Negative Option Plans

Chances are, you’ve been offered “10 CDs for a $1” or a free trial subscription to one of your favorite magazines.   However, by accepting such offers, you may be entering into a negative option plan. 

A “negative option” is an arrangement where goods or services are sent to you automatically unless you tell the seller that you do not want them.  Although negative options can be convenient if you want the goods that are being sent to you, they can also be a nuisance.  For example, if you forget to notify a seller that you do not want a particular good, you will either be forced to pay for the unwanted good or will have to return the good to the seller, which can be inconvenient.  Thus, it is important to understand what type of agreement you are getting involved in before making any commitments.

How Negative Options Work
Negative option plans usually take the form of a free trial offer or a special deal (e.g., “10 CDs for $1”).  Trial offers generally require you to cancel the offer before the trial period expires.  If you fail to do so, you will continue to receive the good or service, and you will be charged accordingly.  Examples of trial offers that often contain negative options include magazine subscriptions, internet services, and credit card protection services.

Special deals usually require you to join a club, such as a “Book of the Month” club, where you are required to purchase additional goods or services at their regular price.  The club will generally tell you which good they plan to send in advance, and will give you a chance to refuse the good.  If you do not respond to the notification, you will be charged for the item.  This type of negative option is commonly referred to as a “prenotification” negative option.

Automatic Renewals
While negative options are most commonly associated with free trial offers or special deals, they can also appear in other types of agreements.   For example, an “automatic renewal” provision may be included in your cell phone contract or equipment lease.  Automatic renewal provisions require you to tell a business that you do not want to renew your contract with them.  If you do not cancel the contract before the cancellation deadline, your contract will be renewed for another term, and you will be required to continue paying for the particular good or service. 

Since automatic renewals usually are not the focal point of contracts, it is important to determine whether a contract contains an automatic renewal provision before signing it.  To see how difficult it can be to spot an automatic renewal provision, read this portion of an actual equipment lease:

1. AGREEMENT:   You agree to rent from us the personal property described above and as modified by supplements to this Master Agreement from time to time signed by you and us (such property and any upgrades, replacements, repairs, and additions referred to as “Equipment”) for business purposes only.  You agree to all of the terms and conditions contained in this Agreement and any supplement, which together are a complete statement of our Agreement regarding the listed equipment (“Agreement”) and supersedes any purchase order or outstanding invoice.  This Agreement may be modified by written agreement and not by course of performance.  This Agreement becomes valid upon execution by us and will begin on the Rent Commencement Date which will be the date of delivery, installation and acceptance of Equipment by you and will continue for the number of consecutive months shown.  The term will be extended automatically for successive 12 month terms unless you send us written notice you do not want it renewed at least ninety (90) days before the end of any term.  If any provision of this Agreement is declared unenforceable in any jurisdiction, the other provisions herein shall remain in full force and effect in that jurisdiction and all others.

The automatic renewal provision within the actual lease was not in bold text.  As you can see, it can be difficult to locate automatic renewal provisions, so read all of your leases and contracts closely before signing them.  If any portion of the contract is unclear, ask the business to clarify its meaning.

It is also important to pay attention to an automatic renewal’s cancellation deadline.   For example, the lease above requires you to cancel the lease 90 days before the end of its term, or you will be locked into the lease for another year.  Since neglecting to cancel an automatic renewal can be a costly mistake, it is important to pay close attention to the cancellation requirements within all of your contracts.  If you are unsure whether you will remember to cancel the contract before the deadline, you may want to ask the business to send you a reminder when the cancellation deadline is approaching, or avoid such contracts altogether. 

What You Can Do
Be cautious of any special offers—there is usually a catch.  Before accepting an offer or signing a lease, be sure to read all of its terms and conditions.  If the offer is made over the phone, the Federal Trade Commission (FTC) suggests that you ask the salesperson the following questions:

  • Is there a minimum purchase requirement?
  • How and when can you cancel your membership?
  • How many notifications will you have to respond to each year, and how often will you receive them?
  • How do you reject merchandise?
  • How much time do you have to reject merchandise?
  • Is postage and handling included in the product prices?

The FTC’s Negative Option Rule requires sellers to disclose all of this information to consumers in a clear and conspicuous manner.  Thus, it is important to look for all of this information while reading an offer’s terms and conditions.  Last, before making any commitment, be sure to compare the offer’s prices to the good’s retail value.  Otherwise, you may get locked into a commitment to buy overpriced goods.

Know Your Rights
Businesses must obtain your consent before enrolling you in a negative option plan.  This is because, under traditional contract law, businesses cannot charge you for goods that you do not order.  In fact, you are legally entitled to keep any unordered merchandise that you receive.

While the Negative Option Rule only applies to prenotification negative option plans, the FTC will take action against non-prenotification plans that it considers to be unfair or deceptive.  If you were enrolled in a negative option plan without your knowledge, and the terms and conditions of the plan were not described in a clear and conspicuous manner, you may file a complaint with the Federal Trade Commission or Georgia Governor’s Office of Consumer Protection.