be affected, and they ' and their lawyers ' should be on alert.

Young adds that the law will not, contrary to the belief of some retailers' spokespeople, kill upsells and cross-sells.

View from Overseas

Dr. Katharina Scheja of Heymann and Partner, Frankfurt, Germany, and a member of e-Commerce Law & Strategy's Board of Editors, offers an international perspective on the law and its impact. Scheja says the German Civil Code covers most of what is included in ROSCA under data-protection and competition law. German legislation in this area, she adds, is based mostly on European Union Directives, and so is similar to other jurisdictions in the EU.

Overall, she says, “general terms and conditions of agreements, in particular the price, have to be disclosed for being incorporated in a contract; unexpected, misleading, [non]-transparent and ambiguous clauses such as unforeseen payment obligations or recurring payment obligations are invalid and unenforceable.

“If the seller fails to inform the customer on his voidance right, customers can void the contracts for an indefinite period,” Scheja says. “Therefore, proper information [from] the customers is essential for merchants to secure their payment claims.”

EU and German law also forbid companies from transferring payment information from an initial merchant to post-transaction third-party sellers without the prior written consent of consumers, Scheja explains.

Cause-Effect

Some information reported by the Committee on Commerce, Science, and Transportation's Office of Oversight and Investigations, published on Nov. 16, 2009, follows.

• Affinion, Vertrue, Webloyalty and their e-commerce partners had earned over $1.4 billion in revenue as of mid-2009 by using aggressive tactics to charge Internet shoppers for club membership programs. Between 1999 and mid-2009, Internet consumers had been enrolled more than 35 million times in Affinion, Vertrue and Webloyalty's membership clubs.
• More than 450 e-commerce Web sites and retailers have partnered with Affinion, Vertrue and Webloyalty to employ aggressive sales tactics against their online customers. Of the $1.4 billion in total revenue earned through using these tactics, $792 million of this total was earned by Affinion, Vertrue and Webloyalty's e-commerce partners. Eighty-eight e-commerce companies ' earned more than $1 million through using these tactics, including 19 that made more than $10 million. Classmates.com made more than $70 million using these controversial practices.
• Internal documents Committee staff reviewed showed Affinion, Vertrue, and Webloyalty knew most of the members they acquired through their aggressive online sales tactics did not understand they had been enrolled in a program that charges their credit or debit card on a recurring basis.

A new layer of federal oversight should help protect consumers and ethical e-commerce companies against misleading and name-tarnishing activities of outlaw e-tailers who have ripped off thousands of U.S. consumers.

On Dec. 29, President Obama signed the Restore Online Shoppers' Confidence Act (“ROSCA”), introduced in the Senate early last year by Sen. John D. Rockefeller IV (D-WV), chair of the Senate Committee on Commerce, Science, and Transportation. (The Act is available at http://bit.ly/g95D6h.)

“We're pleased Congress passed this legislation,” Federal Trade Commission (“FTC”) Chair Jon Leibowitz says in a statement on the Commission's Web site. “Too many companies are trying to use phony monthly billing to rip off Americans and this bill will help strengthen our hand.”

The FTC will enforce the law.

What the Law Targets

The law is aimed at deceptive online sales schemes in which third-party billers that receive consumers' credit- and debit-card information from Web sites on which the consumers do business and then charge shoppers for goods and services they were unaware they had purchased.

Those third parties continue the charges until consumers cancel the billings ' called “negative-option” plans because the “seller” considers consumers' silence, such as not canceling a sales agreement they're unaware of, as having accepted the “offer.”

The name of the law, the Restore Online Shoppers' Confidence Act, is a bit misleading, e-commerce counsel say. While thousands of Internet shoppers' confidence may have been shaken by online scams, e-commerce continues growing, with studies showing that most consumers trust secure, established Web sites.

As the FTC explains on its Web site, the law extends three “important” protections to people shopping online.

First, it is unlawful for a post-transaction third-party seller ' a seller who markets goods and services online through an initial merchant after a consumer has initiated a transaction ' to charge, or attempt to charge, a consumer for any good or service sold in an online transaction, unless:

• The seller clearly discloses to the consumer all the material terms of the transaction; and
• The seller has obtained the consumer's consent before charging [his or her] credit card, bank account or other financial account.

That consent includes sellers obtaining directly from the consumer the full financial account number to be charged.

Second, online sellers cannot transfer a consumer's financial account number to a third-party seller.

Third, ROSCA prohibits a seller from charging, or attempting to charge, a consumer for any good or service with a negative-option feature (the consumer doesn't act specifically to cancel an agreement that he or she is not aware was entered) in an online transaction, unless:

• The seller clearly discloses to the consumer all the material terms of the transaction;
• The seller has obtained the consumer's consent before charging [his or her] credit card, bank account or other financial account; and
• The seller provides a simple way for the consumer to stop charges.

Rockefeller led a bipartisan effort to put the law in place after a 2009 Senate report revealed that three companies ' Affinion, Vertrue, and Webloyalty ' employed aggressive and confusing sales tactics at the end of consumers' transactions at reputable Web sites.

The Senate report found that the companies' separate offers on “partner” Web sites seemed linked to original transactions, which, in essence, shoppers thought were sustained by clicking a “next” or “continue” button prior to confirming their intended transactions. But consumers were unwittingly agreeing to enroll in online-shopper clubs, the Senate report states.

Typically, after the transfer of consumers' credit-card data, third parties billed $10 or $20 a month for shopper club memberships, usually after an alleged 30-day free trial. The billing continued until consumers learned about it and canceled.

A statement on Rockefeller's Senate Web site says he acted after legislators heard complaints from thousands of consumers about “rip-offs” in such schemes.

Some Reaction

e-Commerce lawyers welcomed the law. They, after all, know about the “few bad apples” that cast a shadow on the reputation of the majority of upstanding and law-abiding Web retailers. These attorneys, though, welcomed the law.

“[Ninety-nine] percent of Internet marketers won't have a problem obeying this law to begin with because they aren't screwing over customers using the deceptive tactics banned by the law,” Mike “The Internet Lawyer” Young posted on his blog (see, http://mikeyounglaw.com/internet-lawyer).

Young notes that the law will have an impact on shifty online sellers, but not on sites that employ honest sales practices.

Is the new law something e-commerce counsel should be telling their clients about?

“Absolutely,” says Cyrus Wadia, an e-commerce lawyer at Cooper, White & Cooper, in San Francisco. “It's a bill that requires all marketers to have transparency in Internet sales transactions, forbidding the use of a consumer's financial information in the hidden sale of back-end products after the main transaction has been completed.”

Wadia adds that while “most reputable online retailers likely don't engage in the affiliate tactics that are proscribed by this bill,” some suspect post-transaction firms may try the tactics on reputable sellers' Web sites, so all e-tailers could be affected, and they ' and their lawyers ' should be on alert.

Young adds that the law will not, contrary to the belief of some retailers' spokespeople, kill upsells and cross-sells.

View from Overseas

Dr. Katharina Scheja of Heymann and Partner, Frankfurt, Germany, and a member of e-Commerce Law & Strategy's Board of Editors, offers an international perspective on the law and its impact. Scheja says the German Civil Code covers most of what is included in ROSCA under data-protection and competition law. German legislation in this area, she adds, is based mostly on European Union Directives, and so is similar to other jurisdictions in the EU.

Overall, she says, “general terms and conditions of agreements, in particular the price, have to be disclosed for being incorporated in a contract; unexpected, misleading, [non]-transparent and ambiguous clauses such as unforeseen payment obligations or recurring payment obligations are invalid and unenforceable.

“If the seller fails to inform the customer on his voidance right, customers can void the contracts for an indefinite period,” Scheja says. “Therefore, proper information [from] the customers is essential for merchants to secure their payment claims.”

EU and German law also forbid companies from transferring payment information from an initial merchant to post-transaction third-party sellers without the prior written consent of consumers, Scheja explains.

Cause-Effect

Some information reported by the Committee on Commerce, Science, and Transportation's Office of Oversight and Investigations, published on Nov. 16, 2009, follows.

• Affinion, Vertrue, Webloyalty and their e-commerce partners had earned over $1.4 billion in revenue as of mid-2009 by using aggressive tactics to charge Internet shoppers for club membership programs. Between 1999 and mid-2009, Internet consumers had been enrolled more than 35 million times in Affinion, Vertrue and Webloyalty's membership clubs.
• More than 450 e-commerce Web sites and retailers have partnered with Affinion, Vertrue and Webloyalty to employ aggressive sales tactics against their online customers. Of the $1.4 billion in total revenue earned through using these tactics, $792 million of this total was earned by Affinion, Vertrue and Webloyalty's e-commerce partners. Eighty-eight e-commerce companies ' earned more than $1 million through using these tactics, including 19 that made more than $10 million. Classmates.com made more than $70 million using these controversial practices.
• Internal documents Committee staff reviewed showed Affinion, Vertrue, and Webloyalty knew most of the members they acquired through their aggressive online sales tactics did not understand they had been enrolled in a program that charges their credit or debit card on a recurring basis.