America Online, Inc.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 952-3331]

America Online, Inc.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, would, among other things, require the respondent,

an Internet service provider, 1), when offering a ``free trial'' with

automatic membership enrollment or renewal, to disclose clearly and

prominently any obligation to cancel to avoid charges and to provide at

least one reasonable means of canceling; 2) to obtain consumers'

authorization before debiting their accounts; ad 3) to run a consumer

education program about electronic payment systems. The consent

agreement also prohibits AOL from misrepresenting either the fees

assessed for its services or the terms of electronic transfers from

consumer accounts. The complaint accompanying the consent agreement

alleges that AOL's ``free trial'' offers resulted in unexpected charges

for many consumers, because the offers did not make clear that

consumers had an affirmative obligation to cancel before the trial

period ended. As a result, consumers who failed to cancel were

automatically enrolled as members and began incurring monthly charges.

The complaint also alleges that AOL failed to obtain appropriate

authorization before making electronic withdrawals from the accounts of

consumers and failed to inform consumers that 15 seconds of connect

time was added to each online session, resulting in additional

undisclosed charges.

DATES: Comments must be received on or before [60 days after Federal

Register publication date].

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

David Medine, Federal Trade Commission, S-4429, 6th St. and Pa. Ave.,

N.W., Washington, D.C. 20580, (202) 326-3025

Lucy Morris, Federal Trade Commission, S-4429, 6th St. and Pa. Ave.,

N.W., Washington, D.C. 20580, (202) 326-3295

Steven Silverman, Federal Trade Commission, S-4429, 6th St. and Pa.

Ave., N.W., Washington, D.C. 20580, (202) 326-2460

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of

the Commission's Rules and Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions section of the FTC Home Page (for May 1, 1997), on

the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A paper

copy can be obtained from the FTC Public Reference Room, Room H-130,

Sixth Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580,

either in person or by calling (202) 326-3627. Public comment is

invited. Such comments or views will be considered by the Commission

and will be available for inspection and copying at its principal

office in accordance with Section 4.9(b)(6)(ii) of the Commission's

Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission has accepted, subject to final

approval, an agreement to a proposed consent order from America Online,

Inc. (``America Online'').

The proposed consent order has been placed on the public record for

sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and the comments received and will decide whether it should

withdraw from the agreement or make final the agreement's proposed

order.

The complaint alleges that America Online's advertisements and

statements online to consumers violated the Federal Trade Commission

Act (``FTC Act''). Section 5 of the FTC Act prohibits false,

misleading, or deceptive representations or omissions of material

information. See 15 U.S.C. Secs. 45-58, as amended. The complaint also

alleges that America Online's billing practices violated the Electronic

Fund Transfer Act (``EFTA'') and its implementing Regulation E.

Sections 907(a) of the EFTA and 205.10(b) of Regulation E permit

preauthorized electronic transfers from consumer accounts only if such

transfers are authorized by consumers in writings that are signed or

similarly authenticated. See 15 U.S.C. Sec. 1693e(a); 12 CFR

Sec. 205.10(b). Sections 907(b) of the EFTA and 205.10(d) of Regulation

E require advance written notice to consumers of preauthorized

transfers varying in amount from previous preauthorized transfers. See

15 U.S.C. Sec. 1693e(b); 12 CFR Sec. 205.10(d).

The complaint alleges that America Online represented that

consumers who participate in its free trial offer will not be charged,

provided only that they use the ten hours of allotted trial time within

thirty days of their initial sign-on and do not exceed ten hours of

online use. This representation is false, according to the complaint,

because consumers who participate in America Online's free trial offer

and use less than ten hours of online time during the thirty days

following their initial sign-on, but who fail to cancel their

memberships during the trial period, incur charges. The complaint also

alleges that America Online failed to disclose adequately to consumers

that, upon completion of ten hours of online use or thirty days from

the date of initial sign-on, whichever is earlier, consumers who fail

to cancel their trial memberships are automatically enrolled as members

of America Online and are charged a monthly membership fee plus

applicable hourly fees. These fees continue until the consumers

affirmatively cancel their memberships. These practices, according to

the complaint, constitute deceptive practices in violation of Section 5

of the FTC Act.

The complaint also alleges that America Online represented that it

calculates online connect time at the rate of $2.95 per hour, prorated

by one-minute increments, for time spent online beyond the five hours

of monthly connect time that it provides to its members (America Online

rounds up portions of a minute to the next highest whole minute; thus,

an online session lasting 2 minutes and 46 seconds, for example, would

be billed as 3 minutes). This representation is false, according to the

complaint, because America Online adds 15 seconds of connect time to

each online session for connection charges incurred at the beginning

and end of the session. When online usage consists of a whole minute

plus 46-59 seconds, the additional 15 seconds causes the total connect

time to exceed the next whole minute (for example, an online session of

2 minutes and 46 seconds, with the 15 second supplement, totals 3

minutes

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and 1 second and is billed as 4 minutes). In addition, the complaint

alleges that America Online failed to disclose adequately to consumers

its practice of adding 15 seconds of connect time to each online

session. These practices, according to the complaint, are deceptive in

violation of Section 5 of the FTC Act.

The American Online complaint further alleges that the company

represented online that it would not debit consumers' checking accounts

before it received from them authorized forms permitting it to do so.

This representation is false, according to the complaint, because

America Online regularly debited consumers' checking accounts before

receiving their authorization forms or without ever receiving such

forms. The complaint alleges that this practice is false or misleading

in violation of Section 5 of the FTC Act.

The complaint also alleges that, because America Online in many

instances debited consumers' checking accounts before receiving their

authorization forms or without ever receiving such forms, it violated

Sections 907(a) of the EFTA and 205.10(b) of Regulation E. In addition,

the complaint alleges that America Online often failed to provide

consumers with advance written notice of transfers from their accounts

varying in amount from previous transfers, thereby violating Section

907(b) of the EFTA and 205.10(d) of Regulation E.

The proposed consent order contains provisions designed to remedy

the violations charged and to prevent America Online from engaging in

similar acts and practices in the future. Specifically, Paragraph I of

the proposed order prohibits America Online, in connection with

advertising, promoting, selling, or distributing any online service,

from misrepresenting the terms or conditions of any trial offer of such

online service.

Paragraph II of the proposed consent order prohibits America

Online, in connection with advertising, promoting, selling, or

distributing any online service, from representing that the online

service is ``free,'' ``without risk,'' ``without charge,'' ``without

further obligation,'' or words of similar effect unless America Online

discloses, ``clearly and prominently,'' any obligation to cancel or

take other affirmative action to avoid charges for use of the online

service.

Paragraph II also contains two provisos that set out the

requirements of a ``clear and prominent'' disclosure. First, with

respect to covered representation made by America Online in detailed

instructional materials distributed to consumers (e.g., starter kits

and guidebooks), the disclosure must be in a type size and in a

location that are sufficiently noticeable so that an ordinary consumer

could notice, read, and comprehend it. Second, as to representations

made through other media, America Online must provide a statement

directing consumers to a location where the required disclosure will be

available (e.g., ``For conditions and membership details,'' followed

by: ``load up trial software'' or ``see registration process'' or words

of similar effect). Audio statements shall be delivered in a volume and

cadence sufficient for an ordinary consumer to notice, hear, and

comprehend them. Video statements shall be of a size and shade and

shall appear for a duration sufficient for an ordinary consumer to

notice, read, and comprehend them. In the case of print media, the

statement shall be in a type size and in a location sufficient for an

ordinary consumer to notice, read, and comprehend it.

Paragraph III prohibits America Online, in connection with

advertising, promoting, selling, or distributing any online service,

from misrepresenting the fees or charges assessed for such online

service.

Paragraph IV complements Paragraph III and supplements Paragraph

II. It provides that America Online, in connection with advertising,

promoting, selling, or distributing any online service, shall disclose,

``clearly and prominently,'' during the final registration process, and

prior to consumers incurring any financial obligation or liability, the

terms of all mandatory financial obligations that will be incurred by

consumers as a result of using such online service. Specifically,

subparagraph IV.A. requires America Online to disclose the financial

terms and conditions of any plan (e.g., trial offer) by which consumers

enroll in or renew enrollment in the online service. Moreover, if such

plan exists, America Online must disclose, ``clearly and prominently,''

any obligation to cancel or take other affirmative action to avoid

charges and provide at least one reasonable means by which consumers

may effectively cancel their enrollment. Subparagraph IV.B. requires

America Online to disclose any mandatory membership, enrollment, or

usage fees (e.g., monthly or hourly usage charges) and, pursuant to

subparagraph IV.C., the manner in which such fees or changes are

assessed and calculated. America Online may satisfy subparagraph IV.C.

by disclosing: (1) that additional charges might apply; (2) that

information about assessing and calculating fees or charges can be

found online; and (3) the exact location where consumers can find

detailed information about assessing and calculating fees or charges.

For purposes of Paragraph IV, a disclosure is ``clearly and

prominently'' made if it is of size and shade, and appears for a

duration sufficient for an ordinary consumer to notice, read, and

comprehend it. The disclosure shall not be avoidable by consumers.

Paragraph V prohibits America Online, in connection with

advertising, promoting, selling, or distributing any online service,

from misrepresenting the terms or conditions of any electronic fund

transfer from a consumer's account.

Paragraph VI requires America Online, in connection with an

electronic fund transfer from a consumer account, to obtain

authorization for the transfer, as required by Section 907(a) of the

EFTA and Section 205.10(b) of Regulation E. In addition, America Online

must provide advance notice of electronic fund transfers from consumer

accounts that vary in amount from previous transfers, as required by

Section 907(b) of the EFTA and Section 205.10(d) of Regulation E.

Paragraphs VII through XI contain provisions generally found in

Commission consent orders, including record-keeping requirements,

distribution requirements, notice requirements, and a requirement that

America Online submit a report setting forth the manner in which it has

complied with the consent order.

Paragraph XII requires America Online to implement a consumer

education program concerning the use of electronic payment systems.

Specifically, subparagraph XII.A. provides that the program may be

established jointly with, or under the control of, an appropriate trade

association or other consumer education program. Subparagraph XII.B.

requires that the program last at least one year from the date of

implementation and, pursuant to subparagraph XII.C., the program must

be of a scope and employ the means necessary to reach a wide group of

consumers. Such means must include: (1) Providing at least 50,000 color

brochures directly to consumers and organizations with direct access to

consumers likely to use electronic payments systems; (2) providing

content on the Internet; (3) referencing such content on America

Online's service; and (4) providing a direct link to the Internet from

America Online's service. Subparagraph XII.D. requires that the content

of the education program includes information about: (1) The

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various types of electronic payment systems available to consumers; (2)

the obligations of consumers, merchants, and financial institutions in

using such systems; (3) the methods by which such payment systems are

used, including how consumers may attempt to prevent the fraudulent use

of those systems; (4) the legal protections available to consumers; and

(5) the organizations, including law enforcement agencies, from which

consumers may obtain further information or assistance. The consumer

education program must be approved by the Commission's Associate

Director for Credit Practices.

Finally, Paragraph XIII contains a provision terminating the order,

under ordinary circumstances, twenty years from the date of its

issuance.

The purpose of this analysis is to facilitate public comment on the

proposed order, and it is not intended to constitute an official

interpretation of the agreement and proposed order or to modify in any

way their terms.

Donald S. Clark,

Secretary.

Statement of Commissioner Roscoe B. Starek, III, Concurring in Part and

Dissenting in Part in America Online, Inc., File No. 952-3331

Although I have voted to accept for public comment the consent

agreement with America Online, Inc. (``AOL''), the extensive consumer

education remedy contained in paragraph XII of the proposed order is

far too broad. Once again, a majority of the Commission is willing to

use a negotiated settlement to compel speech that it would have

virtually no chance of persuading a court to require.

The proposed consumer education program is an extremely

comprehensive endeavor that no doubt will provide valuable information

to consumers of online services about the use of electronic payment

systems. Further, it is more closely related to the violations alleged

in the complaint than the sunscreen advertising ``consumer education''

remedy in the proposed consent agreement with Schering-Plough

Healthcare Products, Inc. accepted for comment two months ago.\1\

Nonetheless, as a fencing-in remedy it is too broad to be reasonably

related to AOL's alleged law violations.

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\1\ See Schering-Plough Healthcare Products, Inc., File No. 942-

3341 (separate statements of Commissioner Azcuenaga and Commissioner

Starek concurring in part and dissenting in part).

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The complaint alleges that AOL misrepresented and deceptively

failed to disclose material information about its billing practices,

misrepresented the terms of its checking account debiting program, and

violated provisions of the Electronic Fund Transfer Act and its

implementing Regulation E pertaining to consumer authorization of

electronic payments. As fencing-in relief, the order requires AOL to

establish and implement a program lasting at least one year to educate

consumers about the use of electronic payment systems.\2\ The program

must ``be of a scope and employ media reasonably necessary to reach a

wide audience of Consumers [of online services], including but not

limited to'' 50,000 color brochures, the Internet, and AOL's online

service. Proposed order, para.XII(C) (emphasis added).

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\2\ Within 90 days of the order's issuance, AOL must submit, for

review and approval by the Associate Director of the Bureau of

Consumer Protection's Division of Credit Practices, a draft plan for

the program and drafts of any materials to be disseminated. Proposed

order, para.XII.

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The order also requires that the program include, but not be

limited to, information about: various types of electronic payment

systems available to Consumers; obligations of Consumers, merchants,

and Financial Institutions in using such systems; how such payment

systems are used, including the means by which Consumers may attempt to

prevent the fraudulent use of those systems; various legal protections

available to Consumers under each system; and organizations, including

law enforcement agencies, from which Consumers may obtain further

information or assistance. Proposed order, para.XII(D) (emphasis

added).

Although some form of consumer education program may well be

warranted as fencing-in relief, this program goes too far. AOL is not

so likely to engage in a whole host of future law violations that it

should be required to educate consumers about how to use ``various

types of electronic payment systems'' and how to attempt to prevent

fraudulent use of those systems. Nor do I think that it is reasonable

in scope to require AOL to inform consumers about their own obligations

and the obligations of merchants and financial institutions generally

in using electronic payment systems. Similarly, requiring AOL to

educate consumers about ``various legal protections'' for consumers

using electronic payment systems is too broad to be reasonably related

to the prevention of future deception like or related to that alleged

in the complaint. That the alleged deception here involves the use of

electronic payment systems is not enough of a nexus to justify a

consumer education program covering all risks, obligations, and law

violations involving electronic payment systems. Following that logic,

information about driving a car and traffic laws would be reasonably

related to a violation of the Commission's Used Car Rule.\3\

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\3\ See Used Motor Vehicle Trade Regulation Rule, 16 CFR Part

455.

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Finally, the consumer education provision would require content and

dissemination ``not limited to'' what is stated in the order. Although

it is not clear how the Commission could enforce content and

dissemination requirements not described in the order, it makes little

sense to accept language indicating that even the extensive

dissemination measures and speech described in the proposed order may

not be enough to comply with the basic requirement to establish a

program to educate consumers about the use of electronic payment

systems.

If this relief were sought in litigation, rather than obtained

through a consent agreement, it would not withstand scrutiny under the

First Amendment. The information that the order specifically requires

AOL to disseminate is far more extensive than necessary to prevent

future violations by AOL, and the boundaries of the ``not limited to''

language are unclear. Even if a respondent waives its First Amendment

rights in a consent agreement, the Commission--as a government agency

acting in the public interest--should not compel speech through

negotiation that it has no colorable chance of obtaining in litigation.

[FR Doc. 97-12581 Filed 5-13-97; 8:45 am]

BILLING CODE 6750-01-M