educational

New Law Will Ban Certain Internet Sales Practices

Gregory A Piccionelli

The Restore Online Shoppers’ Confidence Act (ROSCA), which I reported on past June while it was still pending in Congress, was signed into law by President Obama at the end of 2010. It is an important law that, as I cautioned last year, is likely to have a significant impact on the way many Internet retailers conduct business online.

The new regulations imposed by ROSCA will particularly impact those offering services or goods via “cross-sales” or using socalled “negative option” offers, both marketing methods that are very commonly used by adult online merchants.

ROSCA will now make it unlawful for any third-party seller to charge a consumer’s credit card for a product or service without providing clear disclosures regarding the terms of the offer and receiving the consumer’s express informed consent to billing.

For those unfamiliar with these marketing techniques, cross-sales typically involve offering a purchaser of a website membership one or more additional memberships to other websites (or other products or services). As a part of this marketing method, some companies also pass the purchaser’s billing information from the original seller or the seller’s payment processor to a third-party seller or its payment processor.

For example, a common use of cross-sale marketing involves offering consumers additional memberships to a second or third website as they complete the transaction to join their initial website of interest.

Often the additional “cross-sale” websites are operated by third parties unrelated to the original website membership seller. Often these ‘’post-transaction’’ offers are designed to make consumers think that the additional offers were part of the initial purchase, rather than a new transaction with a new seller.

“Negative option” sales generally refer to offers in which goods or services are sold to a consumer automatically unless the consumer takes some specific action to decline the sale in advance of billing. This sales method covers a variety of techniques and can take just about any form that requires a consumer to take an affirmative action to say “no” to an offer (such as un-check a prechecked box) to prevent a sale. Some common examples of negative option sales currently in use in the online adult entertainment industry involve sales of memberships after free or reduced cost “trial” memberships, crosssales of memberships to additional sites, sales of upgraded or premium services, and sales of additional live chat minutes.

ROSCA will now make it unlawful for any thirdparty seller to charge a consumer’s credit card for a product or service without providing clear disclosures regarding the terms of the offer and receiving the consumer’s express informed consent to billing. To obtain such consent under ROSCA requires the consumer to provide both the billing information, a means of contacting the consumer, and an affirmative means of consent to the transaction (such as by clicking on an unchecked box). Third party sellers will also have to disclose the fact that they are not the initial seller.

ROSCA also prohibits the practice of merchants disclosing and transferring a consumer’s billing information to any third party seller for use in any Internet-based sale of goods or services offered by the third-party seller.

ROSCA also imposes clear limitations on the use of negative options in Internetbased sales by making it unlawful to charge a consumer through an Internet-based negative option program unless: (a) there is clear and conspicuous disclosure of all the material terms of the offer and the identity of the entity making the offer prior to the sale; (b) the consumer has provided express informed consent to the merchant to bill the consumer; and (c) the merchant provides a simple process to cancel the recurring billing.

The new law authorizes the Federal Trade Commission to use all of that federal agency’s formidable powers provided to it by the FTC Act to enforce ROSCA. The law also provides for enforcement at the state level by the state Attorneys General.

The full text of Section 3 of ROSCA, which sets forth the Act’s specific prohibitions against certain Internet sales practices, is provided at the end of this article.

The passage of ROSCA is yet another indication that the federal government is stepping up actions against online businesses engaged in false or deceptive trade practices. This should come as no surprise to my regular readers or attendees of the 2009 XBIZ Summer Forum, where I arranged for FTC representative Steve Cohen to meet with adult industry webmasters about likely areas of future FTC enforcement. In fact, in the July 2009 issue of XBIZ World my article entitled “Move Over DOJ, It’s The FTC’s Turn To Regulate Adult” pretty much predicted the shift of enforcement focus we now see fully underway.

I wrote the aforementioned article and arranged for Mr. Cohen’s appearance at the ‘09 XBIZ Summer Forum not only because of the anticipated shift of federal enforcement activity with respect to the adult online industry from the DOJ to the FTC, but also because of my concern that many of the competitively driven aggressive marketing methods we see today might well lead well-intentioned but uninformed webmasters into problems with the FTC. With the enactment of ROSCA, these concerns have now taken on a renewed and greater urgency.

Having represented a fair number of adult Internet business clients before the FTC in the round of actions under the last democratic administration, I can tell you that while FTC complaints are civil actions and not criminal prosecutions, each was a very unpleasant experience for the targeted defendants. In one case we handled, for example, at the time our firm was engaged by the client, the client’s business was already being run by an outside receiver appointed by a federal judge at the request of the FTC.

We resolved the case favorably for our client, thankfully. But some companies (not any of our clients, fortunately) did not fare as well in that round of FTC actions. Some were effectively shut down by the FTC. Needless to say that I take the possibility of a new round of FTC actions against Internet companies very seriously, and sincerely hope that all online adult entertainment companies do the same.

Additionally, as I have stated in previous articles, and at trade shows during the last year, it is a good time for webmasters to get ahead of the enforcement curve and invest the required effort to become familiar with the FTC regulations applicable to their business practices if they have not done so already. To do this, a good place to start is the FTC website at www.ftc.gov. I have found it to be an unusually informative government website.

But as good as the FTC website is, it is no substitute for a professional evaluation of your business practices by an experienced attorney to evaluate your business practices for compliance with FTC regulations.

This article is not intended to be, nor should be considered to be, legal advice. I strongly urge you to seek the counsel of a qualified and experienced adult entertainment attorney familiar with the legal matters discussed in this article.

Gregory A. Piccionelli is an intellectual property and adult entertainment attorney with substantial experience in a broad spectrum of Internet matters. He can be reached at Piccionelli & Sarno at (818) 201-3955 or greg@piccionellisarno.com.

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