Free trials and deceptive trade practices

Earlier this week, I wrote about an interesting development in Quebec regarding the interpretation of section 230(c) of the Quebec Consumer Protection Act. A Quebec court concluded that this provision did not require a merchant to obtain the fresh agreement of a consumer at the end of a free trial or introductory rate period before rolling the consumer over into a regular rate plan if the consumer expressly agreed to the regular rate plan when signing-up for the free trial or introductory rate period. You can read my blog post here.

As mentioned in that post, the court’s interpretation of section 230(c) remains open to debate given that the plaintiff filed an appeal. Although the court’s judgment appears to be consistent with explanatory material from the Quebec Office of Consumer Protection (at least at the time of writing), the Court of Appeal is not bound to give deference to that material. It is still possible that the Quebec Court of Appeal might conclude that the policy behind the law is simply to outlaw these types of inducements unless the merchant obtains the positive agreement of the consumer to continue the subscription during or after the free trial or introductory rate period.

So what are the policy considerations that might support a bright line approach prohibiting automatic rollover into full rate plans without the consumer’s fresh consent?

The most compelling reason for a bright line rule is the frequency with which free trial and introductory rate offers are used as deceptive marketing practices. A bright-line approach makes enforcement easier. The U.S. Federal Trade Commission enforcement shows a robust history of enforcement action against marketers using free trials as part of a deceptive marketing plan. A particularly egregious example is detailed in an FTC complaint against a teeth whitening product marketer. Consumers who enrolled in a supposed low introductory offer actually agreed to an on-going full rate monthly charge. The agreement was buried in the fine print. You can read the FTC complaint here. Arendt Fox has a quick summary that you can find here.

Another reason has to do with the psychology of the consumer. Free trials and introductory rate offers emphasize the “no risk” or “free” or “low price” aspect of the offer. Marketers do not give equal prominence to the true cost of the goods or services. The consumer is induced to enroll on the basis that they can change their mind. The consumer may be less apt to comparative shop or reflect on whether the value of the product or service is reflected in the true “after deal” price.

Finally, the effectiveness of free trial and introductory rate offers depends, in part, on consumer inaction. This is the heart of the “negative option billing” issue. While it may be paternalistic for governments to effectively “save” the consumer from doing something as theoretically simple as sending a cancellation notice, all consumer protection law is intended to relieve the consumer of what would otherwise be the outcome of freedom to contract.

Notwithstanding the arguments in favour of a bright-line approach, a prohibition against free trials and reduced rate offers that automatically roll over into full rate plans seems heavy-handed for online contracts.

While there are policy options to support this approach, governments have other policy options available to them. Most Canadian consumer protection laws require the merchant to deliver a copy of the consumer agreement formed online to the consumer in a form that can be retained and containing specific details. Theoretically, the government could simply require merchants to provide an easy and effective online method to opt-out that is promimently displayed at the beginning of that agreement, followed by a notice to the consumer prior to the full-rate plan kicking in. 


Free trials, introductory offers and negative option billing

An interesting decision of the Quebec Superior Court of Justice came out this year throwing cold water on a class action by consumers in Quebec against well-known telecommunication companies and online media service providers. The case is interesting because it clarifies that the use of free-trials as consumer incentives is not prohibited by the negative option billing prohibitions in section 230(c) of the Quebec Consumer Protection Act. The decision has been appealed though. So, it is possible it will be overturned.

What is negative option billing?

Negative option billing involves requiring a consumer to specifically reject goods and services or be forced to pay for them. The supplier of the goods or services relies on the fact that the consumer accepts receipt of the goods or services as forming an agreement by the consumer to pay for those goods or services.

Periodically, examples of negative option billing have made headlines and led to consumer backlash. For example, in 1995, there was a backlash against Rogers Cablesystems and other cable television providers when they altered their cable packages to add new specialty channels. Consumers received these channels for a short period of time for free. If they did not change their packages to remove these channels, Rogers and other telecommunications providers would begin charging extra for them. There was broad outrage, and Rogers and other industry players relented.

Negative option billing laws in Canada

There are many laws that prohibit negative option billing in Canada. I won’t address all of them here. A few examples will be enough. Section 13 of the Ontario Consumer Protection Act, 2002 and section 12 of the British Columbia Business Practices and Consumer Protection Act state that a consumer has no legal obligation with respect to unsolicited goods or services (with limited exceptions). Unsolicited goods or services includes goods and services provided to a consumer who did not request them. A change to a good or service may result in the goods being unsolicited if the change is material.

The Alberta Consumer Protection Act is stricter than Ontario and British Columbia’s laws. Section 20 of the Alberta Consumer Protection Act deems an unsolicited enhancement of a service to be a negative option if the consumer is required to send a notice that it does not wish to pay for the goods or services. Alberta expressly prohibits suppliers from supplying goods or services to a consumer using a negative option practice.

Federally, the government enacted the Negative Option Billing Regulations in 2012, which apply to federally regulated financial institutions.

How is Quebec different?

The negative option billing provisions in Section 230 of the Quebec Consumer Protection Act appear to cover a broader set of practices than those in other provinces. Section 230(a) contains the usual prohibition against unsolicited goods. Section 230(c) goes further and says that a merchant cannot provide free trials or discounted services to a consumer for a fixed period and then automatically roll the consumer over to the higher price if the consumer does not send a notice stating that the consumer does not want the service.

230. No merchant, manufacturer or advertiser may, by any means whatever,

(a)   charge any sum whatever for any goods or services that he has sent or rendered to a consumer without the consumer having ordered them;

(b)   give any reason as a pretext for soliciting the sale of goods or the provision of services;

(c)   require that a consumer to whom he has provided services or goods free of charge or at a reduced price for a fixed period send a notice at the end of that period indicating that the consumer does not wish to obtain the services or goods at the regular price.

In Benabu c. Vidéotron, the class action plaintiff sued several telecommunication companies and online media service providers for violations of section 230(c). The plaintiff’s theory was that section 230(c) prohibited all forms of free trials or introductory rate offers if the supplier was not required to obtain consent from the consumer at the end of the free trial or introductory rate period. The court disagreed.

The defendants offered a free trial or introductory rates for a limited period when a consumer signed up for month-to-month services for an indefinite term. The court said that the monthly rate was clearly set out in the contract. The court also said that the consumer clearly knew at the time of entering into the contract that this rate would be charged after the initial free trial or introductory rate period. The consumer could cancel the contract at anytime – either before or after the initial free trial or introductory rate period. In these circumstances, the court thought it was absurd that the consumer would have to reaffirm the contract at the end of the free trial or introductory rate period.

Is the Benabu decision sound?

The Benabu decision is under appeal. There are arguments that the decision might not survive the appeal.

Section 230(a) of the Quebec Consumer Protection Act is like provisions in the Ontario, British Columbia and Alberta legislation. If the consumer did not request the services, the consumer would not be required to pay. Like the provisions of other provinces, section 230(a) would not prohibit the use of free trials or introductory rates as an incentive when the consumer signed up. Arguably, section 230(a), like the provisions in other provinces, would apply to “add-ons” such as the specialty channel add-ons that caused problems for Rogers in 1995.

So, if section 230(c) doesn’t require a consumer to expressly agree – at the end of a free trial or introductory rate period – to the continuation of the contract, what is its purpose? The court took some guidance from the Quebec Office of Consumer Protection. In each case, the Office of Consumer Protection seemed to indicate that the consumer could agree in advance to the ongoing purchase of the product following the free trial.

The court noted that the text of section 230(c) uses the past tense “to whom he has provided services or goods free of charge or at a reduced price for a fixed period”. Although the court did not say so, this would support the idea that the provision is intended to prohibit a deceptive sales practice of having the consumer sign up for a free trial period without telling the consumer that he or she must provide a notice to cancel before the free trial period has ended or the consumer will be forced into an ongoing agreement.

Caution: The Benabu decision is one of the few cases dealing with section 230 of the Quebec Consumer Protection Act. Other judges or the Court of Appeal could disagree. The status of free trials in Quebec is far from completely settled.

Read Benabu c. Vidéotron here.