[Federal Register Volume 62, Number 61 (Monday, March 31, 1997)]
[Proposed Rules]
[Pages 15135-15137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8064]
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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
[[Page 15136]]
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)?
[[Page 15137]]
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