CompuServe, Inc.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 962-3096]

CompuServe, 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, when offering a ``free trial'' with

automatic membership enrollment or renewal, to disclose clearly and

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

least one reasonable means of canceling, and to obtain consumers'

authorization before debiting their accounts. The complaint

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accompanying the consent agreement alleges that CompuServe'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

CompuServe failed to obtain appropriate authorization before making

electronic withdrawals from the accounts of consumers.

DATES: Comments must be received on or before July 14, 1997.

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 of 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 CompuServe,

Inc. (``CompuServe'').

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 CompuServe'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 CompuServe'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 writing that are signed or

similarly authenticated. See 15 U.S.C. Sec. 1693(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 CompuServe 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 one

month 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 CompuServe's free trial offer and use less

than ten hours of online time during the month following their initial

sign-on, but who fail to cancel their memberships during the trial

period, incur charges. The complaint also alleges that CompuServe

failed to disclose adequately to consumers that, upon completion of ten

hours of online use or one month from the date of initial sign-on,

whichever is earlier, consumers who fail to cancel are treated as

members of CompuServe 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, because CompuServe has debited

consumers' accounts via their debit cards without their authorization,

it violated Sections 907(a) of the EFTA and 205.10(b) of Regulation E.

In addition, the complaint alleges that CompuServe failed to provide

consumers with advance written notice of transfers from their accounts

varying in amount from previous transfers, thereby violating Sections

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 CompuServe from engaging in

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

the proposed order prohibits CompuServe, 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 CompuServe, 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 CompuServe 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 a covered representation made by CompuServe 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, CompuServe 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

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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 supplements Paragraph II. It provides that

CompuServe, 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

III.A. requires CompuServe 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, CompuServe 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 III.B. requires

CompuServe to disclose any mandatory membership, enrollment, or usage

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

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

prominently'' made if it is of a 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 IV requires CompuServe, 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, CompuServe 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 V through IX contain provisions generally found in

Commission consent orders, including record-keeping requirements,

distribution requirements, notice requirements, and a requirement that

CompuServe submit a report setting forth the manner in which it has

complied with the consent order.

Finally, Paragraph X 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.

[FR Doc. 97-12582 Filed 5-13-97; 8:45 am]

BILLING CODE 6750-01-M