[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
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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.