Several readers of this post have asked us about a recent FTC settlement with Moviepass and its principals that we briefly covered in a LinkedIn post last week. While this settlement only applies to the named defendants, it nevertheless raises some novel, interesting, and frankly chilling issues for subscription marketers.

Briefly, the FTC alleged in its complaint that Moviepass and its principals violated Section 5 of the FTC Act and the Restore Online Shoppers Confidence Act (ROSCA) by making it difficult for subscribers of its $9.95 a month unlimited “one movie per day” service to access tickets.  The FTC claimed that when the company began losing money on the service due to high usage, it implemented various policies to frustrate members' ability to obtain tickets, such as informing users their account password had been invalidated due to “suspicious activity on their account” (which was false) and had to be reset, and requiring users to verify their ticket purchases.  The FTC alleged these efforts, among others, prevented subscribers from utilizing the service, thus violating the promise of unlimited movies.

Here's where it gets interesting.  The FTC's complaint alleged these policies offended ROSCA in addition to Section 5, which generally prohibits unfair and deceptive acts and practices.  Why is this important?   Because ROSCA provides for civil penalties for all violations whereas Section 5, for first time violations, does not.  Thus, by alleging these practices violated ROSCA, the FTC would be able to impose financial penalties for the offensive actions (which it did not actually do in this case since the company was bankrupt).

The rub here is that the primary purpose of ROSCA is to prevent companies from using unfair or deceptive means to enroll consumers in negative option programs, whereas the offensive actions in this case occurred after enrollment and related to the product characteristics itself (using the service), and not to how consumers enrolled.  So how did the FTC apply ROSCA here?  By alleging the respondents violated Section 4 of ROSCA by failing to “clearly and conspicuously disclose all material terms of the transaction before obtaining the consumer's billing information” and “obtain the consumer's express informed consent before charging the consumer's credit card, [or] debit card  . . . for the transaction.”    In the FTC's view, the policies implemented by the respondents to prevent subscribers from using the service were material terms that should have been disclosed to consumers prior to collecting and charging their account for the subscription.  Having not done so, they violated ROSCA.

Without opining here on the respondents' alleged bad acts, the fact that the FTC applied a “look back” approach to these practices and applied ROSCA to aspects of the service itself rather than to how consumers enrolled, is chilling.  In a dissenting statement, Commissioner Noah Phillips provides some interesting food for thought:

The Commission's decision in this case to plead a novel theory of liability under [ROSCA] accomplishes nothing for consumers and reduces clarity for businesses seeking to follow the law.

“The novelty here is that, for the first time, the Commission is treating a deception about the characteristics of the underlying product—not the negative option feature—as a violation of ROSCA.

The Commission is thus announcing that it may seek civil penalties against all businesses that use online negative option features where the Commission determines that there has been any material deception, whether relating to the negative option feature or a characteristic of the underlying product.

 T]he Commission fails to announce today precisely what it believes are the “material terms”,(sic) reducing clarity for businesses about their disclosure obligations. ROSCA creates affirmative disclosure obligations, but we have given no guidance to businesses about what to disclose.

On the other hand, in a concurring statement, Commissioner Christine Wilson acknowledges the novelty of the FTC's approach, but nevertheless sides with the majority:

I am mindful that this settlement marks the first time the Commission has alleged a violation of ROSCA where the undisclosed material terms do not relate specifically to the negative option feature but instead to the underlying good or service marketed through that feature. But I believe that the facts of this case fall well within the bounds of the conduct that Congress contemplated challenging when promulgating the statute. In fact, the conduct described in the complaint fits neatly within the plain language of the statue.

With this matter under its belt, it remains to be seen whether and to what extent the FTC will apply this approach to future negative option cases.  While the facts giving rise to this matter were indeed egregious (we urge you to read the complaint to see what not to do when your service becomes wildly successful) and the Commission may exercise restraint when faced with less offensive behavior, the fact remains that the door is now open to ROSCA allegations for practices unrelated and subsequent to the actual negative option enrollment process.