On May 19, 2010, the U.S. Senate Commerce Committee released proposed legislation - the "Restore Online Shoppers' Confidence Act" - aimed at regulating sites that transmit or receive consumer data for post-transaction sales and sites that sell products or services with recurring charges.

The proposed legislation was based in part on the Commerce Committee's 2009 report that focused on three direct marketing companies: Affinion, Vertrue, and Webloyalty. The report found that the three companies partnered with hundreds of legitimate websites that shared their customers' billing information, including credit card numbers, with the result that consumers were charged for membership clubs and services that they did not want and were unaware that they had purchased.

The proposed legislation introduces new regulations for two broad categories of marketing practices:

• post-transaction third-party sales, and
• negative option sales.

The proposed legislation seeks to regulate post-transaction third-party sales in by:

• prohibiting the initial merchant from disclosing and transferring a consumer's billing information to any post-transaction third party merchant for use in any Internet-based sale of goods or services from the third-party merchant;
• requiring the third-party merchant to collect all billing information directly from the consumer;
• prohibiting the third-party merchant from charging the consumers' credit card without first providing clear disclosures regarding the terms of the offer; and
• requiring the third-party merchant to obtain the consumers' express, informed consent by taking an affirmative step such as clicking through on an acceptance box or I AGREE button.

With the negative option model, the seller ships goods or sell services at regular intervals unless the customer sends a refusal notice in advance of each shipment or billing cycle. In essence, the negative option model turns the normal sales process on its head. Instead of the seller having to sell a product, the underlying assumption is that the customer has already purchased it, unless the customer cancels prior to shipment or billing by exercising the so-called "negative option".

The best example of the negative option model in practice would be the typical book-of-the-month club. Initially, the customer agrees to purchase a series of heavily discounted books. Also, as part of the book club agreement, the customer agrees to purchase regular shipments of additional books sent each month at full price, unless the customer exercises its "negative option" of notifying the seller that it does not want to receive the next month's offering.

The proposed legislation would adopt the following definition of a "negative option" taken from the Federal Trade Commission's (FTC's) Telemarketing Sales Rule: "an offer or agreement to sell or provide any goods or services, a provision under which the customer's silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer." 16 C.F.R. §310.2(t)". While this definition would clearly cover the typical book club example discussed above, it would also cover the typical Internet membership site that bills on a recurring basis.

Under the proposed new regulations, merchants will be required to:

• provide a clear and conspicuous disclosure of the merchant's name, a description and cost of the goods or services, when billing will begin and at what intervals the charges will occur;
• provide a clear and conspicuous disclosure of the length of any trial period, including a statement that the consumer's account will be charged unless the consumer takes action to cancel and the steps the consumer must take to avoid the charge;
• acquire express, informed consent from the consumer in the same manner as for post-transaction sales;
• provide a cancellation method that is available via the Internet and the telephone; and
• send an e-mail to the consumer, not less than 10 days prior to the initiation of each charge, clearly and conspicuously disclosing that the charge will be made, the amount of the charge and a description of the goods and services.

The court held that there was no apparent authority to bind the customer in this case because the customer had notified Syslocate that only its officers were authorized to bind the company. The court reasoned that it would be unreasonable for Syslocate to believe that the individuals who accepted the EULA were authorized to do so.

The proposed legislation will have a huge impact on many eCommerce websites. It would place new and significant burdens on online merchants involved in post-transaction third-party sales - including both merchants involved in the initial sale and the post-transaction third-party sales. Even if the sharing of personal information is for purposes of post-transaction third-party sales is adequately disclosed in the initial merchants' privacy policies, these new regulations would still apply.

In addition, all online merchants that sell products or services with recurring charges - including membership sites - will be required to comply with the new regulations regarding negative options.

Copyright © 2010 Chip Cooper

This article is provided for educational and informative purposes only. This information does not constitute legal advice, and should not be construed as such.

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