FTC Focuses On Subscription Offerings And Negative Options – Practical Tips And Considerations - Dodd-Frank, Consumer Protection Act

On March 23, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rule Making to amend its Negative Option Rule (the Amended Rule), and on June 23, 2023, it concluded its 60-day public comment period. If the FTC finalizes the Amended Rule, it would apply to all negative options (e.g., negative option offers, subscription programs, automatic renewals, continuity plans, and free-to-pay or nominal-fee-to-pay conversion offers) in all media, and it would incorporate a series of both new and existing obligations under the current patchwork of state and federal laws governing negative options. Entertainment and media companies, such as streaming, gaming, and digital publication platforms, that rely heavily on their subscription programs to generate revenue should pay close attention to the FTC's rulemaking on this topic in order to mitigate the risk of litigation and can take measures now to set up strong compliance programs.

Summary of the current legal framework

"Negative options" refers broadly to a category of commercial transactions where the subscription will automatically continue or renew unless the consumer takes an affirmative action to prevent it from continuing or renewing. Negative option marketing generally falls into four categories: prenotification plans (e.g., book-of-the-month clubs), continuity plans (e.g., grocery deliveries), automatic renewals (e.g., magazine or newspaper subscriptions), and free trial (i.e., free-to-play or nominal-fee-to-pay) conversion offers. These forms of negative option marketing are governed by a patchwork of federal and state laws, and in particular, the FTC Act, the Restore Online Shoppers' Confidence Act (ROSCA), the Telemarketing Sales Rule (TSR), and individual state auto-renewal laws.

These laws include specific guidelines concerning the operation of negative option business activities, many of which overlap in varying degrees, but as acknowledged by the FTC, the current legal framework does not provide clear guidance about how to avoid deceptive negative option disclosures and procedures. In response, the FTC proposed the Amended Rule, which would (1) consolidate all legal requirements specifically applicable to negative option marketing; (2) formalize many of the guidelines previously issued by the FTC; and (3) incorporate new requirements not previously addressed at the federal level.

At the close of the FTC's most recent public comment period, a bipartisan coalition of 26 state attorneys general (AGs) expressed their support of the Amended Rule and how additional guidance and specificity on compliance with negative option rules would benefit consumers. The AGs' public comment also made a few additional proposals to the Amended Rule, including that (1) an additional consent should be required before charging a customer after the completion of a free trial; (2) as well as being simple, the cancellation mechanism must be "cost effective, timely, and easy to use"; (3) consumers should receive reminders at least annually; and (4) the Amended Rule should not infringe on a state's authority to regulate negative marketing in its own jurisdiction.

Why it's important for entertainment and media companies to comply with negative option laws

Over the past several years, the increasing ease and accessibility for consumers to purchase goods online has resulted in the adoption of fierce marketing tactics and aggressive means by many companies to obtain – and retain – consumers. In particular, entertainment and media companies not only compete for the attention of consumers, but compete for their subscription dollars as well. As a result, some companies may be inclined to use clever techniques to either lock consumers into their subscriptions for an extended duration or make it extremely difficult for consumers to cancel their subscriptions. However, such techniques may violate the patchwork of federal and state laws mentioned above that govern negative option marketing, and regulatory authorities, such as the FTC and state AGs, will not hesitate to bring enforcement actions.

The FTC typically enforces its complaints related to negative options under the FTC Act, ROSCA, and the TSR, and relies on these federal rules to enforce the current Negative Option Rule, which governs the rarely used pre-notification option plans (e.g., book-of-the-month clubs) and lacks an explicit enforcement provision. Negative option marketing remains one of the most common areas in which the FTC takes action. At the state level, states such as California and New York have also been particularly active with enforcement of negative options under state unfair competition theories. As the subscription products and services offered within the entertainment and media industry continue to grow – in part due to the heightened demand for content during the pandemic – regulators have become increasingly fixated on ensuring that the programs are transparent and consumers understand that enrollment may be continuous.

Companies offering these programs – whether they are in the entertainment, consumer product, gaming, or beauty/health care spaces – should review their current programs, particularly their autorenewal subscription offerings and customer notices, to ensure they are adhering to the relevant regulations.

The below items provide a starting point for an internal review of these programs. At a very high level, strong compliance begins with adequate disclosures, proper consent, and easy cancellation options.

Disclose all materials of the program

Before charging consumers for any subscription or making a recurring charge, companies should disclose the material terms of the transaction. Consistent with the current requirements under ROSCA and the FTC Act, the Amended Rule would require companies to disclose any material terms related to the underlying product or service that are necessary to prevent deception. Those terms at a minimum should include:

Any express claim or deliberately implied claim;
Any material term related to the underlying product or service necessary to prevent deception, regardless of whether that term directly relates to the terms of the negative option offer;
Wording to the effect that consumers will be charged for the good or service, or that those charges will increase after any applicable trial period ends, and, if applicable, that the charges will be on a recurring basis, unless the consumer takes timely steps to prevent or stop such charges;
Each deadline by which the consumer must act in order to stop the charges;
The amount the consumer will be charged or billed and, if applicable, the frequency of such charges unless the consumer takes timely steps to prevent or stop those charges;
The date(s) each charge will be submitted for payment;
All information necessary to cancel the contract.

In 2020, to illustrate the financial consequence of not including these material terms, the FTC targeted the online learning company Age of Learning, Inc., which operates the program ABCmouse, because it made misrepresentations about cancellations and did not disclose key information in its contracts with consumers, in conjunction with an automatically renewing subscription. ABCmouse settled the case for $10 million.

How to disclose the terms of the program

Consistent with the FTC's previous guidance, the Amended Rule would require companies offering these programs to ensure the disclosure of the programs' material terms is "difficult to miss" (i.e., easily noticeable) or unavoidable and easily understandable by ordinary consumers. For example, streaming and video game platforms may provide the disclosure both audibly and visually because their consumers generally absorb such content through both means simultaneously. In contrast, a digital publication such as an online news outlet or magazine may provide the disclosure visually only. In essence, companies should use the same means to make their disclosures as they do for communicating their content. Visual disclosures should stand out from any accompanying text or other visual elements by size, contrast, location, the length of time they appear, and other characteristics. Audible disclosures should be delivered in a volume, speed, and cadence sufficient for ordinary consumers to easily hear and understand them. For interactive electronic mediums, such as the internet or software, the disclosure should be unavoidable, and consumers should not have to take any action, such as clicking on a hyperlink or hovering over an icon, to see it.

When and where to disclose the terms of the program

Timing and placement of the disclosure are also important considerations. If the disclosure is in writing (including on the internet) and related to the company's negative option programs, it should appear immediately adjacent to the means of recording the consumer's consent (e.g., an "I Accept" button). If the disclosure is in writing (including on the internet) but not related to the negative option program, it should appear before consumers make a decision to buy (e.g., before they "add to shopping cart"). In either scenario, the disclosure should not contain any other information that interferes with, detracts from, contradicts, or otherwise undermines the ability of consumers to read and understand the disclosure, including any information not directly related to the material terms and conditions of the program. If approved and finalized by the FTC, the Amended Rule would require companies to implement these timing and placement considerations, rather than view them as the FTC's recommendations.

Obtain consumers' express, informed consent to the program's terms

Once the terms of the program are properly disclosed, companies should ensure consumers provide their express, informed consent to those terms. In practice, this means (1) obtaining acceptance of the program separate from any other portion of the transaction; (2) ensuring consent is affirmative and unambiguous; and (3) having the ability to verify the consumer's consent. Like the previous sections, the Amended Rule would turn these means of obtaining express, informed consent, as previously recommended by the FTC, into requirements.

Relatedly, the FTC's Amended Rule recognizes checkboxes, signatures, express consent buttons, and other similar mechanisms as permissible methods of obtaining consumer consent. However, an open question remains regarding what other methods may also be acceptable under both federal and state laws.

Provide a simple cancellation mechanism

In terms of cancellation, companies should make it as easy to cancel a subscription as it was to start it, as this will also become a requirement if the FTC finalizes the Amended Rule. For example, if a consumer can sign up online, they must be able to cancel online and in the same number of steps. The FTC describes this as "click to cancel."

In addition, some states like California require businesses to provide at least one of the following methods for a consumer to cancel an automatic renewal program online:

A toll-free telephone number
An email address
A postal address if the business directly bills the consumer
Any other mechanism that is cost-effective, timely, and easy to use

In previous enforcement actions, the FTC noted that certain cancellation practices may render a program a negative option, such as:

Requiring customers to speak with a live agent to cancel services they set up online;
Making it hard to locate the correct department to initiate cancellations;
Not completing promised callbacks;
Subjecting customers to long hold times;
Using aggressive sales tactics to retain customers once they did reach a live agent;
Disconnecting calls, requiring customers to restart the cancellation process;
Using hidden early termination fees to further dissuade customers from cancelling.

It is important to evaluate your program as a whole and from the perspective of an uninformed consumer by asking whether it is as easy for consumers to find the cancellation option as it is to sign up.

International companies may also be subject to U.S. laws

The entertainment and media industry has global reach online, and businesses within the space often engage in cross-border marketing and sales. However, just because the business is located outside the U.S. does not mean it does not target or sell to U.S. consumers. International companies with U.S. subscribers are, therefore, likely subject to the same patchwork of federal and state laws governing negative option marketing.

In particular, section 5 of the FTC Act has a provision which extends the FTC's enforcement authority to matters involving foreign commerce. In addition, the FTC works with more than 100 foreign competition and consumer protection authorities around the world, and cooperates with foreign authorities on enforcement and policy.

Relatedly, the U.S. SAFE WEB Act allows the FTC to share investigative material and issue compulsory process on behalf of foreign consumer protection counterparts. The FTC may also provide assistance in investigations or enforcement proceedings for violations of laws prohibiting fraudulent or deceptive practices, or practices substantially similar to those prohibited by laws the FTC administers.

In practice, this means international companies may be subject to enforcement actions under U.S. laws, even if consumers agree to their terms and conditions that expressly limit jurisdiction to the country in which the company is headquartered or operates its principal place of business.

Beyond the U.S.

The U.S. is not the only territory working on changes to subscription rules. In the UK, the Digital Markets, Competitions and Consumers Bill (DMCC) is in advanced draft form and contains a number of new obligations for those providing subscription services to consumers. These include prescriptive information requirements that need to be met before a consumer enters into a contract, as well as reminders that must be given prior to the taking of a renewal payment and provide a means of cancellation. The DMCC will introduce a new "GDPR style" enforcement regime with increased fines of up to 10% of global turnover if passed in its current form. Also noteworthy is that the DMCC can be seen as part of Europe's focus on so-called "dark patterns," mirroring developments in the U.S. For a roundup of current and pending dark patterns rules in the U.S., UK and EU, see our digital law comparison table.

This article is presented for informational purposes only and is not intended to constitute legal advice.