[Federal Register Volume 62, Number 93 (Wednesday, May 14, 1997)]
[Notices]
[Pages 26510-26512]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12581]



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FEDERAL TRADE COMMISSION

[File No. 952-3331]


America Online, Inc.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting 
unfair or deceptive acts or practices and unfair methods of 
competition, this consent agreement, accepted subject to final 
Commission approval, would, among other things, require the respondent, 
an Internet service provider, 1), when offering a ``free trial'' with 
automatic membership enrollment or renewal, to disclose clearly and 
prominently any obligation to cancel to avoid charges and to provide at 
least one reasonable means of canceling; 2) to obtain consumers' 
authorization before debiting their accounts; ad 3) to run a consumer 
education program about electronic payment systems. The consent 
agreement also prohibits AOL from misrepresenting either the fees 
assessed for its services or the terms of electronic transfers from 
consumer accounts. The complaint accompanying the consent agreement 
alleges that AOL's ``free trial'' offers resulted in unexpected charges 
for many consumers, because the offers did not make clear that 
consumers had an affirmative obligation to cancel before the trial 
period ended. As a result, consumers who failed to cancel were 
automatically enrolled as members and began incurring monthly charges. 
The complaint also alleges that AOL failed to obtain appropriate 
authorization before making electronic withdrawals from the accounts of 
consumers and failed to inform consumers that 15 seconds of connect 
time was added to each online session, resulting in additional 
undisclosed charges.

DATES: Comments must be received on or before [60 days after Federal 
Register publication date].

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary, 
Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:
David Medine, Federal Trade Commission, S-4429, 6th St. and Pa. Ave., 
N.W., Washington, D.C. 20580, (202) 326-3025
Lucy Morris, Federal Trade Commission, S-4429, 6th St. and Pa. Ave., 
N.W., Washington, D.C. 20580, (202) 326-3295
Steven Silverman, Federal Trade Commission, S-4429, 6th St. and Pa. 
Ave., N.W., Washington, D.C. 20580, (202) 326-2460
SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of 
the Commission's Rules and Practice (16 CFR 2.34), notice is hereby 
given that the above-captioned consent agreement containing a consent 
order to cease and desist, having been filed with and accepted, subject 
to final approval, by the Commission, has been placed on the public 
record for a period of sixty (60) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the accompanying complaint. An electronic copy of the 
full text of the consent agreement package can be obtained from the 
Commission Actions section of the FTC Home Page (for May 1, 1997), on 
the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A paper 
copy can be obtained from the FTC Public Reference Room, Room H-130, 
Sixth Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580, 
either in person or by calling (202) 326-3627. Public comment is 
invited. Such comments or views will be considered by the Commission 
and will be available for inspection and copying at its principal 
office in accordance with Section 4.9(b)(6)(ii) of the Commission's 
Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order To Aid Public Comment

    The Federal Trade Commission has accepted, subject to final 
approval, an agreement to a proposed consent order from America Online, 
Inc. (``America Online'').
    The proposed consent order has been placed on the public record for 
sixty (60) days for reception of comments by interested persons. 
Comments received during this period will become part of the public 
record. After sixty (60) days, the Commission will again review the 
agreement and the comments received and will decide whether it should 
withdraw from the agreement or make final the agreement's proposed 
order.
    The complaint alleges that America Online's advertisements and 
statements online to consumers violated the Federal Trade Commission 
Act (``FTC Act''). Section 5 of the FTC Act prohibits false, 
misleading, or deceptive representations or omissions of material 
information. See 15 U.S.C. Secs. 45-58, as amended. The complaint also 
alleges that America Online's billing practices violated the Electronic 
Fund Transfer Act (``EFTA'') and its implementing Regulation E. 
Sections 907(a) of the EFTA and 205.10(b) of Regulation E permit 
preauthorized electronic transfers from consumer accounts only if such 
transfers are authorized by consumers in writings that are signed or 
similarly authenticated. See 15 U.S.C. Sec. 1693e(a); 12 CFR 
Sec. 205.10(b). Sections 907(b) of the EFTA and 205.10(d) of Regulation 
E require advance written notice to consumers of preauthorized 
transfers varying in amount from previous preauthorized transfers. See 
15 U.S.C. Sec. 1693e(b); 12 CFR Sec. 205.10(d).
    The complaint alleges that America Online represented that 
consumers who participate in its free trial offer will not be charged, 
provided only that they use the ten hours of allotted trial time within 
thirty days of their initial sign-on and do not exceed ten hours of 
online use. This representation is false, according to the complaint, 
because consumers who participate in America Online's free trial offer 
and use less than ten hours of online time during the thirty days 
following their initial sign-on, but who fail to cancel their 
memberships during the trial period, incur charges. The complaint also 
alleges that America Online failed to disclose adequately to consumers 
that, upon completion of ten hours of online use or thirty days from 
the date of initial sign-on, whichever is earlier, consumers who fail 
to cancel their trial memberships are automatically enrolled as members 
of America Online and are charged a monthly membership fee plus 
applicable hourly fees. These fees continue until the consumers 
affirmatively cancel their memberships. These practices, according to 
the complaint, constitute deceptive practices in violation of Section 5 
of the FTC Act.
    The complaint also alleges that America Online represented that it 
calculates online connect time at the rate of $2.95 per hour, prorated 
by one-minute increments, for time spent online beyond the five hours 
of monthly connect time that it provides to its members (America Online 
rounds up portions of a minute to the next highest whole minute; thus, 
an online session lasting 2 minutes and 46 seconds, for example, would 
be billed as 3 minutes). This representation is false, according to the 
complaint, because America Online adds 15 seconds of connect time to 
each online session for connection charges incurred at the beginning 
and end of the session. When online usage consists of a whole minute 
plus 46-59 seconds, the additional 15 seconds causes the total connect 
time to exceed the next whole minute (for example, an online session of 
2 minutes and 46 seconds, with the 15 second supplement, totals 3 
minutes

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and 1 second and is billed as 4 minutes). In addition, the complaint 
alleges that America Online failed to disclose adequately to consumers 
its practice of adding 15 seconds of connect time to each online 
session. These practices, according to the complaint, are deceptive in 
violation of Section 5 of the FTC Act.
    The American Online complaint further alleges that the company 
represented online that it would not debit consumers' checking accounts 
before it received from them authorized forms permitting it to do so. 
This representation is false, according to the complaint, because 
America Online regularly debited consumers' checking accounts before 
receiving their authorization forms or without ever receiving such 
forms. The complaint alleges that this practice is false or misleading 
in violation of Section 5 of the FTC Act.
    The complaint also alleges that, because America Online in many 
instances debited consumers' checking accounts before receiving their 
authorization forms or without ever receiving such forms, it violated 
Sections 907(a) of the EFTA and 205.10(b) of Regulation E. In addition, 
the complaint alleges that America Online often failed to provide 
consumers with advance written notice of transfers from their accounts 
varying in amount from previous transfers, thereby violating Section 
907(b) of the EFTA and 205.10(d) of Regulation E.
    The proposed consent order contains provisions designed to remedy 
the violations charged and to prevent America Online from engaging in 
similar acts and practices in the future. Specifically, Paragraph I of 
the proposed order prohibits America Online, in connection with 
advertising, promoting, selling, or distributing any online service, 
from misrepresenting the terms or conditions of any trial offer of such 
online service.
    Paragraph II of the proposed consent order prohibits America 
Online, in connection with advertising, promoting, selling, or 
distributing any online service, from representing that the online 
service is ``free,'' ``without risk,'' ``without charge,'' ``without 
further obligation,'' or words of similar effect unless America Online 
discloses, ``clearly and prominently,'' any obligation to cancel or 
take other affirmative action to avoid charges for use of the online 
service.
    Paragraph II also contains two provisos that set out the 
requirements of a ``clear and prominent'' disclosure. First, with 
respect to covered representation made by America Online in detailed 
instructional materials distributed to consumers (e.g., starter kits 
and guidebooks), the disclosure must be in a type size and in a 
location that are sufficiently noticeable so that an ordinary consumer 
could notice, read, and comprehend it. Second, as to representations 
made through other media, America Online must provide a statement 
directing consumers to a location where the required disclosure will be 
available (e.g., ``For conditions and membership details,'' followed 
by: ``load up trial software'' or ``see registration process'' or words 
of similar effect). Audio statements shall be delivered in a volume and 
cadence sufficient for an ordinary consumer to notice, hear, and 
comprehend them. Video statements shall be of a size and shade and 
shall appear for a duration sufficient for an ordinary consumer to 
notice, read, and comprehend them. In the case of print media, the 
statement shall be in a type size and in a location sufficient for an 
ordinary consumer to notice, read, and comprehend it.
    Paragraph III prohibits America Online, in connection with 
advertising, promoting, selling, or distributing any online service, 
from misrepresenting the fees or charges assessed for such online 
service.
    Paragraph IV complements Paragraph III and supplements Paragraph 
II. It provides that America Online, in connection with advertising, 
promoting, selling, or distributing any online service, shall disclose, 
``clearly and prominently,'' during the final registration process, and 
prior to consumers incurring any financial obligation or liability, the 
terms of all mandatory financial obligations that will be incurred by 
consumers as a result of using such online service. Specifically, 
subparagraph IV.A. requires America Online to disclose the financial 
terms and conditions of any plan (e.g., trial offer) by which consumers 
enroll in or renew enrollment in the online service. Moreover, if such 
plan exists, America Online must disclose, ``clearly and prominently,'' 
any obligation to cancel or take other affirmative action to avoid 
charges and provide at least one reasonable means by which consumers 
may effectively cancel their enrollment. Subparagraph IV.B. requires 
America Online to disclose any mandatory membership, enrollment, or 
usage fees (e.g., monthly or hourly usage charges) and, pursuant to 
subparagraph IV.C., the manner in which such fees or changes are 
assessed and calculated. America Online may satisfy subparagraph IV.C. 
by disclosing: (1) that additional charges might apply; (2) that 
information about assessing and calculating fees or charges can be 
found online; and (3) the exact location where consumers can find 
detailed information about assessing and calculating fees or charges.
    For purposes of Paragraph IV, a disclosure is ``clearly and 
prominently'' made if it is of size and shade, and appears for a 
duration sufficient for an ordinary consumer to notice, read, and 
comprehend it. The disclosure shall not be avoidable by consumers.
    Paragraph V prohibits America Online, in connection with 
advertising, promoting, selling, or distributing any online service, 
from misrepresenting the terms or conditions of any electronic fund 
transfer from a consumer's account.
    Paragraph VI requires America Online, in connection with an 
electronic fund transfer from a consumer account, to obtain 
authorization for the transfer, as required by Section 907(a) of the 
EFTA and Section 205.10(b) of Regulation E. In addition, America Online 
must provide advance notice of electronic fund transfers from consumer 
accounts that vary in amount from previous transfers, as required by 
Section 907(b) of the EFTA and Section 205.10(d) of Regulation E.
    Paragraphs VII through XI contain provisions generally found in 
Commission consent orders, including record-keeping requirements, 
distribution requirements, notice requirements, and a requirement that 
America Online submit a report setting forth the manner in which it has 
complied with the consent order.
    Paragraph XII requires America Online to implement a consumer 
education program concerning the use of electronic payment systems. 
Specifically, subparagraph XII.A. provides that the program may be 
established jointly with, or under the control of, an appropriate trade 
association or other consumer education program. Subparagraph XII.B. 
requires that the program last at least one year from the date of 
implementation and, pursuant to subparagraph XII.C., the program must 
be of a scope and employ the means necessary to reach a wide group of 
consumers. Such means must include: (1) Providing at least 50,000 color 
brochures directly to consumers and organizations with direct access to 
consumers likely to use electronic payments systems; (2) providing 
content on the Internet; (3) referencing such content on America 
Online's service; and (4) providing a direct link to the Internet from 
America Online's service. Subparagraph XII.D. requires that the content 
of the education program includes information about: (1) The

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various types of electronic payment systems available to consumers; (2) 
the obligations of consumers, merchants, and financial institutions in 
using such systems; (3) the methods by which such payment systems are 
used, including how consumers may attempt to prevent the fraudulent use 
of those systems; (4) the legal protections available to consumers; and 
(5) the organizations, including law enforcement agencies, from which 
consumers may obtain further information or assistance. The consumer 
education program must be approved by the Commission's Associate 
Director for Credit Practices.
    Finally, Paragraph XIII contains a provision terminating the order, 
under ordinary circumstances, twenty years from the date of its 
issuance.
    The purpose of this analysis is to facilitate public comment on the 
proposed order, and it is not intended to constitute an official 
interpretation of the agreement and proposed order or to modify in any 
way their terms.
Donald S. Clark,
Secretary.

Statement of Commissioner Roscoe B. Starek, III, Concurring in Part and 
Dissenting in Part in America Online, Inc., File No. 952-3331

    Although I have voted to accept for public comment the consent 
agreement with America Online, Inc. (``AOL''), the extensive consumer 
education remedy contained in paragraph XII of the proposed order is 
far too broad. Once again, a majority of the Commission is willing to 
use a negotiated settlement to compel speech that it would have 
virtually no chance of persuading a court to require.
    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. Further, it is more closely related to the violations alleged 
in the complaint than the sunscreen advertising ``consumer education'' 
remedy in the proposed consent agreement with Schering-Plough 
Healthcare Products, Inc. accepted for comment two months ago.\1\ 
Nonetheless, as a fencing-in remedy it is too broad to be reasonably 
related to AOL's alleged law violations.
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    \1\ See Schering-Plough Healthcare Products, Inc., File No. 942-
3341 (separate statements of Commissioner Azcuenaga and Commissioner 
Starek concurring in part and dissenting in part).
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    The complaint alleges that AOL misrepresented and deceptively 
failed to disclose material information about its billing practices, 
misrepresented the terms of its checking account debiting program, and 
violated provisions of the Electronic Fund Transfer Act and its 
implementing Regulation E pertaining to consumer authorization of 
electronic payments. As fencing-in relief, the order requires AOL to 
establish and implement a program lasting at least one year to educate 
consumers about the use of electronic payment systems.\2\ The program 
must ``be of a scope and employ media reasonably necessary to reach a 
wide audience of Consumers [of online services], including but not 
limited to'' 50,000 color brochures, the Internet, and AOL's online 
service. Proposed order, para.XII(C) (emphasis added).
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    \2\ Within 90 days of the order's issuance, AOL must submit, for 
review and approval by the Associate Director of the Bureau of 
Consumer Protection's Division of Credit Practices, a draft plan for 
the program and drafts of any materials to be disseminated. Proposed 
order, para.XII.
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    The order also requires that the program include, but not be 
limited to, information about: various types of electronic payment 
systems available to Consumers; obligations of Consumers, merchants, 
and Financial Institutions in using such systems; how such payment 
systems are used, including the means by which Consumers may attempt to 
prevent the fraudulent use of those systems; various legal protections 
available to Consumers under each system; and organizations, including 
law enforcement agencies, from which Consumers may obtain further 
information or assistance. Proposed order, para.XII(D) (emphasis 
added).
    Although some form of consumer education program may well be 
warranted as fencing-in relief, this program goes too far. AOL is not 
so likely to engage in a whole host of future law violations that it 
should be required to educate consumers about how to use ``various 
types of electronic payment systems'' and how to attempt to prevent 
fraudulent use of those systems. Nor do I think that it is reasonable 
in scope to require AOL to inform consumers about their own obligations 
and the obligations of merchants and financial institutions generally 
in using electronic payment systems. Similarly, requiring AOL to 
educate consumers about ``various legal protections'' for consumers 
using electronic payment systems is too broad to be reasonably related 
to the prevention of future deception like or related to that alleged 
in the complaint. That the alleged deception here involves the use of 
electronic payment systems is not enough of a nexus to justify a 
consumer education program covering all risks, obligations, and law 
violations involving electronic payment systems. Following that logic, 
information about driving a car and traffic laws would be reasonably 
related to a violation of the Commission's Used Car Rule.\3\
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    \3\ See Used Motor Vehicle Trade Regulation Rule, 16 CFR Part 
455.
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    Finally, the consumer education provision would require content and 
dissemination ``not limited to'' what is stated in the order. Although 
it is not clear how the Commission could enforce content and 
dissemination requirements not described in the order, it makes little 
sense to accept language indicating that even the extensive 
dissemination measures and speech described in the proposed order may 
not be enough to comply with the basic requirement to establish a 
program to educate consumers about the use of electronic payment 
systems.
    If this relief were sought in litigation, rather than obtained 
through a consent agreement, it would not withstand scrutiny under the 
First Amendment. The information that the order specifically requires 
AOL to disseminate is far more extensive than necessary to prevent 
future violations by AOL, and the boundaries of the ``not limited to'' 
language are unclear. 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.

[FR Doc. 97-12581 Filed 5-13-97; 8:45 am]
BILLING CODE 6750-01-M