Judicial Gavel and Scales of Justice and Law for FTC Ruling on Subscription and Recurring Revenue Companies

FTC Enforcement Action Against ABCMouse for $10 Million

The FTC just announced another settlement against an online marketer for millions, this time $10,000, against its acquisition of new consumers for its online

Online content marketers do not seem to learn. Yet again, the Federal Trade Commission just announced another settlement against an online marketer for millions, this time $10 million, against its acquisition of new consumers for its online subscription services without complying with federal law, in particular the Restore Online Shoppers Confidence Act (ROSCA).

With the global pandemic subscription-based content businesses are experiencing a boon. It does not negate the need to comply with the law.

California-based Age of Learning, Inc., operates ABCmouse, a membership learning site where parents can have their kids between the ages of two and eight access educational content. In addition to monthly memberships costing $9.95 per month, ABCmouse advertised a “Special Offer” – a 12-month membership for $59.95. But according to the FTC complaint, from 2015 until at least 2018, the company failed to clearly disclose that memberships would automatically renew and apparently made it difficult for consumers to stop those recurrent charges.

ABCmouse also offered consumers who enrolled in a 30-day “free trial” membership the ability to extend it beyond the trial period for $39.95 for 12 months or $29.95 for 6 months. But again, ABCmouse failed to properly disclose that consumers would be charged automatically – and repeatedly – after the initial period ended.

As a refresher, The Restore Online Shoppers’ Confidence Act (ROSCA) makes it illegal to charge consumers for products sold through online negative options unless the seller:

1.       clearly and conspicuously discloses material terms of the transaction before obtaining the consumer’s billing information;

2.       obtains the consumer’s express informed consent before making the charge; and

3.       provides simple mechanisms to stop recurring charges.

In addition, deceptive or unfair practices related to negative options and the failure to disclose material information may violate the FTC Act (as well as various state laws).

Revealing material details in a hyperlink, even if NOT buried in dense text, is not clear and conspicuous. To be clear and conspicuous the required information has to be unavoidable. An example of ABCmouse’s online sign up form shown in the FTC complaint is here:

In addition, as you can see, the sales pitch touted easy cancellation. But ABCmouse made members navigate through a confusing series of links and save attempts and did not honor cancelation requests made through the customer support page. ROSCA requires an easy mechanism for cancelation. And, if you make a marketing promise it must be honored.

As part of the settlement ABCmouse will have to disclose the terms of it recurring billing practices, or negative options “clearly and conspicuously, and immediately adjacent to” its references to “free, trial, no obligation, reduced, upgraded, or discounted” offers. The company will have to follow up on customer orders with written confirmation.

In FTC’s press release the FTC offered a few tips which I will summarize:

  • “Listen to your customers”. ABCmouse received tens of thousands of complaints about its auto-renewal and cancellation policies. An ABCmouse employee characterized a consumer complaint as “the standard ‘I only subscribed for 1 year and now I’m being billed again’ complaint.” If there ever is a “standard” consumer complaint, pay attention.
  • “Cancellation methods must be free of red tape and rigmarole”. Under ROSCA, it’s illegal to offer an online negative option unless you provide “simple mechanisms for a consumer to stop recurring charges from being placed on the consumer’s credit card, debit card, bank account, or other financial account.” It is not that hard to do and avoidance of making it easy is simply illegal.
  • “A key component of consumer confidence is transparency”. As the FTC went on to say in its press release, clearly explaining the nature of the transaction up front is more likely to build a base of lifetime satisfied customers. Even making the service easy to cancel might encourage consumers to come back.

Takeaway:  Review your online procedures for acquiring your customers and ensure that they, and all your customer service practices and disclosures, comply with federal and state laws.

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