    [Senate Report 111-240]
    [From the U.S. Government Publishing Office]

    111th Congress
     2d Session                      SENATE                          Report
                                                                    111-240
    _______________________________________________________________________

                                                           Calendar No. 500

                    RESTORE ONLINE SHOPPERS' CONFIDENCE ACT

                                   __________

                                  R E P O R T

                                     OF THE

               COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                                       on

                                    S. 3386

                     August 2, 2010.--Ordered to be printed
           SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
                         one hundred eleventh congress
                                 second session

                JOHN D. ROCKEFELLER IV, West Virginia, Chairman
    DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas
    JOHN F. KERRY, Massachusetts         OLYMPIA J. SNOWE, Maine
    BYRON L. DORGAN, North Dakota        JOHN ENSIGN, Nevada
    BARBARA BOXER, California            JIM DeMINT, South Carolina
    BILL NELSON, Florida                 JOHN THUNE, South Dakota
    MARIA CANTWELL, Washington           ROGER F. WICKER, Mississippi
    FRANK R. LAUTENBERG, New Jersey      GEORGE S. LeMIEUX, Florida
    MARK PRYOR, Arkansas                 JOHNNY ISAKSON, Georgia
    CLAIRE McCASKILL, Missouri           DAVID VITTER, Louisiana
    AMY KLOBUCHAR, Minnesota             SAM BROWNBACK, Kansas
    TOM UDALL, New Mexico                MIKE JOHANNS, Nebraska
    MARK WARNER, Virginia
    MARK BEGICH, Alaska
                         Ellen Doneski, Staff Director
                       James Reid, Deputy Staff Director
                         Bruce Andrews, General Counsel
                     Ann Begeman, Republican Staff Director
                  Brian Hendricks, Republican General Counsel
                    Todd Bertoson, Republican Senior Counsel

                                                           Calendar No. 500
    111th Congress                                                   Report
                                     SENATE
     2d Session                                                     111-240

    ======================================================================

                    RESTORE ONLINE SHOPPERS' CONFIDENCE ACT

                                    _______

                     August 2, 2010.--Ordered to be printed

                                    _______

         Mr. Rockefeller, from the Committee on Commerce, Science, and
                    Transportation, submitted the following

                                     REPORT

                             [To accompany S. 3386]

        The Committee on Commerce, Science, and Transportation, to
    which was referred the bill (S. 3386) to protect consumers from
    certain aggressive sales tactics on the Internet, having
    considered the same, reports favorably thereon with an
    amendment (in the nature of a substitute) and recommends that
    the bill (as amended) do pass.

                              Purpose of the Bill

      S. 3386, as amended, would protect online consumers from
    unfair and deceptive sales tactics on the Internet by (1)
    requiring e-commerce companies that advertise on other
    companies' websites to meet certain requirements before
    charging consumers' financial accounts, (2) prohibiting e-
    commerce companies from transferring their customers' billing
    information to the e-commerce companies that are advertising on
    their websites, and (3) requiring e-commerce companies that use
    ``negative options'' to meet certain minimum requirements.

                              Background and Needs

      In the past 15 years, the Internet has rapidly grown from an
    entertaining diversion to an integral part of the daily life of
    millions of Americans. According to research done by the Pew
    Internet and American Life Project, over half of all American
    adults had either made an online purchase or an online travel
    reservation by 2008. Yet large percentages of online consumers
    continue to report that they feel frustrated, overwhelmed, or
    confused by online shopping.
      A key factor contributing to consumers' lingering unease
    about online shopping is the aggressive sales tactics that many
    companies have used against their customers. In response, in
    May 2009, the Committee opened an investigation into a set of
    online sales tactics that many consumers, law enforcement
    officials, and consumer advocates described as misleading and
    deceptive. The year-long investigation found that hundreds of
    legitimate, respected websites had shared their customers'
    billing information through a ``data pass'' process with other
    companies (defined as ``post-transaction third party sellers''
    in S. 3386). These post-transaction third party sellers then
    enrolled online consumers in their membership programs more
    than 35 million times, charging them over $1.4 billion in fees
    for benefits and services they were often unaware they had
    purchased.
      The post-transaction third party sellers and the websites
    they partnered with used a combination of three aggressive
    sales tactics to enroll consumers in their membership clubs and
    discount programs: post-transaction marketing, data pass, and
    negative options.
      Post-Transaction Marketing: Offers for membership clubs were
    presented to online consumers as they were completing their
    purchases on familiar retailers' websites. After consumers
    entered their billing information into a ``check out'' purchase
    page on familiar e-retailers' sites, but before they completed
    confirmation of the transaction, the unfamiliar post-
    transaction third party sellers interrupted the process and
    attempted to enroll consumers in membership clubs.
      Data Pass: Consumers were not required to enter their billing
    information to be enrolled in the membership clubs offered by
    the post-transaction third party sellers. The websites on which
    the consumers had already made purchases were willing to share
    their customers' billing information with the post-transaction
    third party sellers. Collectively, hundreds of well-known,
    reputable websites earned hundreds of millions of dollars by
    passing their customers' billing information, including credit
    and debit card numbers, to third party sellers.
      Negative Options: Consumers enrolled in the membership clubs
    were automatically charged a recurring, monthly fee until they
    contacted the post-transaction third party seller to cancel the
    membership. Post-transaction third party sellers' use of
    negative options cost American consumers hundreds of millions
    of dollars because they were enrolled in and charged for the
    membership clubs indefinitely, until they realized there was an
    unfamiliar charge on their credit card or debit card
    statements.
      Attached to this report are two Committee staff investigative
    reports which document how extensive the injuries to consumers
    were and how pervasive the tactics were on the Internet. The
    evidence obtained by the Committee demonstrated overwhelmingly
    that most consumers were unaware they were enrolled in the
    membership programs.
      During interviews with Committee staff and in Committee
    testimony, many affected consumers stated repeatedly that they
    were not aware they were consenting to allow a website to
    transfer their billing information to a post-transaction third
    party seller by simply clicking a button and providing their e-
    mail address. Many online consumers informed Committee staff
    that they had mistakenly believed it was illegal for e-commerce
    companies to transfer their billing information to another
    company.
      Evidence obtained through the Committee's investigation
    showed that the companies engaged in the practice were well
    aware that consumers did not understand this process. The
    companies exploited consumer confusion by using practices that
    caused consumers to unwittingly enroll in the companies'
    services and programs. Annually, the post-transaction third
    party sellers received millions of calls from angry, frustrated
    consumers cancelling their memberships or asking questions
    about the charges to their credit or debit cards. When the
    companies tracked the reasons for these angry calls, the
    evidence overwhelmingly showed that consumers were being
    enrolled in the membership programs without their express
    informed consent. An employee of one company commented candidly
    in an internal e-mail that ``at least 90% of our members don't
    know anything about the membership.''

                             Summary of Provisions

      To ensure online consumers are no longer taken advantage of
    by these questionable sales tactics, S. 3386 would create new
    rules for companies using post-transaction marketing and
    negative options. It would also prohibit e-commerce companies
    from using the so-called data pass process to pass their
    customers' billing information to e-commerce companies engaging
    in post-transaction marketing on their websites.
      Post-transaction third party sellers would be required to
    meet certain requirements before charging a consumer for a good
    or service. The bill would require post-transaction third party
    sellers to disclose the material terms of the transaction and
    obtain the consumer's express informed consent. The disclosure
    requirements include:
               a description of the goods or services being
            offered;
               the fact that the post-transaction third
            party is not affiliated with the initial merchant; and
               the cost of such goods or services.
      For a post-transaction third party seller to obtain
    consumers' express informed consent, consumers would need to
    provide their full sixteen digit credit card or debit card
    number, their name and address, and a means to contact them.
    The purpose of this provision is to require post-transaction
    third party sellers to go through the same process to charge
    consumers as initial merchants do. Evidence obtained through
    the Committee's investigation shows that online consumers
    understand that they are making a purchase when they go through
    this process. The bill would also prohibit initial merchants
    from transferring their customers' billing information to post-
    transaction third party sellers because initial merchants, like
    post-transaction third party sellers, should be held liable if
    they participate in a data pass process prohibited by the bill.
      The bill's ``negative option'' provision would establish
    clear standards of disclosure and consent for sales that
    involve recurring charges. The practices outlined in this
    provision are already used by most legitimate e-commerce
    companies selling goods and services through negative option
    sales. All companies would be required to make certain
    disclosures, obtain consumers' express informed consent and
    provide the consumers with simple, convenient ways to cancel
    the ``negative options'' via the Internet or through e-mail.
    The disclosure requirements include:
               the name and entity offering the goods or
            services;
               a description of the goods or services;
               the cost of such goods or services;
               notice of when billing will begin and at
            what intervals the charges will occur;
               the length of any trial period; and
               instructions for stopping the recurring
            charges.
      The bill would provide the Federal Trade Commission with
    enforcement authority and the State Attorneys General with the
    power to seek injunctive relief in Federal court.

                              Legislative History

      Senator Rockefeller introduced S. 3386 on May 19, 2010, and
    it was referred to the Committee on Commerce, Science, and
    Transportation. The bill was co-sponsored by Senators Pryor,
    Nelson, Klobuchar, McCaskill, and LeMieux. The bill was
    introduced following a November 17, 2009, investigative hearing
    entitled ``Aggressive Sales Tactics on the Internet and Their
    Impact on American Consumers'' and the release of two Committee
    staff reports on the subject. Each staff report is attached. On
    June 9, 2010, the Committee considered the bill during an open
    executive session and adopted it by voice vote.

                                Estimated Costs

      In accordance with paragraph 11(a) of rule XXVI of the
    Standing Rules of the Senate and section 403 of the
    Congressional Budget Act of 1974, the Committee provides the
    following cost estimate, prepared by the Congressional Budget
    Office:

                                                         July 14, 2010.
    Hon. John D. Rockefeller IV,
    Chairman, Committee on Commerce, Science, and Transportation,
    U.S. Senate, Washington, DC.
        Dear Mr. Chairman: The Congressional Budget Office has
    prepared the enclosed cost estimate for S. 3386, the Restore
    Online Shoppers' Confidence Act.
        If you wish further details on this estimate, we will be
    pleased to provide them. The CBO staff contacts are Alan Eder
    and Susan Willie.
                Sincerely,
                                                  Douglas W. Elmendorf.
        Enclosure.

    S. 3386--Restore Online Shoppers' Confidence Act

        Impact on the Federal Budget: S. 3386 would make it
    unlawful for any third-party seller to charge a consumer's
    financial account after the sale of any good or service over
    the Internet unless certain requirements are met. The bill
    would define third-party sellers as vendors that offer a good
    or service to a consumer after the consumer has completed a
    transaction with a different Internet merchant.
        Additionally, S. 3386 would make it unlawful for a person
    who has directly obtained a consumer's billing information
    through an online transaction to disclose it to any third-party
    seller. Finally, the bill would require the Federal Trade
    Commission (FTC) to develop regulations necessary to enforce
    the new requirements and make any person who violates those
    regulations subject to penalty.
        Based on information provided by the FTC, CBO estimates
    that developing and enforcing the new regulations would have a
    minor cost. Therefore, CBO estimates that implementing the
    provisions of S. 3386 would not significantly increase spending
    subject to appropriation.
        Enacting S. 3386 could increase revenues from the
    collection of civil penalties; therefore, pay-as-you-go
    procedures would apply. However, CBO estimates that revenue
    collections from those penalties would be negligible in each
    year.
        Intergovernmental and private-sector impact: S. 3386
    contains no intergovernmental mandates as defined in the
    Unfunded Mandates Reform Act (UMRA) and would not affect the
    budgets of state, local, or tribal governments.
        S. 3386 would impose private-sector mandates, as defined in
    UMRA, on sellers that use ``negative-option'' features in
    selling goods or services on the Internet and on Internet
    sellers that engage in the sale of consumer financial
    information for the purpose of marketing or sales.
        Internet sellers frequently use a negative-option feature
    wherein consumers who do not wish to buy a good or service
    being offered at the time of another purchase must opt out of
    the offer. The bill would require that new and more detailed
    information be provided to consumers when a negative-option
    plan is in use, including the means by which consumers can
    avoid charges after any trial period.
        Internet sellers sometimes increase sales and revenues by
    partnering with one another and sharing the financial
    information of consumers without the consumers' knowledge or
    consent. As a result of those partnerships, consumers may be
    enrolled in programs and billed, often on a recurring basis,
    without their knowledge. The majority of those consumers cancel
    once they discover they have been enrolled. The sellers that
    obtain consumer financial information directly would be
    prohibited from disclosing the financial information of their
    customers to any third party. Third-party Internet sellers
    would be prohibited from charging or attempting to charge
    consumers for their goods or services unless they have obtained
    the financial information directly from the consumers and
    received their express informed consent.
         The cost of the mandate would be the forgone revenue from
    the sale of products and services which have been sold in this
    manner. Because of the number of consumers being billed for
    those types of goods and services and the average monthly cost
    per consumer, CBO estimates that the aggregate cost of the
    mandates would be above the annual threshold for private-sector
    mandates ($141 million in 2010, adjusted annually for
    inflation).
        Estimate prepared by: Federal costs: Alan Eder and Susan
    Willie; Impact on state, local, and tribal governments:
    Elizabeth Cover Delisle; Impact on the private sector: Marin
    Randall.
        Estimate approved by: Peter H. Fontaine, Assistant Director
    for Budget Analysis.

                          Regulatory Impact Statement

      In accordance with paragraph 11(b) of rule XXVI of the
    Standing Rules of the Senate, the Committee provides the
    following evaluation of the regulatory impact of the
    legislation, as reported:

                           NUMBER OF PERSONS COVERED

      S. 3386 would cover all e-commerce companies whose practices
    meet the definition of a post-transaction third party seller,
    all Internet merchants that would otherwise share consumers'
    billing information with post-transaction third party sellers,
    and all marketers of negative option programs offered through
    the Internet.

                                ECONOMIC IMPACT

      S. 3386 would not have an adverse impact on the nation's
    economy. The legislation is expected to reduce the number of
    consumers who are subject to fraudulent online sales practices,
    and would therefore save consumers millions of dollars every
    year in unauthorized charges.

                                    PRIVACY

      S. 3386 would increase the personal privacy of consumers
    making purchases on the Internet by prohibiting online
    retailers from passing consumers' billing information to post-
    transaction third party sellers.

                                   PAPERWORK

      S. 3386 would not increase paperwork requirements for
    individuals and businesses.

                       Congressionally Directed Spending

      In compliance with paragraph 4(b) of rule XLIV of the
    Standing Rules of the Senate, the Committee provides that no
    provisions contained in the bill, as reported, meet the
    definition of congressionally directed spending items under the
    rule.

                          Section-by-Section Analysis

    Section 1. Short Title.

      This section would provide that the Act may be cited as the
    Restore Online Shoppers' Confidence Act.

    Section 2. Findings; Declaration of Policy.

      Section 2 sets out the bill's findings, which are based in
    large part on the Committee's year-long investigation into
    aggressive online sales tactics.

    Section 3. Prohibitions Against Certain Unfair and Deceptive Internet
            Sales Practices.

      Section 3(a) would prohibit an online post-transaction third
    party seller from charging a consumer unless the post-
    transaction third party seller has clearly disclosed the terms
    of an Internet purchase to the consumer and has obtained the
    consumer's express informed consent to the purchase. The
    consumer signifies express informed consent by submitting his
    or her billing information, including the full credit or debit
    card number, to the post-transaction third party seller and by
    performing an additional affirmative action.
      Section 3(b) would prohibit Internet retailers and other
    commercial websites (``initial merchants'') from transferring a
    consumer's billing information to post-transaction third party
    sellers.
      Section 3(c) would establish rules under which Internet
    retailers may periodically charge consumers for goods or
    services until the consumer cancels the arrangement (``negative
    option feature''). It would prohibit a seller from charging a
    consumer through a negative option feature unless: 1) the
    seller has clearly disclosed the terms of the plan to the
    consumer; 2) the seller has obtained the consumer's express
    informed consent to the plan; and 3) the seller provides the
    consumer simple, convenient ways to cancel the negative option
    plan.
      Section 3(d) would define the terms initial merchant,
    negative option, and post-transaction third party seller.

    Section 4. Enforcement by Federal Trade Commission.

      Section 4 would give the Federal Trade Commission the
    authority to enforce the prohibitions in section 3 and to write
    regulations furthering enforcement of the prohibitions in
    section 3.

    Section 5. Enforcement by State Attorneys General.

      Section 5 would give State Attorneys General the authority to
    use injunctive relief in Federal court to stop entities from
    violating the prohibitions in section 3.

                            Changes in Existing Law

      In compliance with paragraph 12 of rule XXVI of the Standing
    Rules of the Senate, the Committee states that the bill as
    reported would make no change to existing law.