FTC Gambles and Loses in DIRECTV Negative Option Case

Continuity marketing, featuring free trials with a negative option binding consumers to recurring charges until they cancel, has been a prominent target of Federal Trade Commission enforcement for years. These actions typically begin with a temporary restraining order and asset freeze and end in a settlement, with little if any litigation in between. As a result, very little case law has developed to define the line between lawful and unlawful continuity marketing, the analysis of which centers on the adequacy of disclosure of the negative option.

Only a few negative option cases have actually been adjudicated to final judgment. One, FTC v. Grant Connect, in 2011, ended in a $30 million summary judgment for the FTC, with the court ruling that disclosures of a negative option feature in a series of “forced” upsells unrelated to the primary product were inadequate because they were inconspicuous. The terms were listed in “small compact type” on the checkout page, below the fold, requiring scrolling down, making it unlikely the consumer would see them. They were also buried in “dense small text” in the hyperlinked terms and conditions, which the court said a consumer should not have to view “to learn they are being charged for two or three recurring monthly membership charges unrelated to the product they actually ordered and which they did not request.”

Another, FTC v Commerce Planet et al. in 2012, also ended profitably for the FTC, in an $18.2 million judgment against the former president of the company (then defunct). The court said the negative option feature in a free trial offer for an online auction product was not “clearly and conspicuously” disclosed, leaving the deceptive “net impression” that the consumer could get the product for free. The negative option was disclosed only in hyperlinked terms and conditions and “below the fold,” at the “very bottom” of the order page, in “fine print” that was “difficult to read” because it was the smallest text size and blended into the background.

The most recent case, the biggest of all, is nearing its conclusion in FTC v. DIRECTV. For the first time, the FTC finds itself on the losing side in a negative option challenge, after the judge granted judgment last month to DIRECTV on every claim but one after hearing only the FTC’s case, without even requiring DIRECTV to put on a defense.

The FTC had sued DIRECTV in 2015, alleging it had failed to adequately disclose in its advertising certain terms of purchase for its satellite television services, including a negative option attached to a free trial offer of a premium channel package. (Other alleged defective disclosures concerned the duration of an introductory discounted price, existence of a commitment period, and an early termination fee.) The FTC further contended that DIRECTV failed to adequately disclose the premium channel negative option on its website and to obtain express informed consent to charge consumers in violation of the Restore Online Shoppers’ Confidence Act (“ROSCA”), which requires clear and conspicuous disclosure of a negative option before billing data is received in online transactions, and express informed consent to the offer. (For a detailed description of the negative option disclosures on the DIRECTV website and the parties’ competing arguments as to their sufficiency under the FTC’s Dot.Com Disclosures, see “FTC v. DIRECTV: Negative Options, Info-Hovers, Icons and More,” March 2017.)

After cross-motions for summary judgment were denied, trial seemed inevitable. At the last second, however, the parties stepped back from the brink, filing a notice of settlement the day before trial was to start. However, in an unusual (and fateful) move, one FTC Commissioner notified the court that she could not support the settlement because the consumer redress was “insufficient” and the injunctive relief was too weak. With three vacancies on the 5-member FTC at the time, a single nay vote was enough to kill the deal.

After the apparent failure of any further settlement attempts, the trial commenced this summer. Decidedly unconvinced of the merit of the FTC’s case – and demand for $3.95 billion in consumer restitution – after hearing its evidence, the court, in an unexpected move, suspended the trial upon DIRECTVs request to submit a motion for judgment after the FTC had rested. The court then granted the motion, rendering judgment in DIRECTV’s favor on every issue except its website. It emphasized that the FTC’s theory was not that DIRECTV had affirmatively misled consumers, or that it had failed to disclose the terms of its offers, but that “critical details” of those offers were not disclosed prominently enough to make the offers non-misleading. To sustain its theory, the FTC had to carry its burden of proving that the net overall impression of the DIRECTV ads was deceptive as to the actual terms of the offerings. The court found it failed to do so.

First, it said the FTC had never clearly explained what the net overall impression of the ads was and how it was deceptive. Second, it complained that the FTC was asking it to find that every single one of over 40,000 DIRECTV ads run over an 8-year period was deceptive by omission, even though the FTC had introduced into evidence only a fraction of those ads. Analyzing one print ad which the FTC’s experts said was representative of the total, it failed to find that the ad created a misleading overall impression due to inadequate disclosures. While the disclosures were primarily at the bottom of the page, were in much smaller text than the offers, and were in black and white and not color, like the offers, they still stood out visually because, unlike most of the other disclosure text, they were bolded, in capital letters, and partially underlined. Even though the ad was packed with information, the court felt a reasonable consumer would understand that this is because a subscription satellite television service is a complex product with a number of options for price, level of service, package features and other components. The court therefore concluded that the terms of the offers were “adequately disclosed” and the overall impression of the ad was not misleading.

Third, even if it had found this one ad to be deceptive, the court said it would have had no basis for generalizing that finding to the tens of thousands of other ads it had not seen – much less granting the FTC’s multi-billion dollar restitution request based on those ads. As it said: “The FTC’s ambition in attempting to show that over 40,000 advertisements were likely to deceive substantially exceeded the strength of its evidence: this case did not involve the type of strong proof the Court would expect to see in a case seeking nearly $4 billion in restitution, based on a claim that all of DIRECTV’s 33 million customers between 2007 and 2015 were necessarily deceived.”

As for the website offers, the court denied DIRECTV’s motion for judgment and said it would defer a decision on the adequacy of those disclosures until after the close of evidence. It noted, though, that the FTC’s case on the websites was “far from overwhelming,” foreshadowing a likely defeat for the FTC on that issue as well.

Given the volume and complexity of the ads, and the jaw-dropping size of the FTC’s restitution demand, DIRECTV is not exactly a typical case of deception by omission of material terms, including those relating to a negative option. Still, it affirms that the mere failure to disclose a negative option to the FTC’s satisfaction is not by itself a legal violation. The FTC must demonstrate, through facial analysis of advertising and/or extrinsic evidence, that without the level of disclosure it deems necessary, the net overall impression of a free trial offer with a negative option feature is misleading, entitling consumers to restitution. While the decision in DIRECTV simply applies long-standing “net overall impression” analysis and breaks no new legal ground, defense counsel in discussions with FTC staff in negative option investigations and settlement negotiations can cite it to argue that less than optimal disclosures do not ipso facto engender a deceptive net overall impression in violation of Section 5 of the FTC Act and ROSCA.

Talking about Direct Response, FTC, Online Marketing



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