Getting to no - making sure your negative option billing program is lawful

By Scott Crabb, Laura Clarke

13 Apr 2017

Disclosure, meaningful trial periods, and a clear way to opt out are all key to ensuring your negative option billing program stays on the right side of the law.

Negative option billing programs have the potential to be a profitable strategy for businesses and have become increasingly popular.

These programs are a legitimate marketing strategy. However, care needs to be taken if businesses are to avoid falling foul of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth)).

What is a negative option billing program?

A negative option or opt-out billing program is one in which customers are required to opt out of a program within a prescribed time period to avoid incurring additional charges.

Typically, a customer signs up to a program to take advantage of a 'free' sample for a trial period and then continues to receive products or services on a periodic basis until the customer takes positive steps to withdraw from the program. In the meantime, the customer's credit card is charged a specified sum or a periodic direct debit is made to the customer's bank account.

The Australian regulatory regime

Unlike some countries, Australia does not have a specific regime that regulates negative option billing programs. The legality of these programs is largely to be assessed against the provisions of the Australian Consumer Law relating to unsolicited goods and services, misleading or deceptive conduct and unfair contract terms.

An example of what can go wrong is the decision in Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204. In that case, the Federal Court held that a negative option billing program which enabled a supplier to continue debiting a customer's bank account after an initial order had been paid for in full was void as an unfair contract term. The amounts debited were intended to be held as a fund to be applied to any future order that the customer may wish to make. The amounts were refundable if the customer decided to opt-out of the program but without the payment of any interest.

The chief criticism of the program in the Chrisco case was its lack of transparency. The supplier did not disclose the amounts to be debited to the customer's account and how those amounts were to be determined. It was not clear whether customers would be provided with an additional opportunity to authorise the direct debits, nor the means by which the customer could cancel the negative option billing program and obtain a refund. The order form contained a check-box by which a customer could opt-out of the program but this was not prominent enough.

An additional problem was that the description of the customer's agreement to continue to receive goods - and the supplier's entitlement to continue to debit the customer's account - appeared on the order form in a standard font size and colour, in stark contrast to other items on the form that were specifically drawn to the attention of the customer with different font sizes and colours. Finally, the order confirmation sent by the supplier to each customer failed to remind the customer clearly that payments could be cancelled or refunded by opting-out of the program.

So how can you use negative option billing in your business?

Before embarking on a negative option billing program, there are a number of steps you should take to avoid any unnecessary legal risks.

First, marketing materials should disclose details of the program, the products which will be supplied on a recurring basis, the charges which will be levied, the proposed use of credit card or bank account details provided by a customer, the frequency of the proposed charges and the deadline by which the customer must opt out to prevent or stop recurring charges. These details should be prominently displayed in a font size and colour that ensures that customers can understand what the program involves.

Secondly, we recommend that you provide customers with a meaningful opportunity to trial the goods or services before they are required to make a decision as to whether they will continue with the program. 

Thirdly, you should provide an easy, efficient and accessible method by which a customer can opt out of the program. If customers cannot exercise their right to opt out of the program free of charge (which is the safest course) then the cost of doing so will need to be fully and clearly disclosed in all marketing materials, order forms and invoices.

Fourthly, you should adequately disclose the method by which the customer can opt out of the program and the date by which that step must be taken if customers are to avoid additional or ongoing charges. Again, these details should be prominently displayed in marketing materials, order forms and invoices in a font size and colour that ensures that customers can understand what they need to do and by when.

Finally, send reminders to ensure that customers are aware of the time left to opt out of the program to avoid additional or ongoing charges and to remind customers of the method by which the customer can opt-out of the program. Given the criticism levied at the supplier in the Chrisco case, we suggest that the safest course is to send a reminder (such as an email message) shortly after the original order is made and then another email shortly before expiry of the trial period.  

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.