United States: FTC Proposes Massive Expansion Of Negative Option Rule; Would Provide Redress And Civil Penalty Authority For Deceptive Practices Unrelated To The Negative Option Transaction

If you're offering any products or services involving a negative option or automatic renewal plan, pay close attention to the FTC's announcement today of a proposed rule that would drastically alter requirements for negative option disclosures while simultaneously granting the agency authority to seek redress and civil penalties for misrepresentations unrelated to the negative option transaction itself, such as claims related to underlying products, features, and services. Among other things, the rule as proposed would require that cancellation be "at least as easy to use as the method the consumer used to initiate the Negative Option Feature," and that companies obtain consent before trying to "save" a cancellation attempt and provide annual reminders for services that do not involve the physical delivery of goods.

In her dissent, Commissioner Wilson characterized the proposed rule as an "end-run around the Supreme Court's decision in AMG" and detailed a host of substantive and procedural issues with the proposed rule.

Further analysis and our take below.

Current Negative Option Rule & Other Regulatory Requirements Related to Negative Option Marketing

The existing Negative Option Rule covers a narrow category of negative option marketing known as prenotification negative option plans. Under such plans, which have traditionally involved book-of-the-month clubs and the like, sellers send periodic notices offering goods to consumers and then send - and charge for - those goods only if the consumer takes no action to decline the offer. The current Rule enumerates seven material terms sellers must disclose and requires them to follow certain procedures. In 2019, the FTC published an Advanced Notice of Proposed Rulemaking (ANPR), seeking comment on the need to amend and expand the Rule to cover more prevalent practices involving negative option marketing.

In addition to the Negative Option Rule, several other federal statutes and regulations could address negative option practices, depending on the context:

• Section 5 of the FTC Act, which prohibits unfair or deceptive practices, has traditionally been used to address unlawful negative option practices. In 2021, the FTC issued an Enforcement Policy Statement Regarding Negative Option Marketing to provide additional guidance regarding the agency's interpretation and enforcement related to negative option marketing.
• The Restore Online Shoppers' Confidence Act (ROSCA) was passed primarily to address offers made by third party sellers during or immediately following a transaction with an initial merchant. It also contains general provisions related to disclosures, consent, and cancellation but is limited to the material terms of a transaction for goods and services sold on the internet with a negative option feature.
• The Telemarketing Sales Rule (TSR) prohibits deceptive acts or practices and requires certain disclosures for negative option offers, but only applies to such offers made over the telephone through "telemarketing" as defined under the TSR.
• The Electronic Fund Transfer Act (EFTA) prohibits sellers from imposing recurring charges on a consumer's debit card or bank account without written authorization.
• The Postal Reorganization Act (i.e., Unordered Merchandise Statute) prohibits the mailing of or billing for unordered merchandise.

Companies also need to consider a patchwork of state laws addressing negative option and automatic renewal offers. These laws often require companies to disclose specific material terms, provide written acknowledgments after consumers sign up, send written reminders before a term renews, and establish easy cancellation mechanisms.

Proposed Changes to the Negative Option Rule

The proposed amendments would alter the current Rule in fundamental and far-reaching ways:

• Expanded Scope: The new Rule (retitled "Rule Concerning Recurring Subscriptions and Other Negative Option Plans") would cover all forms of negative option marketing, whether effectuated over the internet, phone, through print materials, and in-person transactions. Any persons "selling, offering, promoting, charging for, or otherwise marketing a negative option feature" would be subject to the new Rule.
• Expanded Authority to Seek Redress and Civil Penalties for Misrepresentations: Perhaps the most controversial feature of the new Rule, as discussed in Commissioner Wilson's dissent (summarized more fully below), is the application of the Rule to any misrepresentations regarding the underlying product or service, even if it is wholly unrelated to the negative option feature. Specifically, the proposed Rule prohibits 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).
• Expanded Disclosure Requirements: The new Rule requires sellers to disclose "any material terms related to the underlying good or service that is necessary to prevent deception" regardless of whether it relates to the negative option feature, including (1) that consumers' payment will be recurring, (2) the deadline by which consumers must act to stop charges, (3) the amount or range of costs they may incur, (4) the date the charge will be submitted for payment, and (5) information about cancellation mechanisms. The Rule imposes requirements related to where, when, and how to make these required disclosures.
• Expanded Consent Requirements: The new Rule would require sellers to obtain separate consent for the negative option feature, refrain from including any other information that would interfere with or detract from consumers' ability to provide consent, obtain consent for the entire transaction, and maintain verification of consent for three years. The Rule also imposes requirements on how such consent can be obtained.
• Expanded Cancellation Requirements ("Click to Cancel"): The new Rule would require cancellation to be "at least as easy to use as the method the consumer used to initiate the Negative Option Feature." While the Rule does not generally define what it means to be "at least as easy to use," at minimum, such cancellation must be effectuated through the same medium (such as Internet, telephone, mail, or in-person) that the person used to sign up for the negative option.
• Obtaining Consent Before Trying to "Save" an Account: Sellers must obtain the consumer's "unambiguously affirmative consent" before presenting any additional offers, modifications to the existing agreement, or other similar information to try to persuade a consumer not to cancel a negative option feature.
• Expanded Notification Requirements: Sellers that do not provide automatic delivery of physical goods must provide consumers with reminders, at least annually, identifying the product or service, the frequency and amount of charges, and the means to cancel.

Potential Issues for Comment & Commissioner Wilson's Dissent

In what is likely one of her final opinions before she departs the Commission at the end of the month, Commissioner Wilson laid out a number of issues with the proposed rule in her dissent:

• Far-reaching nature - civil penalties for claims about underlying products and services. The Advance Notice of Proposed Rulemaking (ANPR) published in October 2019 sought comment on "ways to improve its existing regulations for negative option marketing, a common form of marketing where the absence of affirmative consumer action constitutes assent to be charged for goods or services." The ANPR, however, did not specifically seek comment on whether a proposed rule should address general misrepresentations about a product or service offered under a negative option plan. The proposed rule as written authorizes civil penalties and redress for a host of misrepresentations unrelated to the negative option feature itself, such as the efficacy of a dietary supplement sold through a subscription plan or the features associated with a video streaming or software service.
• Meeting standard for "prevalence" required for Magnuson-Moss Rulemaking. As we have discussed at length in other posts, the FTC must meet a number of procedural and substantive requirements before promulgating a rule under its Magnuson-Moss authority, as proposed here. Importantly, to justify a proposed rule, the FTC must find that "it has reason to believe that the unfair or deceptive acts or practices which are the subject of the proposed rulemaking are prevalent." While court decisions on the meaning of "prevalence" are limited, the FTC must show here that there are prevalent UDAP violations as to all conduct addressed (i.e., misrepresentations related to negative option plans and the underlying products and services offered under those plans).
• Congressional intent or a means to circumvent AMG? As noted above, the proposal attempts to consolidate existing FTC rules and guidance on automatic renewal and negative option plans into a single rule with one set of standards. Other grants of authority to obtain civil penalties and consumer redress related to such plans, however, have been narrower. For example, Congress passed ROSCA to address a specific type of deception that was common at the time where consumers were unknowingly passed off to third-parties after a valid transaction and sold different goods and services. While ROSCA also includes general requirements for negative option features, it only requires disclosure of "material terms of the transaction," rather than the underlying goods and services. This was a central issue in the Commission's MoviePass settlement - as we discussed here - with then-Commissioner Phillips dissenting on the grounds that the new interpretation would result in "sweeping liability" for claims that were not part of the "material terms of the transaction." The FTC makes very clear here that the new rule would reach much farther.

If finalized, the revised and expanded Negative Option Rule would go a long ways to countering the effects of the AMG Capital decision holding that the FTC lacks authority to obtain consumer redress under Section 13(b) - and then some, by also opening up civil penalties for covered practices. Comments are due on the proposed rule within 60 days of publication in the Federal Register, which we expect in the coming weeks.

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.