Many alerts and articles discussing the Federal Trade Commission's (FTC) updated Negative Option Rule and the Amendments to California's Automatic Renewal law have focused on the stricter consent and cancellation requirements. But very few have addressed the elephant in the room: the FTC's Rule and California law both provide new rights of action where companies could face multi-millions of dollars in liability for making allegedly false, unsubstantiated, or misleading claims about the underlying products or services.
In other words, the updated rule and law afford the FTC and private plaintiffs a new avenue for challenging any advertising claims, with potentially business-ending implications, for any company selling products on an autorenewal, continuous service, or negative option basis.
Specifically, the FTC Rule would prohibit companies selling on a negative option basis to misrepresent, expressly or by implication, any material fact of the transaction, including: the fact or any terms of the negative option feature, including consumer consent, any deadline to prevent or stop a charge, or the cancellation policy; cost; purpose or efficacy of the underlying good or service; health or safety; or any other material fact. It imposes a penalty of $51,744 per violation, and the FTC takes the position that multiple violations can occur in one transaction.
California's updated law will prohibit companies from misrepresenting "expressly or by implication, any material fact related to the transaction, including, but not limited to, the inclusion of an automatic renewal or continuous service, or any material fact related to the underlying good or service." California law provides a private right of action for violations, and regulators like the California Automatic Renewal Taskforce (CART) can seek $2,500 per violation. Goods or services sold in violation of the law will be deemed unconditional gifts, which plaintiffs assert requires full refunds for all sales made in violation of the rule.
Penalties under each of these can rack up quickly. Thus, companies selling on a negative option basis should audit not only their enrollment and cancellation funnels but also the advertising claims made throughout the customer experience.
Reminder: Multiple challenges have been filed against the FTC's Rule, which could delay its current implementation date of 180 days after publication in the Federal Register. California's amendments will take effect in July 2025. Although companies have some time to come into compliance, now is a good time to review your offers. Venable's Autorenewal Solutions Team (VAST) and FDA Team stand ready to help with questions regarding your company's autorenewal or subscription services and advertising substantiation issues.
To learn more about these and the other, less publicized impacts of the FTC Rule and California law, join VAST on November 19 for a webinar, more details will follow. To learn more about the top five advertising claims being challenged in 2024, you can view the authors' webinar here.
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.