In March 2023, we summarized the Federal Trade Commission's (the "FTC" or "Commission") proposal to dramatically expand the Negative Option Rule to impose new cancellation requirements for companies selling products or services under a "negative option feature," including free trials, subscriptions, and repeat delivery offers.
At long last, the FTC issued its Final Rule on October 16, 2024, after reviewing more than 16,000 public comments and suffering a temporary setback from its own Administrative Law Judge last April. The Final Rule retains most, but not all, provisions included in the 2023 Proposed Rule. Should it survive likely judicial challenge, the Final Rule would significantly increase marketing, consent, disclosure, and recordkeeping requirements for businesses operating subscription-based models, while providing the Commission with expanded authority to seek redress and civil penalties for violations, including for misrepresentations completely unrelated to the negative option transaction itself.
Key Changes in the Final Rule
The Final Rule applies to any person who sells, offers, charges,
or otherwise markets a good or service with a "negative option
feature," i.e., a subscription, membership, free or
partially free trial that converts to a paid subscription, or other
recurring-payment program that indefinitely renews unless a
consumer affirmatively cancels or returns the goods or
services.1 Notably, the Final Rule broadly applies to
negative option marketing in all forms, whether conducted online,
on the phone, in print materials, via in-person transactions, or
via business-to-business transactions.
Further, the Rule does not require consumers to actually avail
themselves of a negative option in order to trigger the Rule's
applicability. Instead, the Rule applies any time a good or service
is marketed or sold "with" a negative option feature,
leaving open uncertainty for companies offering goods or services
that could be purchased either with a negative option feature or
without.
Some of the new requirements from the Final Rule include:
- Expanded Disclosure Requirements: Sellers must disclose "any material terms related to the underlying good or service that is necessary to prevent deception, regardless of whether the terms relate to the negative option feature." The Rule also imposes requirements related to where, when, and how to make these required disclosures. The Rule requires that these disclosures be clear and conspicuous, that they occur prior to obtaining consumers' billing information, and that they appear immediately next to and before the means of recording consumers' consent to the negative option. For companies for which consumers have previously elected to save their billing information, the disclosures must be made before the consumers provide consent to use the saved account information.
- Expanded Authority to Seek Redress and Civil Penalties: Should it go into effect, the Rule will prohibit negative option sellers from "misrepresenting, expressly or by implication, any material fact related to the transaction." The Final Rule defines "material" as a fact "likely to affect a person's choice of, or conduct regarding, goods or services." Although the Rule provides examples of "material facts," including the cost, purpose, efficacy, and health or safety of the good or service, it ambiguously adds "or. . . any other material fact," leaving open the possibility that many other types of misrepresentations could be interpreted as "material" and thus trigger a rule violation. In other words, a company could comply, to the letter, with the negative option portions of the Rule, but nonetheless violate the Rule if, for example, the company mispresented the efficacy of the product being sold to the consumer through a negative option feature.
- Express Affirmative Consent & Recordkeeping: The Rule requires sellers to obtain consumers' "unambiguously affirmative consent" to the negative option feature. The consent (a) must be separate from any other portion of the transaction; (b) cannot include any information that interferes with or undermines the ability of the consumer to consent; and (c) must occur before the consumer is charged. Moreover, the Rule requires that sellers maintain records of consumers' consent for three years unless the seller can show that it uses a process that would not allow the consumer to complete the transaction without the required consent.
In a potential consolation to some industry members, the Final Rule removes the requirement from the Proposed Rule that mandated that sellers also obtain separate, unambiguously affirmative consent to the "rest of the transaction," as opposed to the "negative option feature" itself. The Rule establishes a safe harbor for companies obtaining consent through a "check box, signature, or other substantially similar method" as long as the consumer affirmatively selects it and it relates only to the negative option feature and no other portion of the transaction.
- Simple Cancellation ("Click-to-Cancel"): Sellers are required to provide a "simple mechanism" for a consumer to cancel the negative option feature or avoid being charged. The Rule requires that this "simple mechanism" be at least as easy to use as the mechanism the consumer used to consent to the negative option feature.
- "Save" Attempts: In contrast to the Proposed Rule, the Final Rule does not require sellers to obtain consumers' express consent before attempting to 'save' a subscription or negative option feature that the consumer attempted to cancel. Following an evaluation of public comments, the Commission decided to exclude this requirement from the Final Rule—but noted that it is "keep[ing] the record open on these issues." Businesses can therefore expect to see the FTC seek additional public comments on "save" attempts in a supplemental rulemaking.
- No Annual Reminders: There is another significant aspect in which the Final Rule differs from the Proposed Rule: the FTC discarded a proposed requirement that sellers provide annual reminders to consumers of the negative option feature of their subscription. As with "save" attempts, the Commission plans to revisit this issue in a supplemental rulemaking.
Dissent & Effective Date
The Final Rule was approved by a 3-2 vote along party lines, with Commissioner Holyoak issuing a dissent outlining many of the issues those challenging the legality of the Rule are likely to raise. Commissioner Holyoak argued, among other things, that the majority failed to follow the Magnusson-Moss rulemaking process, that the Rule incentivizes companies to avoid negative options by raising risks associated with such features, and that the Commission missed an opportunity to make needed changes to the prior version of the Rule that are within its authority and could withstand judicial scrutiny.
The Rule takes a bifurcated approach to the effective date. Provisions relating to disclosures, consent, and cancellation will go into effect within 180 days of publication in the Federal Register, or April 14, 2025. The provisions prohibiting misrepresentations will take effect within 60 days of publication in the Federal Register, or December 16, 2024.
While the Final Rule will likely face some legal challenges, companies should evaluate whether their current practices comport with the new requirements in the Rule, along with additional state requirements that may overlap with and at times go farther than the new Rule. On this last point, businesses must bear in mind that the Final Rule does not preempt state autorenewal laws that provide consumers with greater protections than the FTC's Rule does, thus continuing to force subscription marketers to comply with a patchwork of state and federal laws.
Footnote
1 The Commission's Telemarketing Sales Rule defines a negative option feature as a provision in an offer or agreement to sell or provide any goods or services "under which the customer's silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer." 16 CFR § 310.2(w).
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