America OnLine, Compuserve and Prodigy Settle FTC Charges Over "Free" Trial Offers, Billing Practices

Three of the nation’s largest Internet service providers, America Online, Inc. (AOL), CompuServe, Inc., and Prodigy Services Corporation, have agreed to settle Federal Trade Commission allegations that their “free trial” offers resulted in unexpected charges for many consumers. The FTC alleged that the offers didn’t make clear that consumers had an affirmative obligation to cancel before the trial period ended. As a result, consumers who failed to cancel were enrolled automatically as members and began incurring monthly charges, the FTC alleged.

The FTC also alleged that AOL failed to inform consumers that 15 seconds of connect time was added to each online session, resulting in additional undisclosed charges; and misrepresented that it would not debit many of its customers’ bank accounts before receiving authorization. In addition, the FTC settlements address charges that all three firms have failed to obtain appropriate consumer authorization before making electronic withdrawals from the accounts of consumers, and also failed to give consumers advance notice of monthly amounts to be electronically withdrawn from their accounts, leaving those customers vulnerable to bounced checks and the resulting bank and retailer fees, in violation of the Electronic Funds Transfer Act (EFTA).

Announcing the cases, Jodie Bernstein, Director of the FTC’s Bureau of Consumer Protection, said, “We support the development of the online industry and all the benefits it offers today and in the future. We are pleased that these industry leaders have agreed to standards that comply with the laws enforced by the Commission. We will continue to work, on an industry- wide basis, to ensure that all companies understand and comply with the laws enforced by the FTC."

The settlements would require the online service providers, when offering a “free trial” with automatic membership enrollment or renewal, to disclose clearly and prominently any obligation to cancel to avoid charges, and provide at least one reasonable means of canceling. The settlements prohibit any misrepresentation of the terms of any online service offer. The settlements also would require the firms to obtain consumers’ authorization before debiting their accounts and to notify consumers in advance about amounts to be debited that vary from previous debits. The settlement with AOL further prohibits that firm from misrepresenting either the fees assessed for its service or the terms of electronic transfers from consumer accounts. AOL also has agreed to run a consumer education program about electronic payment systems.

AOL, the world’s largest computer online service provider, has grown from about 100,000 subscribers in 1990 to about 8 million today. It is based in Dulles, Virginia. Compu Serve, ranked number two in the industry, is based in Columbus, Ohio. Prodigy is based in White Plains, New York. It ranks number four in the industry, behind the Microsoft Network.

According to the FTC complaints detailing the charges in these cases, AOL, CompuServe and Prodigy have used the "free trial" membership strategy extensively in advertising campaigns that include print and television ads, direct mailings of computer disks, and promotional and instructional materials. These materials all state that consumers may use the online services for a specified number of hours, typically 10 hours during their first month (or 30 days) online. Consumers are not told they will incur charges unless they affirmatively cancel their member ships during the trial period, the FTC alleged. When consumers do not cancel, the online service providers automatically enroll them as members and charge them monthly membership fees until they do cancel. The Commission alleged that these false statements and deceptive omissions are violations of the Federal Trade Commission Act.

The FTC also challenged AOL’s failure to tell its customers that it automatically added 15 seconds to each online session. The FTC alleged that this added time, combined with AOL’s practice of rounding up online sessions to the next full minute, resulted in many consumers unknowingly incurring extra charges for their time online. For example, an online session of 2 minutes and 46 seconds, with the 15 second supplement, totals 3 minutes and 1 second and, with rounding, would be billed by AOL as 4 minutes. These practices are not applicable to customers who pay a flat rate for unlimited monthly service.

The FTC also alleged that AOL violated the FTC Act and the EFTA through its elec tronic debiting procedures. AOL allowed consumers to select from various billing methods, including automatic debiting from their checking accounts, the FTC said. AOL informed consumers who chose automatic debiting that they would receive an authorization form by mail and that AOL would not debit their accounts before receiving the returned form. In fact, the FTC charged, AOL debited consumers’ accounts without their authorization, thereby violating both the FTC Act and the EFTA.

CompuServe and Prodigy allegedly violated the EFTA by electronically withdrawing funds without authorization from the accounts of customers paying by debit card, the FTC charged. In addition, in all three cases, the FTC charged the online service providers with violating the EFTA by failing to give consumers at least 10 days’ advance notice of transfers from their accounts in amounts that varied from prior months’ transfers.

The proposed consent agreements settling these charges are being announced today for public comment before the Commission determines whether to make them final and binding. They would:

• bar the online service providers from misrepresenting the terms or conditions of any online service trial offer;
• bar them from representing that an online service is free or otherwise representing that consumers need not pay for the online service, unless they disclose clearly and prominently in their instructional materials any obligation to cancel or take other action to avoid charges, and in all other advertisements include a statement directing consumers to where this disclosure is available;
• require the online service providers to disclose clearly and prominently during the final registration process and prior to consumers incurring any financial obligation, the terms of all mandatory charges that consumers will incur as a result of using the online services;
• require them, if they use an automatic membership enrollment or renewal plan, to disclose clearly and prominently any obligation of consumers to cancel to avoid charges and to provide consumers with at least one reasonable means of canceling their memberships; and
• require the respondents to obtain consumers’ written authorization before initiating any electronic fund transfer and to notify consumers in advance about electronic fund transfers varying in amount from previous transfers, as required by the EFTA.

The settlement with AOL contains additional provisions that would:

• prohibit the firm from misrepresenting the fees or charges assessed for the online service;
• require disclosure of the manner in which fees or charges are assessed or calculated;
• bar misrepresentations about the terms or conditions of any electronic fund transfer from a consumer account; and
• require AOL to establish a consumer education program about the use of electronic payment systems. In order to reach a wide audience of consumers, AOL must prepare and distribute at least 50,000 color brochures, maintain information about electronic payment systems on the Internet, and reference such information on its online service.

The program must cover the various types of electronic payment systems available to consumers; the obligations of con sumers, merchants, and financial institutions using such systems; methods for consumers to avoid fraudulent use of these systems; the legal protections available to consumers; and organizations and agencies from which consumers can obtain more information.

An FTC brochure for consumers titled "Electronic Banking" offers information about electronic fund transfer technology and consumer protections under federal law. The free brochure is available from the FTC’s web site at www.ftc.gov and also from the FTC’s Public Reference Branch at the address listed below.

The Commission vote to bring these cases was 5-0, with Commissioner Roscoe B. Starek, III, issuing a statement in which he said: "The proposed consumer education program is an extremely comprehensive endeavor that no doubt will provide valuable information to consumers of online services about the use of electronic payment systems. ... Nonetheless, as a fencing-in remedy it is too broad to be reasonably related to AOL’s alleged law violations." Further, Starek said: "Even if a respondent waives its First Amendment rights in a consent agreement, the Commission -- as a government agency acting in the public interest -- should not compel speech through negotiation that it has no colorable chance of obtaining in litigation."

An announcement regarding the complaints and proposed consent agreements will be published in the Federal Register shortly. They will be subject to public comment for 60 days, after which the Commission will decide whether to make them final. Address comments to FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the "Electronic Banking" brochure, complaints, consent agreements and analyses to assist the public in commenting, and Commissioner Starek’s statement are available from the FTC’s web site at www.ftc.gov and the Public Reference Branch, Room 130, same address as above; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. Consent agreements subject to public comment also can be obtained by calling 202-326- 3627. Call our NewsPhone recording at 202-326-2710 for the latest FTC news.

(FTC File Nos. AOL--952 3331; CompuServe--962 3096; Prodigy--952 3332)