Negative Option SS 2014 fin

Supporting Statement
Trade Regulation Rule
Rule on the Use of Prenotification Negative Option Plans
16 C.F.R. Part 425
(Control Number: 3084-0104)
(1)

Necessity for Collecting the Information

The Trade Regulation Rule on the Use of Prenotification Negative Option Plans
(“Negative Option Rule” or “Rule”) governs the operation of prenotification subscription plans.
Under these plans, sellers ship merchandise, such as books, compact discs, or tapes automatically
to their subscribers and bill them for the merchandise if consumers do not expressly reject the
merchandise within a prescribed time. The Rule protects consumers by: (a) requiring that
promotional materials disclose the terms of membership clearly and conspicuously; and
(b) establishing procedures for the administration of such “negative option” plans.
(2)

Use of the Information

Consumers use the Rule’s required disclosures to weigh the benefits and burdens of
negative option plans. These disclosures inform existing and potential subscribers of their rights
under the Rule. Specifically, the seller must disclose the following information:
• that the subscriber will have at least ten days in which to decline the merchandise;
• the subscriber’s minimum purchase obligation;
• the subscriber’s right to cancel the membership after meeting the minimum obligation;
• the frequency with which the seller will send announcements and the maximum number
of announcements that will be sent in a 12-month period;
• whether billing charges will include postage and handling; and
• that the seller will give full credit, and guarantee return postage, for merchandise
returned by a subscriber who has not had at least ten days in which to mail a merchandise
rejection form.
The failure to make these disclosures is an unfair or deceptive act or practice.
(3)

Consideration of Using Improved Information Technology to Reduce Burden

The Rule’s disclosure requirements are technology-neutral and apply to advertisements
and other promotional materials regardless of format. Thus, so long as the Rule’s requirements
are satisfied, an advertisement or other promotional material would not violate the Rule merely
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because it is disseminated in electronic form (e.g., Internet, e-mail). In this way, the Rule leaves
regulated entities free to take advantage of improved information technology and is consistent
with the Government Paperwork Elimination Act, 44 U.S.C. § 3504 note.
(4)

Efforts to Identify Duplication/Availability of Similar Information

The Restore Online Shoppers’ Confidence Act (“ROSCA”) relates to negative option
marketing on the Internet. 15 U.S.C. §§ 8401 et seq. This Act makes it unlawful for Internet
sellers to charge for any goods or services sold using negative option marketing, unless they:
(a) disclose all material terms of sales transactions clearly and conspicuously before obtaining
consumers’ billing information; (b) obtain consumers’ express informed consent before charging
consumers; and (c) provide simple mechanisms for stopping recurring charges.
Notwithstanding ROSCA’s overlap with the Negative Option Rule, the Rule’s reach is
broader, extending beyond Internet sales to other forms of prenotification negative option plan
marketing and advertising, such as direct-mail solicitations. In addition, the Rule requires
specific disclosures and certain procedures for administering prenotification negative option
plans (e.g., sellers must send consumers forms they can use to reject merchandise before it is
shipped) that are not addressed by ROSCA.
Some states regulate negative option marketing, requiring disclosures similar to those
required by the Rule. Nonetheless, the primary industries using negative option plans – book,
music, and video clubs – have a nationwide customer base that necessitates federal regulation,
and the Negative Option Rule has prevented a proliferation of conflicting state laws.
(5)

Efforts to Minimize Burden on Small Businesses

Although the Rule does not exclude small businesses, FTC staff believes that negative
option plans covered by the Rule are generally – if not exclusively – offered by book and record
clubs that are operated by large, national companies.
(6)

Consequences of Conducting Collection Less Frequently

The Rule’s disclosure requirements do not apply to all promotional materials. The Rule
limits its disclosure requirements to promotional materials that contain a means to join a plan,
such as an enrollment form. The disclosures enable consumers to make informed purchasing
decisions and protect consumers from incurring financial obligations for merchandise they do not
want. Not requiring disclosures of material terms for this limited category of promotional
materials could potentially injure consumers in that they might use enrollment forms to join
negative option plans before learning that they are taking on the future obligation to affirmatively
reject merchandise shipped on a periodic basis.
For each item of merchandise a seller ships under a plan, the Rule also requires the seller
to send to subscribers pre-shipment both an announcement identifying the merchandise and a
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form to reject it before it is shipped. The Rule does not require the seller to repeat the material
terms of a negative option plan in the merchandise announcements or rejection forms.
Not requiring sellers to mail rejection forms to subscribers in advance of prospective
shipments would result in subscribers receiving unwanted merchandise.
(7)

Circumstances Requiring Collection Inconsistent with Guidelines

The collection of information in the Rule is consistent with guidelines contained in 5
C.F.R. 1320.5(d)(2).
(8)

Consultation Outside the Agency

The Commission recently completed its regulatory review of the Negative Option Rule as
part of its systematic review of all current FTC regulations and guides. See 79 Fed. Reg. 44,271
(July 31, 2014). The Commission sought comments on the Rule’s costs and benefits, and on
whether it should expand the Rule’s scope to cover negative option features other than
prenotification offers involving merchandise. After considering the comments and recent
legislative developments, the Commission has determined to retain the Rule without amendment.
All commenters who addressed the issue support the Rule’s current provisions.
Additionally, the Commission recently sought public comment in connection with its
latest PRA clearance request for this Rule. See 79 Fed. Reg. 43,047 (July 24, 2014) (no
comments were received), and is doing so again contemporaneously with this submission.
(9)

Payments or Gifts to Respondents
Not applicable.

(10) & (11)

Assurances of Confidentiality/Matters of a Sensitive Nature

No confidentiality issues and no issues involving questions of a sensitive nature are
involved.
(12)

Annual Hours Burden
Estimated annual hours burden: 3,125 hours

Staff estimates that approximately 35 existing clubs each require annually about 75 hours
to comply with the Rule’s disclosure requirements, for a total of 2,625 hours (35 clubs x 75
hours). These clubs should be familiar with the Rule, which has been in effect since 1974, with
the result that the burden of compliance has declined over time. Moreover, a substantial portion
of the existing clubs likely would make these disclosures absent the Rule because they have
helped foster long-term relationships with consumers.
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Approximately 5 new clubs come into being each year. These clubs require
approximately 100 hours to comply with the Rule, including start-up time. Thus, the cumulative
PRA burden for new clubs is about 500 hours (5 clubs x 100 hours). Combined with the
estimated burden for established clubs, the total burden is 3,125 hours.
Estimated annual labor costs: $153,950
Based on recent data from the Bureau of Labor Statistics, 1 the mean hourly wage for
advertising managers is approximately $54 per hour; compensation for office and administrative
support personnel is approximately $17 per hour. Assuming that managers perform the bulk of
the work, and clerical personnel perform associated tasks (e.g., placing advertisements and
responding to inquiries about offerings or prices), the total cost to the industry for the Rule’s
information collection requirements would be approximately $153,950 [(65 hours managerial
time x 35 existing clubs x $54 per hour) + (10 hours clerical time x 35 existing clubs x $17 per
hour) + (90 hours managerial time x 5 new clubs x $54 per hour) + (10 hours clerical time x 5
new clubs x $17)].
(13)

Estimated Annual Capital and/or Other Non-labor Related Costs

Because the Rule has been in effect since 1974, the vast majority of the negative option
clubs have no current start-up costs. For the few new clubs that enter the market each year, the
costs associated with the Rule’s disclosure requirements, beyond the additional labor costs
discussed above, are de minimis. Negative option clubs already have access to the ordinary
office equipment necessary to comply with the Rule. Similarly, the Rule imposes few, if any,
printing and distribution costs. The required disclosures generally constitute only a small
addition to the advertising for negative option plans. Because printing and distribution
expenditures are incurred to market the product regardless of the Rule, adding the required
disclosures results in marginal incremental expense.
(14)

Estimate of Cost to Federal Government

The Rule has been in existence for 40 years and businesses covered by the Rule already
generally comply. Accordingly, the estimated cost to the Federal government of enforcing the
Rule is minimal and is generally confined to reviewing advertisements to ensure that the required
disclosures are made. Staff may also answer inquiries about the Rule. Staff estimates that the
annualized cost to the Commission (per year over the 3-year clearance renewal being sought) to
administer the disclosure requirements will be approximately $7,500 representing approximately
five percent of an FTC FTE.

1

Occupational Employment And Wages – May 2013, Table 1, at http://www.bls.gov/news.release/pdf/ocwage.pdf.

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(15)

Changes in Burden

The burden estimate has been reduced by 750 hours (from 3,875 hours in 2011 to 3,125
in 2014) reflecting the decreased number of existing clubs (from 45 in 2011 to 35 in 2014) due to
consolidation in the industry and the economic downturn.
(16)

Statistical Use of Information
There are no plans to publish any information for statistical use.

(17)

Failure to Display the Expiration Date for OMB Approval
Not applicable

(18)

Exceptions to the Certification for Paperwork Reduction Act Submissions
Not applicable.

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