LEGAL
Online retailers should review their use of negative option transactions and ensure compliance with the Restore Online Shoppers' Confidence Act (ROSCA) following recent enforcement actions brought by the FTC and Washington State Attorney General (AG).
FTC v. Health Formulas, FTC v. JDI Dating and Washington v. Internet Order LLC, all brought in 2014, were the first ROSCA enforcement actions filed against online retailers since it was signed into law in 2010. The ROSCA actions alleged improper use of negative options. Negative options refer to transactions where a consumer is automatically charged on a recurring basis until the consumer takes affirmative action to stop the charges.
Under ROSCA, a negative option is improper unless the retailer:
A proper negative option depends on the disclosure's clarity, as determined by the context of the advertisement.
These cases demonstrate how these types of enforcement actions now proceed under a statute, as opposed to an FTC rule or statutory interpretation. Previously, the FTC and state AGs typically brought enforcement actions as a generally deceptive practice under Section 5(a) of the FTC Act, which would likely consider the particular negative options at issue improper.
ROSCA also regulates post-transaction marketing, or upselling. Specifically, ROSCA prohibits online retailers from engaging in "data pass" transactions, where a retailer, from which a consumer has made an initial purchase, transfers the consumer's financial information to a third-party retailer who attempts to upsell the consumer after the initial transaction. To date, no upselling enforcement actions have been brought. However, recent regulatory interest in ROSCA's negative option provisions may signal general interest in enforcing the statute.
For more on consumer protection statutes and regulations and a brief discussion of product liability remedies, see Practice Note, Consumer Protection: Overview.
Employers should review their arbitration programs carefully following the Fifth Circuit's decision in Sharpe v. AmeriPlan Corp., which held that a court may enforce a mandatory arbitration provision only if it is compatible with the dispute resolution clauses in prior agreements.
In this case, the court evaluated whether it could compel arbitration under an arbitration provision the company added to its Policies and Procedures Manual. The company had earlier entered into separate agreements with different dispute resolution procedures with four plaintiff employees. The court found the specific language in three of the plaintiffs' agreements was inconsistent with the Manual's language and refused to compel arbitration. However, the court compelled arbitration of the fourth plaintiff's claims because the more general language in that plaintiff's agreement comported with the Manual's language.
In light of Sharpe, employers either considering a new arbitration program or reviewing existing arbitration agreements should:
For resources to assist with drafting alternative dispute resolution clauses and agreements, see US Arbitration Toolkit.
In a bench ruling that could potentially chill the use of "proxy put" provisions in loan agreements, the Delaware Court of Chancery highlighted the fiduciary conflict raised by proxy puts, which tend to deter stockholders from nominating their own directors for fear of triggering the put.
In Pontiac General Employees Retirement System v. Ballantine, the court declined to dismiss a claim of breach of fiduciary duty brought against the individual directors of the borrower for agreeing to a proxy put, as well as a claim of aiding and abetting that breach brought against the company's lender administrative agent.
The court rejected the directors' motion to dismiss, finding the claim to be ripe. The court explained that the deterrent effect of proxy puts is not contingent on a proxy contest actually being threatened. However, the court emphasized that its finding of ripeness did not assume that the act of agreeing to a proxy put is a per se breach of fiduciary duties. The court considered the claim ripe because of the "factually specific manner" in which it was alleged that the board breached its fiduciary duties, such as by agreeing to the put soon after declassifying the staggered board in response to stockholder pressure.
The court also rejected the lender's motion to dismiss. The court acknowledged that negotiating at arm's length usually does negate a claim of aiding and abetting. However, the court differentiated between negotiating for the best possible economic terms, which is entirely permissible, and negotiating for a provision that takes advantage of the counterparty's fiduciary conflict of interest, which is not.
For more on this case, see Legal update, Pontiac GERS v. Ballantine: Chancery Court Declines to Dismiss Claims Against Board and Lenders Based on Loan Agreement Proxy Put.
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