Service Contract Industry Council Comments on Rule Concerning Use of Prenotification Negative Option Plans

WASHINGTON, Dec. 7 -- Stephen K. McDaniel, assistant general counsel to the Service Contract Industry Council, Tallahassee, Florida, has issued a public comment on the Federal Trade Commission's proposed rule entitled "Rule Concerning the Use of Prenotification Negative Option Plans". The comment was written and posted on Dec. 2, 2019:

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The Service Contract Industry Council ("SCIC") appreciates the opportunity to provide comment to the Federal Trade Commission ("FTC" or "Commission") in response to its request for public comments on the Rule Concerning the Use of Prenotification Negative Option Plans (the "Rule").

By way of background, the SCIC is a national trade association whose member companies include manufacturers, service contract providers, administrators, insurers, and retailers offering service contracts covering motor vehicles, homes, and consumer goods throughout the country.

We estimate that our member companies, which include Ford Motor Company, Ally Financial, American Home Shield, General Motors, Phoenix American, Assurant, Asurion, Best Buy, CNA National Warranty Co., Automobile Protection Corporation, and Toyota Motor Insurance Services, Inc., among others, offer over 90% of service contracts available in the marketplace today.

In the context of the SCIC, the term "service contract" has a specific meaning, as it is not just referring to a traditional contract for services. The term service contract in the context of the SCIC means a contract or agreement for a separately stated consideration for a specific duration to perform the repair, replacement or maintenance of property or indemnification for repair, replacement or maintenance, for the operational or structural failure of any motor vehicle, residential or other property due to a defect in materials, workmanship, accidental damage from handling, or normal wear and tear, with or without additional provisions for incidental payment of indemnity under limited circumstances, including, but not limited to, towing, rental and emergency road service and road hazard protection.

Established in 1991, the SCIC has played a significant role in the development of uniform regulatory standards appropriate for the industry and consumers, and actively pursues model legislation, lobbies for those standards, and provides industry advice for legislative and regulatory issues both at the state and Federal level. In addition, the SCIC has worked with the National Association of Insurance Commissioners (NAIC) in the development of fair and comprehensive regulations that protect consumers and ensure the long-term viability of the service contract industry.

Initially, it should be noted that service contracts, while briefly mentioned in the Magnuson-Moss Warranty Act, are typically regulated at the state level by state departments of insurance. Depending on the type of service contract (home, consumer goods, or motor vehicle) some 40 states currently have a substantial statutory framework in place governing the offering of these products. Some of the provisions contained within this framework address many of the concerns noted by the Commission and provide significant consumer protection in relation to automatic renewals and continuous service programs that are sometimes utilized by service contract companies. For example, the following concepts are included within the SCIC Service Contract Model Act and are also included within the substantial majority of state service contract laws:

* Registration with the state Commissioner of insurance required of service contract companies;

* Service contract companies are required to demonstrate financial responsibility prior to offering a service contract;

* Service contract companies are required to make available to a consumer a complete sample copy of the service contract terms and conditions prior to the time of sale;

* Service contracts must be cancellable by the consumer and fully refundable within 20 days of the date of mailing if the service contract is not delivered at the point of sale, or within 10 days if the service contract is delivered at the point of sale ("Full Refund Period");

* Service contract companies must pay any refund owed for cancellations during the Full Refund Period within 45 days of cancellation by the consumer or pay to the consumer a 10% penalty per month during which the refund is not paid;

* Subsequent to the Full Refund Period a service contract must be cancellable by the consumer with a refund paid to the consumer of any unearned amounts paid for the service contract and less any claims paid and a cancellation fee which may not exceed 10% of the service contract purchase price; and

* Other disclosure requirements aimed at ensuring consumers are aware of exactly what it is they are purchasing and cancelling if the consumer so desires.

A copy of the SCIC Model Act is attached as Exhibit A for your reference. As mentioned, the SCIC Model Act serves as the basis for legislation at the state level regulating the service contract industry so the substantial majority of state laws include the important consumer protections noted above.

In addition to the SCIC Model Act, there are many states that have elected to adopt laws specifically governing automatic renewals and/or continuous service offers. To date, at least 17 states have a law in place governing these provisions. While some states, acknowledging the statutory framework governing service contracts referenced above, have elected to exempt service contract companies licensed in the state, other states have not done so. Rather, the majority of states have chosen to carve out from their automatic renewal/continuous service laws those contracts that renew for a period of a month or less; recognizing that the appropriate focus of the laws is to address longer term renewing contracts. Additionally, many states have elected to exempt contracts that are cancellable by the consumer at any time with a pro rata refund required to be provided to the consumer upon cancellation.

Based on the foregoing, the SCIC would initially note that it believes that the FTC's current guidance and enforcement ability are adequate to protect consumers who use advance consent programs, and that no Rule expansion or change is necessary to further regulate advance consent programs. However, if the FTC determines that it is necessary to amend or expand the scope of the Rule, the SCIC requests that any amendments to or expansion of the Rule be drafted narrowly to ensure that service contract companies that are currently doing business under the state statutory and regulatory frameworks noted above are not subjected to duplicative and potentially conflicting regulations. The SCIC's belief is that the state Legislatures, Attorneys General, and Insurance Commissioners are appropriately and effectively regulating the service contract industry in connection with these types of programs. As such, the SCIC would request that service contracts that are subject to regulation by the states or which have the types of provisions noted above--not renewing for a period of more than one month, cancellable with a pro rata refund provided--not be subject to any expanded scope of the Rule.

More specific to the FTC's request for information, the SCIC would note the following with respect to the Rule and the published Notice:

Advance Consent Programs Are Beneficial for Consumers and Businesses

Certain marketing and sales arrangements allow consumers to provide consent in advance to receive and pay for goods or services in the future on a continuing or periodic basis. Such subscription programs are convenient and beneficial to both consumers and marketers.

In today's overly complicated world, consumers embrace the simplicity of automatic renewal subscriptions. These products include subscriptions for electrical, natural gas, water and sewer utility services; wireless services, cable, streaming and internet services; newspaper and magazine subscriptions; portable electronics insurance, home repair, motor vehicle home and consumer goods service contracts to name a few. Imagine every year having to remember when each of these contracts has expired and when the enrollment period began. Advance consent is a simple solution, where the seller agrees to provide continuous service or coverage and the customer agrees to pay for that service/coverage on a regular basis. As long as the consumer is protected through the ability to cancel the arrangement at any time these programs provide a valuable tool for both consumers and business.

Advance consent programs also greatly benefit consumers by the convenience they provide. Those who have busy workdays and hectic family schedules, appreciate the ease that a simple renewal process provides for services they request from companies they trust. Having the process automatically completed each period greatly reduces the disruption to a consumer's daily life. Over-regulating the subscriptions process will likely have the contrary effect. In short, these programs provide continuous service for as long as the consumer wants the service and simplifies the renewal process so consumers can maintain coverage without going through the enrollment process month after month, or year after year. It takes time and effort for customers to receive, check and pay a manually issued invoice. If life gets in the way and the consumer forgets to do so, significant protections afforded by a service contract that provides automatic renewal or continuous service can vanish without the consumer even knowing. This could result in a consumer having a significant and unexpected repair cost which could be devastating. As noted by the Federal Reserve's 2018 Survey of Housel Economics and Decision Making, some 40% of Americans would struggle to come up with even $400 to pay for an unexpected bill. Service contracts allow consumers to plan and budget for such unexpected expenses by offering a consumer with the peace of mind of knowing their important purchases are protected in the event of a failure.

On the business side, advance consent marketing provides businesses with the opportunity to market and operate at a reduced cost and keep the service affordable. Manually sending and processing invoices and payment checks is a substantial cost. Further, if coverage or service is interrupted due to the consumer forgetting to pay, business resources are used to re-solicit and gain re-enrollment in the plan or service. If a consumer forgets to pay, their protection may lapse, and the customer will not have the coverage the consumer thought they did when something breaks.

Current Applicable Laws and Rules Are Sufficient and Expansion of the Rule Is Not Necessary

The Rule covers pre-notification programs, where the consumer gives advance consent to receive periodic notices of upcoming deliveries of goods or services. The seller periodically sends out a notice of a product to be shipped and charges for the product if the consumer doesn't actively decline the offer. The Rule does not cover the common subscription service we know today. Despite the Rule's narrow application, in addition to the state laws noted above, there are also a comprehensive set of federal laws and regulations which are in effect for which marketers of automatic renewal plans must comply:

* The Telemarketing Sales Rule ("TSR") imposes script disclosures of the material terms of the negative option program for telephone sales of automatic renewal offers to ensure informed consent;

* The Restore Online Shoppers' Confidence Act ("ROSCA") requires clear and conspicuous disclosures before obtaining payment information and consent in an online sale;

* The Electronic Fund Transfer Act ("EFTA") requires the consumer's written authorization for reoccurring charges on a debit card;

* Sec.5 of the FTC Act (15 U.S.C. Sec.45(a)) prohibits deceptive acts and practices, which include negative option programs. Failure to clearly and conspicuously disclose the material terms and conditions of an advance consent feature in any media platform would violate Sec.5.

Moreover, the new MasterCard "regulations" and forthcoming Visa rules impose additional, new compliance requirements on auto renewal programs. Failure to comply with those rules runs the risk of losing merchant processing relationships.

Thus, regardless of medium, the current regulations require marketers to:

* Clearly and conspicuously disclose the material terms of the automatic renewal offer;

* Obtain explicit, informed consent to the automatic renewal offer; and

* Provide a simple and easy method to cancel the automatic renewal.

As long as the current federal and state laws are followed, consumers will clearly understand the nature of their consent and their right to easily cancel. Accordingly, sufficient consumer protections are already in place. The FTC already has the enforcement tools necessary to address false and deceptive automatic renewal programs. Those who are failing to comply with the current laws and rules would likely not seek to comply with revisions to or an expansion of the Rule. Companies that are already compliant would be unnecessarily hindered by any changes at significant additional administrative costs with no material benefit to consumers.

Marketers need flexibility to determine how best to comply with the requirements already in place based on their media platform and the terms of their offer. Advance consent programs are offered in many different ways through many different media formats with varying formatting and space constraints, with new media formats and new methods of communications always on the horizon. The FTC should not impose specific rules on how to create a marketing offer in a world of constantly changing marketing channels and media platforms.

Such over-regulation will create unnecessary limitations on business without any consumer gain. As the FTC staff stated at its Workshop on Advance Consent Marketing in 2009, ensuring that the terms of an offer are "clear and conspicuous" can be done in so many different ways. Imposing too many specific requirements can sometimes trigger unintended consequences. Leslie Fair, attorney with the Division of Consumer and Business Education, said:

It is not a one size fits all standard simply because we realize that the experts in clear and conspicuous aren't attorneys at the Federal Trade Commission. The experts in how to make information clear and conspicuous to consumers are marketers, advertisers and the attorneys who represent them. We appreciate you know how to make information clear, clean, understandable and accessible to consumers, which is why you're not going to find an FTC ruling on a preferred font face or a minimum type size. Generally speaking, all we want is that it's clear and conspicuous and advertisers and marketers are free to use their many tools of creativity to figure out the best way to convey that information.

Regardless of the extent of regulation, there will be unscrupulous sellers of advance consent marketing plans who engage in deceptive business practices. Expanding existing regulations will not prevent their dishonest practices. The FTC should increase its enforcement actions against deception in the marketplace, rather than over-legislate specific details which is better left to the creative teams. New regulations would create duplicative regulation, increase costs for businesses, and, ultimately, increase cost to consumers.

Service contract companies that utilize automatic renewing or advance consent offers currently have a solid state and federal regulatory framework to ensure that their offers and consent disclosures are transparent and that consumers are fully apprised of their right to cancel. As the states and the FTC have in place the tools to protect consumers from deceptive auto renewal programs, amendments to or expansion of the Rule are unnecessary.

We are happy to answer any further questions you have with respect to the proposal and the Industry appreciates the opportunity to be involved in the rule development process.

Sincerely,

Stephen K. McDaniel

Assistant General Counsel to the SCIC

(850) 425-4000

[email protected].

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The proposed rule can be viewed at: https://www.regulations.gov/document?D=FTC-2019-0082-0001

TARGETED NEWS SERVICE, Harwood Place, Springfield, Virginia, USA: Myron Struck, editor; 703/304-1897; [email protected]; https://targetednews.com