On March 23, 2023, the Federal Trade Commission (FTC or the Commission) issued an 83-page Notice of Proposed Rulemaking (Notice) proposing dramatic changes to current cancellation requirements for companies selling products or services under a "negative option feature," i.e., a subscription, membership, a free or partially free trial that converts to a paid subscription, or other recurring-payment program that indefinitely renews unless a consumer affirmatively cancels or returns the goods or services.1 Among other changes, the Commission's proposed Rule would: (i) expand the types of negative option transactions covered by the rule; (ii) increase the disclosure, consent, notification, and cancellation requirements for businesses; and (iii) expose sellers offering a negative option feature to potentially stiff financial penalties for alleged misrepresentations—even when those misrepresentations are unrelated to the negative option feature itself.
FTC's Enforcement Against Companies Using Negative Option Features
The FTC investigates and initiates enforcement actions against companies using negative option features, primarily using the authority granted to the FTC under the Restore Online Shoppers Confidence Act (ROSCA) and Section 5 of the FTC Act. ROSCA specifically applies to online sales, and requires online sellers using negative option features to clearly and conspicuously disclose all "material terms of the transaction," obtain consumers' express informed consent before charging them using online "negative option features," and provide "simple mechanisms" allowing consumers to cancel the recurring charges. Since ROSCA went into effect in 2010, the FTC has aggressively enforced the law, bringing over thirty enforcement actions over the past few years alone. In these cases, the FTC has sued not only the companies, but also the individual owners and officers of the companies. Under ROSCA, the FTC can pursue civil penalties up to $50,120 per violation. Settlements concerning subscription services and other negative option features have ranged between the single digit millions up to $100 million or more.
Proposed Changes to the Negative Option Rule
As the FTC acknowledges in the Notice, the current version of its Negative Option Rule only applies to prenotification negative option plans. Under these plans, sellers ship merchandise such as books automatically to their subscribers, and bill them for the merchandise, if they do not expressly reject the merchandise within a prescribed time. With its proposed new Rule, the FTC seeks to expand the Rule's coverage of "negative option features" to include other negative option plans and practices, such as continuity plans, automatic renewals, and free (or partially free) trials that convert to paid subscriptions. Indeed, the proposed Rule applies to "all forms of negative option marketing in all media," including telephone and Internet sales, traditional print media, and in-person transactions. In other words, any persons "selling, offering, promoting, charging for, or otherwise marketing a negative option feature" would be subject to the new Rule.
In addition to the expanded coverage of negative options features, the proposed new Rule would also set into action a number of significant changes if it were adopted as written:
- Expanded Disclosure Requirements: The proposed new Rule would require sellers to disclose "any material terms related to the underlying good or service that is necessary to prevent deception, regardless of whether the terms relate to the negative option feature." The proposed new Rule also imposes requirements related to where, when, and how to make these required disclosures.
- Expanded Authority to Seek Redress and Civil Penalties: The proposed new Rule would prohibit negative option sellers from "misrepresenting, expressly or by implication, any material fact related to the transaction, such as the Negative Option Feature, or any material fact related to the underlying good or service" (emphasis added). In other words, a company could comply, to the letter, with the negative option portions of the new Rule, but nonetheless violate the new Rule if, for example, the company mispresented the efficacy of the product being sold to the consumer through a negative option feature.
- Expanded Cancellation Requirements ("Click to Cancel"): The proposed new Rule would also require cancellation to be "at least as easy to use as the method the consumer used to initiate the Negative Option Feature." Such cancellation must be effectuated through the same medium (such as Internet, telephone, mail, or in-person (where "practical")) that the person used to sign up for the negative option.
- Obtaining Customer's Consent before Trying to "Save" the Customer's Business: After a consumer requests cancellation of an account that is billed using a negative option feature, sellers must obtain the consumer's "unambiguously affirmative consent" to receive additional offers, modifications to the existing agreement, or other similar information to try to persuade a consumer not to cancel a negative option feature prior to presenting those additional offers, modifications or similar information designed to save the customer's business. If that unambiguous affirmative consent is not provided by the consumer, the seller is required to immediately honor the consumer's cancellation request, and cancel the account.
Open Questions from the Proposed Changes
With its changes, the proposed new Rule presents a lot of uncertainty to businesses selling products or services using negative option features. As with California's Auto-Renewal Law, the FTC's proposed new Rule does not clarify the number of "save" attempts (i.e., new or modified offers to save the customer's business) a company can make; neither does it define "unambiguously affirmative consent" or offer guidance on what a company would need to demonstrate to show that it is engaging in a legitimate, legal "save" attempt. And, speaking of California's Auto-Renewal Law, the proposed new Rule would not preempt any state laws that provide greater protections to consumers than would the new federal Rule—thus, businesses who sell products or services with negative option features nationwide may still be subject to inconsistent enforcement regimes.
Other important terms are likewise unclear: the "simple mechanism" required for cancellation is not defined. For companies who make in-person sales, the negative option seller is told to offer certain cancellation options "where practical"—but "practical" is left to interpretation, as are the "normal business hours" a company must maintain for telephone cancellation options. This ambiguity deprives businesses of clarity about how to avoid deceptive negative option practices. Along the same vein, there is a high likelihood that this proposed new Rule, or some version of it, once enacted, could be challenged on constitutional bases for its vagueness. In all events, the new proposed Rule would present a significant amount of additional compliance issues and requirements for any business selling on a subscription, continuity, free (or partially free) trial that converts to a paid subscription, or other recurring payment plans.
Current Request for Comments Provide an Opportunity to Shape Future Rulemaking
The public comment period is open for sixty days after the Notice is published in the Federal Register, which we expect to happen in the coming days. The comment period is an important opportunity for businesses to express their views on the proposed new Rule and the issues and complications with it, as well as to present information and data that could help shape the Rule. The Steptoe team can assist with participation in this public comment period and the anticipated rulemaking process. Please do not hesitate to contact the authors of this alert for help with any issues concerning negative option rules or advertising counseling and compliance more generally.
Footnote
1. The Commission's Telemarking Sales Rule defines a negative option feature as a provision in an offer or agreement to sell or provide any goods or services "under which the customer's silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer." 16 CFR § 310.2(w).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
