The CFPB has issued a new circular (2023-01) that addresses the circumstances under which “negative option marketing practices” can violate the CFPA prohibition of unfair, deceptive, or abusive acts or practices.
The circular uses the term “negative option” to refer to “a term or condition under which a seller may interpret a consumer’s silence, failure to take an affirmative action to reject a product or service, or failure to cancel an agreement as acceptance or continued acceptance of the offer.” The CFPB provides the following examples of negative option programs:
- Automatic renewal plans in which consumers’ subscriptions are automatically renewed when they expire unless consumers affirmatively cancel their subscriptions by a certain date.
- Continuity plans in which consumers agree in advance to receive a product or service, which they continue to receive until they cancel the agreements.
- Trial marketing plans in which consumers receive products or services for free (or for a reduced fee) for a trial period. After the trial period, consumers are automatically charged a fee (or a higher fee) on a recurring basis unless they affirmatively cancel.
The circular warns sellers offering negative option programs that they risk engaging in a UDAAP violation if a seller (1) does not clearly and conspicuously disclose the material terms of the negative option offer to the consumer, (2) does not obtain the consumer’s informed consent, or (3) misleads consumers who wish to cancel, erects unreasonable barriers to cancellation, or impedes the effective operation of promised cancellation procedures. The circular describes the CFPB’s theory of UDAAP liability as follows:
- Disclosure-based UDAAP violations. A representation or omission is “deceptive” if it is likely to mislead a reasonable consumer and is material. The CFPB considers a representation or omission to be “material” if it “’involves information that is important to consumers and, hence likely to affect their choice of, or conduct regarding, a product.’” It may consider a seller’s partial disclosure about the nature of a product or service to be deceptive if the seller fails to disclose other material information. In assessing the meaning of a representation or omission, the CFPB will look at a communication’s overall, net impression (i.e. look at the context of the entire advertisement, transaction, or course of dealing rather than statements in isolation.) The CFPB lists the following terms of a negative option offer that it would typically consider to be material, to the extent applicable:
- That the consumer is enrolling in and will be charged for the product or service.
- The amount (or range of amounts) that the consumer will be charged.
- That charges will be on a recurring basis unless the consumer takes affirmative steps to cancel the product or service.
- That in a trial marketing plan, charges will begin (or increase) after the trial period unless the consumer takes affirmative action.
The CFPB states that it would likely find a UDAAP violation if a seller misrepresented or failed to adequately disclose any of these material terms, and provides examples of enforcement cases. As an example, the CFPB cites cases in which it found that it was deceptive for consumer reporting agencies to represent that credit-related products were “free” when consumers who signed up for a “free” trial were automatically enrolled in a subscription program with a recurring monthly fee unless they cancelled. While the consumer reporting agencies did disclose the negative option feature, the CFPB deemed the disclosures “neither clear nor conspicuous” because they “were often displayed in fine print, in low contrast, and were generally placed in a less prominent location, such as the bottom of a web page, grouped with other disclosures.”
- Consent-based UDAAP violations. The CFPB states that it would likely find a UDAAP violation if a seller failed to obtain the consumer’s informed consent before charging the consumer. The CFPB will generally consider consent not to be informed if, for example, a seller mischaracterized or concealed a negative option feature, provided contradictory or misleading information, or otherwise interfered with the consumer’s understanding of the agreement. As an example of a deception claim based on a seller’s failure to obtain consumers’ informed consent, the CFPB cites credit card add-on cases in which it found that card issuers engaged in a deceptive practice when they falsely represented to consumers that they were agreeing to receive information about an add-on product rather than purchasing the product. As an example of an unfairness claim based on a seller’s failure to obtain consumers’ informed consent, the CFPB cites its allegation that a debt relief company engaged in an unfair practice by charging consumers on an automatic, recurring basis where the recurring charges were not clearly explained or disclosed to consumers at the time of purchase.
- Cancellation-based UDAAP claims. The CFPB cites its finding that a credit card issuer engaged in a deceptive practice when it represented that consumers could cancel an add-on product “immediately” and with “no questions asked” but then directed sales representatives to repeatedly rebut requests to cancel, with the result that consumers were often unable to cancel unless they demanded cancellation multiple times in succession. According to the CFPB, in making this finding, it viewed the issuer’s representations about cancellation as representations about cost and thus material representations. The CFPB also cites its finding that sellers engaged in deceptive practices by making misrepresentations about the costs and benefits of their products and services in order to persuade consumers not to cancel. The CFPB notes its agreement with the FTC that sellers would likely violate the law if they create unreasonable barriers to cancellation or fail to honor cancellation requests made in accordance with their stated cancellation procedures. As examples of such conduct, the CFPB lists “[h]ang[ing] up on consumers who call to cancel; plac[ing] them on hold for an unreasonably long time; provid[ing] false information about how to cancel; or misrepresent[ing] the reasons for delays in processing consumers’ cancellation requests.” The CFPB raises the possibility that depending on the facts and circumstances, such conduct could be an unfair, deceptive, or abusive act or practice.
The FTC set forth its position on negative option marketing in an October 2021 policy statement. The policy statement was intended to “put companies on notice that they will face legal action if their sign-up process fails to provide clear, up-front information, obtain consumers’ informed consent, and make cancellation easy.” To bring enforcement actions against negative option marketing, the FTC relies predominantly on Section 5 of the FTC Act (15 U.S.C. § 45(a)), the Restore Online Shoppers’ Confidence Act (15 U.S.C. §§ 8401-8405), the Telemarketing Sales Rule (16 C.F.R. § 310), the Use of Prenotification of Negative Plans Rule (16 C.F.R. § 425), the Postal Reorganization Act (also known as the Unordered Merchandise Rule) (39 U.S.C. § 3009), and the Electronic Funds Transfer Act (15 U.S.C. §§ 1693-1693r).
In addition to federal law, there are a number of states that have additional requirements for negative option marketing, including new autorenewal laws in California, Colorado, Delaware, and Illinois. Given the focus at both the federal and state levels, companies should carefully set up any negative option marketing for subscription services and expect heightened scrutiny and potential enforcement for any compliance issues, especially as the CFPB and FTC implement their guidance and new state laws become effective.