On March 23, 2023, the Federal Trade Commission (“FTC” or “Commission”) issued a Notice of Proposed Rule Making (“NPRM”) seeking comment on proposed amendments to the Commission’s Negative Option Rule. The proposed amendments, which would expand the scope of the rule’s coverage to all forms of negative option marketing and consolidate various requirements dispersed across various statutes and regulations, include a “click to cancel” provision which would require a simple cancellation mechanism for consumers to easily cancel subscriptions by using the same method they used to initially enroll.
The FTC uses the phrase “negative option marketing” to broadly refer to a category of commercial transactions in which an underlying condition or term will continue unless the consumer takes an affirmative action to either cancel the agreement or reject the good or service. Negative option plans can take the form of agreements or subscriptions that automatically renew, continuity plans (where a consumer agrees in advance to receive goods or services periodically), or free trial marketing (where a consumer receives goods or services for free or for a nominal price for a limited time period).
The FTC’s Negative Option Rule (16 C.F.R. Part 425), which was first promulgated by the FTC in 1973 pursuant to the FTC Act as a rule to address an unfair or deceptive act or practice under Section 5, applies to prenotification plans for the sale of goods. Under a prenotification plan, sellers generally send periodic notices offering goods to participating consumers (subscribers) and then send (and charge for) those goods if the subscriber fails to affirmatively decline the offer. Under the current rule, prenotification plan sellers must disclose the material terms of their plan – including how to cancel – clearly and conspicuously before subscribers sign up. The proposed amendments would expand the coverage of the rule beyond prenotification plans to all other forms of negative option marketing.
Notwithstanding the limited scope of the current rule, and as we noted when the FTC issued guidance on negative option programs in October 2021, several other statutes and regulations also address contracts that automatically renew in addition to the Negative Option Rule. These include Section 5 of the FTC Act, 15 U.S.C. § 45(a) (which prohibits unfair or deceptive acts and practices), the Restore Online Shoppers’ Confidence Act (“ROSCA”), 15 U.S.C. §§ 8401-8405, the Telemarketing Sales Rule (“TSR”), 16 C.F.R. Part 310 (which applies to negative options offers made over the telephone and requires disclosure that charges will be made to a consumer’s account unless they take specific steps to avoid them), the Postal Reorganization Act (also known as the “Unordered Merchandise Statute”), 39 U.S.C. § 3009 (which designates mailing or billing for unordered merchandise as an unfair practice), and the Electronic Fund Transfer Act (“EFTA”), 15 U.S.C. §§ 1693-1693r (which prohibits sellers from imposing recurring charges on a consumer’s debit cards or bank accounts without written authorization). ROSCA, which was enacted in 2010 and is primarily aimed at negative options, including from third-party sellers during or immediately following a transaction, prohibits the use of negative options in internet sales unless there is clear and conspicuous disclosure, express informed consent, and a simple mechanism to stop recurring charges and opt-out.
The FTC’s rationale in amending the Negative Option Rule is that “[t]he existing patchwork of laws and regulations does not provide industry and consumers with a consistent legal framework across media and offers.” Examples of this lack of consistency, according to the FTC, include that the current Negative Option Rule does not cover common practices such as continuity plans, automatic renewals, and trial conversions, and that ROSCA and the TSR do not address negative option plans in all media, just (respectively) online and telephonic. The FTC also believes the current framework lacks clear guidance and specificity in its disclosure requirements, citing as an example ROSCA’s requirement of “simple mechanisms” for cancellation, without more guidance as to what that may be. The “click to cancel” provision clarifies that a simple mechanism is the same method used to sign-up (e.g. through a website, app, or telephone call).
The proposed amendments make several specific changes:
- Simple Cancellation Mechanism: The proposed rule would require businesses to make it at least as easy to cancel a subscription as it was to start it. For example, if a consumer can sign up online, they must be able to cancel on the same website, in the same number of steps.
- Consent to Hear Additional Offers: The proposed rule would allow sellers to pitch additional offers or modifications when a subscriber tries to cancel their enrollment, but would first require sellers to ask whether they want to hear them. Sellers would be required to immediately implement the enrollment cancellation if a subscriber declined to hear additional offers.
- Reminders and Confirmations: The proposed rule would require sellers to provide an annual reminder to subscribers enrolled in negative option programs involving anything other than physical goods, before they are automatically renewed.
The FTC approved the NPRM by a 3-1 vote, with Commissioner Christine Wilson voting no. In a statement issued by FTC Chair Lina Khan, joined by Commissioners Rebecca Kelly Slaughter and Alvaro Bodoya, the majority approving the NPRM stated “[t]he proposed rule would … provide clarity across industries about sellers’ obligations when engaging in negative option marketing. The click-to-cancel section of the proposed rule would give companies clear and specific instructions around making it at least as easy to cancel their products and services as it is to register for them.” In her dissenting statement, Commissioner Wilson stated that while the amendments may achieve the goal of synthesizing the various negative option requirements into one rule, the NPRM goes far beyond the unfair and deceptive practices that it was meant to address and would capture misrepresentations regarding the underlying product or service wholly unrelated to the negative option feature. According to Commissioner Wilson, “the [NPRM] explains that ‘the proposed Rule prohibits any person from misrepresenting, expressly or by implication, any material fact regarding the entire agreement – not just facts related to a negative option feature.’ It further explains that ‘[s]uch deceptive practices may involve misrepresentations related to costs, product efficacy, free trial claims, processing or shipping fees, billing information use, deadlines, consumer authorization, refunds, cancellation, or any other material representation.’”
The proposed rule is the latest action demonstrating regulatory scrutiny of negative options. In addition to the October 2021 guidance mentioned above, the FTC in 2022 announced consent orders with a phone service provider (Vonage) and payment processor providing services to small businesses (American Payment Systems LP) where the Commission alleged that difficulties encountered by subscribers in the service cancellation process violated Section 5 of the FTC Act and ROSCA. More recently, the Consumer Financial Protection Bureau issued a circular in January 2023 addressing circumstances in which negative option marketing can be unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act. In addition to federal regulatory requirements, several states have enacted requirements for negative option marketing, including, without limitation, new auto-renewal laws in California, Colorado, Delaware, and Illinois.
Public comments to the NPRM may be submitted electronically at www.regulations.gov once the notice has been published in the Federal Register, and must be submitted within 60 days after publication.