Request for Comments Concerning Rule Regarding Use of negative Option Plans by Sellers in Commerce

FEDERAL TRADE COMMISSION

16 CFR Part 425

Request for Comments Concerning Rule Regarding Use of negative

Option Plans by Sellers in Commerce

AGENCY: Federal Trade Commission.

ACTION: Request for public comments.

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SUMMARY: The Federal Trade Commission (``Commission'') requests public

comments about the overall costs and benefits and the continuing need

for its Trade Regulation Rule regarding the Use of Negative Option

Plans by Sellers in Commerce (``the Negative Option Rule'' or ``the

Rule''), as part of the Commission's systematic review of all current

Commission regulations and guides.

DATES: Written comments will be accepted until June 2, 1997.

ADDRESSES: Comments should be directed to: Secretary, Federal Trade

Commission, Room H-159, Sixth Street and Pennsylvania Ave., N.W.,

Washington, D.C. 20580. Comments should be identified as ``Negative

Option Rule, 16 CFR Part 425--Comment.''

FOR FURTHER INFORMATION CONTACT: Edwin Rodriguez, Attorney, Federal

Trade Commission, Washington, D.C. 20580, telephone number (202) 326-

3147.

SUPPLEMENTARY INFORMATION:

I. Background

A. Negative Option Rule

The Commission promulgated the Negative Option Rule on February 15,

1973, 38 FR 4896 (1973), under section 5 of the Federal Trade

Commission Act (``FTC Act''), 15 U.S.C. 45.\1\ The Rule became

effective on June 7, 1974. In promulgating the Rule following a

rulemaking proceeding, the Commission made the following findings:

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\1\ Section 5 of the FTC Act declares unfair methods of

competition and unfair or deceptive acts or practices to be

unlawful.

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(1) marketers of prenotification negative option plans had failed

to disclose adequately the provisions of such plans to the detriment of

their subscribers, Id. at 4899;

(2) subscribers had encounters difficulties in substantiating that

they were not given adequate time to respond to the negative option

notice supplied by the merchandiser, Id. at 4900;

(3) marketers of prenotification negative option plans had

delivered unordered or substituted merchandise in the place of

merchandise specifically ordered by subscribers, without their

subscribers' prior consent, Id.;

(4) marketers of prenotification negative option plans had failed

to honor proper cancellation notices from contract-complete subscribers

\2\ and continued to send them merchandise, Id. at 4901;

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\2\ Negative option plans often require subscribers to purchase

a minimum quantity of merchandise, after which they may cancel their

subscriptions. The Rule refers to a subscriber who has purchased the

minimum quantity of merchandise required by the terms of the plan as

a ``contract-complete subscriber.''

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(5) subscribers had been dunned or billed for unordered

merchandise, and sellers had failed to provide meaningful service to a

large number of their subscribers in connection with complaints

involving operations, particularly in regard to billing problems, Id.;

and

(6) marketers of prenotification negative option plans had operated

their entire systems in such a manner as to place the burden for

correcting ``errors'' on their subscribers, Id. at 4902.

Based on these findings, the Commission determined that it was in

the public interest to prescribe

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regulations for the operation of prenotification negative option

plans.\3\ The Rule defines covered ``negative option plans'' as

contractual arrangements under which a seller and a subscriber enter

into an agreement whereby the seller periodically sends the subscriber

an announcement in advance (the ``prenotification'') that identifies

merchandise it proposes to send to the subscriber, and thereafter bills

the subscriber for the merchandise unless the subscriber instructs the

seller by a date or within a time specified in the announcement not to

send the merchandise (the ``negative option'').\4\ In summary, the

Negative Option Rule requires a seller using a prenotification

``negative option plan'' to:

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\3\ The Rule applies only to prenotification negative option

plans, i.e., those in which marketers send a notice of selection to

subscribers prior to shipment of merchandise and ship and bill the

subscriber for the merchandise if the subscriber does not return a

rejection notice within a prescribed time. The Rule does not apply

to negative option marketing arrangements under which marketers

optionally tender merchandise to subscribers without previously

sending a prenotification announcement. The Commission determined

that the latter arrangements that were used at the time the

Commission promulgated the Rule (which were known as continuity

plans, subscription shipments, library standing order arrangements,

or annual and series arrangements) were so different from the

prenotification negative option plans (such as book and record

clubs) that separate treatment by the Commission would be warranted

if and when consumer complaints justified Commission attention. Id.

at 4908.

\4\ The Commission considered and rejected assertions that it

should ban prenotification negative option plans as being inherently

unfair. Id. at 4902-04.

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(1) disclose specific material information about the plan ``clearly

and conspicuously'' in promotional materials;

(2) send the subscriber an announcement (which identifies the

merchandise selection to be sent) in advance of shipping merchandise

and give the subscriber a specific amount of time to notify the seller

that the subscriber does not want the selection (otherwise, the seller

may send the merchandise and bill the subscriber for it);

(3) notify subscribers that they may return merchandise with return

postage guaranteed and receive credit under certain circumstances;

(4) give credit to subscribers and guarantee postage adequate to

return merchandise under certain circumstances;

(5) ship introductory and bonus merchandise within four weeks of

receipt of an order;

(6) terminate promptly the subscription of a contract-complete

subscriber upon written request; and

(7) ship substitute merchandise only with the express consent of

the subscriber.

In 1986, the Commission conducted a review of the Negative Option

Rule pursuant to the Regulatory Flexibility Act, 5 U.S.C. 601 et seq.,

to determine the impact of the Rule on small entities. In a Federal

Register notice published on November 21, 1986, 51 FR 42087, the

Commission announced the results of that review, concluding that

``there is a continued need for the Rule; there is no reason to believe

that the Rule has had a significant economic impact on a substantial

number of small entities; and the rule should not be changed.''

B. Treatment of Unordered Merchandise

In commenting on the Negative Option Rule; interested parties

should be aware of certain other legal requirements that apply to any

marketer who ships and attempts to collect for unordered merchandise.

Specifically, it is unlawful to send any merchandise by any means

without the express prior request of the recipient (unless the

merchandise is clearly identified as a gift, free sample, or the like,

or is mailed by a charitable organization soliciting contributions);

or, to try to obtain payment for or the return of the unordered

merchandise. Merchandise sent without the customer's prior express

agreement may be treated as unordered merchandise pursuant to section

3009 of the Postal Reorganization Act of 1970, 39 U.S.C. 3009, and

section 5 of the FTC Act.\5\ Customers who receive unordered

merchandise are legally entitled to treat the merchandise as a gift.

The law concerning unordered merchandise is not being reviewed in this

proceeding. An understanding of how that law works in tandem with the

Negative Option Rule, however, is useful.

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\5\ Under section 3009(a) of the Postal Reorganization Act,

mailing of unordered merchandise constitutes a violation of section

5 of the FTC Act. In a public notice it published on September 11,

1970, the Commission formally recognized section 3009 as the proper

interpretation of section 5, 35 FR 14328 (1970). In order to clarify

the 1970 notice and avoid misunderstanding concerning the

Commission's enforcement policy, the Commission published an

additional notice on January 31, 1978, stating that the standard

under section 5 of the FTC Act was not limited to unordered

merchandise sent by U.S. mail. The Commission explained that it

might, for example, prosecute as a violation of section 5 a nonmail

shipment of merchandise that does not meet the standards of 39

U.S.C. 3009, 43 FR 4113 (1978).

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II. Regulatory Review Program

The Commission has determined to review all current Commission

rules and guides periodically. These reviews seek information about the

costs and benefits of the Commission's rules and guides and their

regulatory and economic impact. The information obtained assists the

Commission in identifying rules and guides that warrant modification or

recision. Therefore, the Commission solicits comments on, among other

things, the economic impact of and the continuing need for the Negative

Option Rule; possible conflict between the Rule and state, local, or

other federal laws; and the effect on the Rule of any technological,

economic, or other industry changes.

III. Request for Comment

The Commission solicits written public comments on the following

questions:

(1) Is there a continuing need for the Negative Option Rule?

(a) What benefits has the Rule provided to purchasers of the

products affected by the Rule?

(b) Has the Rule imposed costs on purchasers?

(2) What changes, if any, should be made to the Rule to increase

the benefits of the Rule to purchasers?

(a) How would these changes affect the costs the Rule imposes on

firms subject to its requirements? How would these changes affect the

benefits to purchasers?

(3) What significant burdens or costs, including costs of

compliance, has the Rule imposed on firms subject to its requirements?

(a) Has the Rule provided benefits to such firms? If so, what

benefits?

(4) What changes, if any, should be made to the Rule to reduce the

burdens or costs imposed on firms subject to its requirements?

(a) How would these changes affect the benefits provided by the

Rule?

(5) Does the Rule overlap or conflict with other federal, state, or

local laws or regulations?

(6) Since the Rule was issued, what effects, if any, have changes

in relevant technology or economic conditions had on the Rule? For

example, do sellers use E-mail or the Internet to promote or sell

subscriptions to negative option plans? If so, in what manner; and does

use of this new technology affect consumers' rights or sellers'

responsibilities under the Rule?

(7) Are there any abuses occurring in the promotion, sale, or

operation of negative option plans that are not prohibited or regulated

by the Rule? If so, what mechanisms should be explored to address such

abuses (e.g., consumer education, industry self-regulation, rule

amendment)?

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List of Subjects in 16 CFR Part 425

Trade practices.

Authority: 15 U.S.C. 41-58.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 97-8064 Filed 3-28-97; 8:45 am]

BILLING CODE 6750-01-M