Updated FTC Regulations
In January, MasterCard made an effort to enforce new regulations and best practice guidelines pertaining to online direct marketing – specifically “negative option” marketing, which they consider to be a “brand damaging” practice. The FTC Negative Option staff report, featuring five key marketing principles, triggered both Visa and MasterCard to make changes to their operating guidelines.
Operating Guideline Changes
Visa and MasterCard both instituted changes in their operating guidelines in response to consumer disputes about card not present transactions and direct response products and services. MasterCard’s actions followed policy changes from Visa regarding descriptor formats and disclosure of corporate entities related to direct response offers. While the changes concern online marketers and merchants, they also affect direct mail and telephone marketing businesses.
“Remember the Columbia Record Club? They are a prime example of negative option marketing, which shows that it has been around a long time. “
MasterCard communicated their “Direct Marketing Best Practices” guidelines to their acquirers and direct response marketers to further enforce compliance. The guidelines focus on terms disclosure, trial offers, marketing, endorsements and testimonials, affiliate marketing (CPA) networks, billing timeframes, refund policies, back end offers (up-sells, cross-sells), descriptors, order fulfillment, and customer service.
Of course, these changes are meant to protect the consumer. However, any business affected by these changes should think positive. Consumer complaints can turn into negative publicity (and subsequently, reduced revenue) for any company. Let’s not forget increased chargeback ratios, which no merchant desires.
A Little History
The Federal Trade Commission (FTC) was created in 1914 to prohibit unfair competition and practices in commerce. The agency enforces laws targeting specific marketing practices and product promotions, such as environmental claims, free products, mail and telephone orders, and negative option offers. Section 5 of the FTC Act prohibits unfair and deceptive practices – more specifically, advertising and marketing, in any medium, to consumers. Section 5 describes a product or service as deceptive if it misleads the consumer or affects consumer behavior. Additionally, product claims (i.e. “xyz product” prevents illness) must be substantiated, especially if they concern health, safety or performance. The key marketing principles listed in the Negative Option staff report are meant to guide the industry in compliance with Section 5 of the Act.
“The FTC Act prohibits unfair or deceptive advertising in any medium”
The FTC also implemented changes to its Guides Concerning the Use of Endorsements and Testimonials in Advertising in December, clarifying that “advertisers are subject to liability for false or unsubstantiated statements made through endorsements, and that endorsers also may be liable for statements made in the course of their endorsements.”
California Is Taking Action as Well
On a similar wavelength, a new bill, SB 340, regarding automatic renewal and continuous service offers was signed into law in October in California. SB 340 came to light following a 2006 lawsuit against Time, Inc., for automatic renewal offers and solicitations. Twenty-three states received complaints from consumers, which resulted in an extensive investigation. Time was billing or automatically charging consumers’ credit cards for magazine subscriptions without consent. The company had changed their renewal policy and instead of subscribers actively renewing, they instead required subscribers to actively cancel their subscriptions. Else, the renewal was automatic. The renewal policy always appeared in fine print and was not clearly stated.
SB 340 requires businesses to state “clearly and conspicuously” the renewal terms and obtain the subscriber’s approval at the time of purchase. Clear and conspicuous is defined as “in larger type than the surrounding text or in contrasting type, font or color.” In the case of telephone marketers, the audio disclosure must be “audible and understandable.” It also requires the inclusion of a cancellation policy with the renewal offer and an easy way for the subscriber to cancel. The bill goes into effect on December 1, 2010.
Per the FTC Act, sellers are responsible for product and service claims. Third parties, such as advertising agencies, web site designers and catalog marketers, can also be found liable for product deceptions and unfair competition practices. Those found to be non-compliant could face enforcement by the FTC as well as civil lawsuits. Punishment includes cease and desist orders, fines up to $16,000 (per violation), federal injunctions, and consumer refunds.
FTC staff paper, Dot Com Disclosures, about online advertising
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