Report text available as:

  • TXT
  • PDF   (PDF provides a complete and accurate display of this text.) Tip ?

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.