It's Simple To

Highlights

The Federal Trade Commission (FTC) has proposed several amendments to the current Negative Option Rule (Rule) that, if enacted, will drastically change how subscription- and membership-based businesses operate.
Generally, the proposed Rule would further update the FTC's simple cancellation method (Click to Cancel) to require a mechanism to be at least as simple and capable of being initiated through the same method used to initiate the charge, create new requirements to "save" a customer before cancellation and establish new requirements to provide annual reminders to consumers enrolled in negative options.
This Holland & Knight alert details the changes, potential implications and industry concerns of the proposed Rule.

The Federal Trade Commission (FTC) has proposed several amendments to the current Negative Option Rule (Rule) that, if enacted, will drastically change how subscription- and membership-based businesses operate. Generally, the proposed Rule would further update the FTC's simple cancellation method (Click to Cancel) to require a mechanism to be at least as simple and capable of being initiated through the same method used to initiate the charge, create new requirements to "save" a customer before cancellation and establish new requirements to provide annual reminders to consumers enrolled in negative options.

The FTC held an informal hearing on Jan. 16, 2024 – presided over by Administrative Law Judge Carol Fox Foelak of the U.S. Securities and Exchange Commission (SEC) – on its proposed amendments to the Rule. Industry leaders raised several concerns, notably the increased burden and confusion it would create for both businesses and consumers and the significant cost required to implement the proposed Rule. At the conclusion of the hearing, the FTC stated that there will be further hearings on the proposed Rule to provide an opportunity for vested interests to submit comments and explain how the proposed Rule will impact their business practices and consumers.

Current Rule

The current Rule applies only to prenotification plans for the sale of goods and not much of the current modern negative option marketing.

The current Rule requires prenotification plan sellers to disclose material terms clearly and conspicuously prior to consumers subscribing and creates seven buckets of required disclosures:

how subscribers must notify the seller if they do not wish to purchase the selection
any minimum purchase obligations
the subscriber's right to cancel
whether billing charges include postage and handling
that subscribers have at least 10 days to reject a selection
that if any subscriber is not given 10 days to reject a selection, the seller will credit the return of the selection and postage to return the selection, along with shipping and handling
the frequency with which announcements and forms will be sent

Businesses must also provide consumers with a certain period of time to respond to offers, provide instructions for rejecting merchandise in offers and promptly honor written cancellation requests.

Proposed Rule Requirements

The proposed Rule (retitled Rule Concerning Recurring Subscriptions and Other Negative Option Plans) addresses issues related to negative option marketing, including misrepresentations, disclosures, consent and cancellation. These proposed changes replace existing provisions in the Rule and seek to consolidate all requirements such as those in the Telemarketing Sales Rule (TSR) specifically applicable to negative option marketing. Further, the proposed Rule allows the FTC to seek civil penalties where such remedies are currently unavailable such as deceptive or unfair practices involving negative options in traditional print materials and face-to-face transactions (i.e., in media not covered by the Restore Online Shoppers' Confidence Act (ROSCA) or the TSR) and misrepresentations (which are not expressly covered by ROSCA, even when on the internet). If enacted, the proposed Rule would result in seven key changes to negative option marketing, discussed below.

Coverage

The proposed Rule expands coverage to apply to all forms of negative option marketing. It defines the negative option feature as "a contract provision under which the consumer's silence or failure to take affirmative action to reject a good or service or to cancel the agreement is interpreted by the negative option seller as acceptance or continuing acceptance of the offer." Included in this definition are automatic renewals, continuity plans, free-to-pay conversions or fee-to-pay conversions, and prenotification negative option plans. In addition, the proposed Rule covers offers made in all media, including internet, telephone, in-person and printed material.

Simple Cancellation Method (Click to Cancel)

The proposed Rule directs sellers to provide a simple cancellation mechanism to immediately halt any recurring charges. It requires the mechanism to be at least as simple and capable of being initiated through the same method used to initiate the charge. For example, to meet the simplicity requirement, any telephone call used for cancellation cannot be more expensive than the call used to enroll. In addition, for a recurring charge initiated through an in-person transaction, the seller must offer the simple cancellation mechanism through the internet or by telephone in addition to, where practical, the in-person method used to initiate the transaction.

Additional Offers Before Cancellation (Saves)

The proposed Rule also contains a provision for sellers who seek to pitch additional offers or modifications (saves) during a consumer's cancellation attempt. It requires sellers to first ask consumers whether they would like to consider such offers or modifications. If consumers decline, sellers must desist from presenting such offers and cancel the negative option arrangement immediately. If they accept, sellers may pitch alternative offers. The proposed Rule also clarifies that a consumer's consent to receive additional offers or modifications applies only to the cancellation attempt in question and not to subsequent attempts. Thus, consumers could disengage during the save attempt and avail themselves of the easy cancellation during a separate, subsequent attempt.

Reminders and Confirmations

The proposed Rule requires sellers to provide an annual reminder to consumers enrolled in negative option plans involving anything other than physical goods. The reminders must identify the product or service, the frequency and amount of charges and the means to cancel.

Misrepresentations

Section 425.3 of 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. Such 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 provision allows the FTC to seek civil penalties for material misrepresentations in media other than telemarketing or the internet.

Important Information

Section 425.4 of the proposed Rule requires sellers to provide the following "important information" prior to obtaining the consumer's billing information: 1) that consumers' payments will be recurring, if applicable, 2) the deadline by which consumers must act to stop charges, 3) the amount or ranges of costs consumers may incur, 4) the date the charge will be submitted for payment and 5) information about the mechanism consumers may use to cancel the recurring payments. The failure to provide this information is a deceptive or unfair practice.

The proposed Rule also requires marketers to present this information "clearly and conspicuously," essentially in a way that is not easy to miss and easily understandable by ordinary consumers. To present this information "clearly and conspicuously," the required information may not contain any other information that undermines the ability of consumers to understand the required information, including any information not directly related to the material terms and conditions of any negative option feature.

Consent

Section 425.5 of the proposed Rule requires negative option sellers to obtain consumers' express informed consent before charging them. The failure to obtain such consent is a deceptive or unfair practice. The proposed Rule requires marketers to 1) obtain the consumer's unambiguously affirmative consent to the negative option feature separately from any other portion of the offer, 2) refrain from including any information that "interferes with, detracts from, contradicts, or otherwise undermines" the consumer's ability to provide express informed consent, 3) obtain the consumer's unambiguously affirmative consent to the entire transaction and 4) obtain and maintain (for three years or a year after cancellation, whichever is longer) verification of the consumer's consent.

The net effect is a stricter informed consent standard. For example, the requirement for a separate negative option consent prohibits certain negative option enrollment methods, such as the use of retail sales receipts or check endorsements, in which the customer's signature serves a dual purpose (e.g., negative option enrollment and promotional check cashing). Likewise, for sellers making written offers, the proposed Rule expressly authorizes a limited set of methods, including the use of check boxes and signatures, where the consumer must affirmatively select or sign to accept the negative option feature and no other portion of the offer. (Marketers may still use other methods that meet the express informed consent standard.)

Importantly, in the free trial context, although marketers must obtain consumers' express informed consent prior to being charged, the proposal does not require sellers to obtain an additional round of consent after the trial's completion.

Practical Implications

If enacted, the proposed Rule will have several practical implications for businesses engaged in negative option marketing. Most notably, businesses will be required to:

provide all "important information" before obtaining the consumer's billing address
understand the new, stricter definition of "clear and conspicuous"
provide a separate negative option consent
obtain a consumer's express informed consent before charging them
maintain proof of consumer's express informed consent for three years or one year after cancellation
provide a cancellation method at least as simple and capable of being initiated through the same method used to initiate the charge
obtain a consumer's consent before pitching modifications or additional offers (saves)
provide an annual reminder to consumers enrolled in negative option plans involving anything other than physical goods
invest in at a minimum new employee trainings and new subscription/cancellation systems

Commenters' Concerns

Representatives from five nongovernmental organizations made oral statements at the informal hearing. A common theme among all industry leaders was that, unlike the FTC contends, there are several material facts at issue that require further briefing, opportunities to comment and additional hearings. The oral statements also raised several specific issues that businesses that engage in negative option marketing should be aware of.

Process

Many commenters lamented the lack of process and urged Judge Foelak to require the FTC to comply with the Magnuson-Moss Warranty Act requirements, which go beyond notice and comment and allow commenters to request an informal hearing and require the FTC to provide evidence. The FTC refused to allow an evidentiary hearing, and the informal hearing was limited to five commenters, each of whom were permitted 10 minutes to speak. Further, the advance notice of proposed rulemaking (ANPR) did not include a ban on save options, the double-opt in proposal, the click-to-cancel provision or the expansion of the Rule to cover any marketing misrepresentation. Instead, the ANPR stated that it was focused on harmonizing regulations that affect subscription services. Some commenters thus requested that the proposed Rule be treated as an ANPR.

Overly Broad

Commenters specifically urged the FTC to narrow the scope of the expansion, save-the-sale and cancellation provisions. Further, all commenters noted that the proposed Rule targets practices that benefit, not just those that harm, consumers. For example, negative option marketing saves consumers' time, lowers costs when paired with promotional pricing and free-trial periods, and prevents the potentially catastrophic consequences if a consumer forgets to pay their electric or internet bill on time. The proposed Rule also fails to account for subscription-based services that allow consumers to freeze, rather than cancel, their memberships and keep some of their membership benefits. For example, 80 percent of massage memberships and 40 percent of gym memberships are frozen at any given time. Commenters also noted that the FTC failed to consider how for certain industries, such as health-based subscriptions, immediate cancellation can harm patients. The central concern was clear: The proposed Rule balloons to encompass the entire U.S. market without distinguishing deceptive practices from good practices and thus risks upending popular services that consumers expect and enjoy. For many industries, automatic renewal is the only model that makes sense, and negative option marketing is already governed by a host of federal and state laws.

Inherently Change the Statute

Commenters noted that the proposed Rule – in particular, the expansion and informed disclosure provisions – will drastically change the current statute. If enacted, the expansion provision will expand the FTC's authority to all aspects of negative marketing and allow the FTC to seek civil penalties for deception claims for the first time. The informed disclosure requirement similarly represents a significant change to the statue: It will add new specific requirements that industry leaders describe as overly prescriptive, a burden to business, a restriction to innovation and confusing to consumers.

No Prevalence

The FTC is authorized to promulgate a new Rule only when an unfair or deceptive practice is prevalent. Several commenters noted that the conduct governed by the proposed Rule is explicitly authorized by ROSCA, the net effect of which is for the FTC to impose civil penalties for conduct that remains legal under a congressionally enacted statute. One commenter noted that such practices have not been proven to be prevalent among a majority of the automotive industry, yet the entire industry will be affected. Similarly, another industry leader submitted that none of its members are engaged in activity covered by the proposed Rule, yet all will be impacted if it takes effect.

Poor Fit for Certain Industries

Several commenters noted that the proposed Rule is a poor fit for their respective industries. For example, small businesses, which make up 80 percent of franchises, are disproportionately impacted by the proposed Rule. Further, many franchises are distinct from the digital subscriptions at the core of the proposed Rule. It was also noted that the Rule is a poor fit for the communication industry. Neither the FTC nor any state attorney general has cited examples of cable, internet or broadband businesses engaging in this behavior. Moreover, it is common practice to offer services in custom bundles across a wide range of devices. If enacted, the Rule may deprive low-income consumers of the opportunity to learn of government programs that would allow them to keep broadband service or to understand the price ramifications of canceling just one service that is part of a bundle. The informed consent provision was criticized across industries for being a poor fit, as the proposed Rule prevents almost any communication without first obtaining the consumer's informed affirmative consent. The consensus among commenters was that this will disrupt services, choke off helpful information, forgo consumer savings and implicate First Amendment issues.

Cost

All commenters expressed concern at the cost to implement the proposed Rule and challenged the FTC's characterization of the associated costs as de minimis. The FTC estimates that, if enacted, the Rule will take just three hours a year to comply with and that the costs will be de minimis. However, industry leaders contend that the cost to implement will be significant and, for some businesses, impossible. To implement the proposed Rule, businesses will need to invest in new technology, retrain employees, overhaul their subscription and cancellation systems, and assess how to comply simultaneously with state laws and the Rule. It is estimated that it will cost the internet and television industry more than $100 million, or $12 million to $25 million per company, to comply with the proposed Rule. It was also noted that small businesses may not be able to afford compliance and instead be forced to cease services that would reduce competition and create higher costs for consumers.

Best Practices

Any business that engages in negative option marketing, including all businesses with a subscription- or membership-based model, have a vested interest in the outcome of the proposed Rule. The next round of hearings provide an opportunity to raise concerns or potential issues with the proposed Rule and to explain how the proposed Rule will impact businesses and their customers. In the event that the proposed Rule is enacted, businesses can start to prepare by gaining an in-depth understanding of how their current practices must change and what systems will need to be put in place to implement the Rule, including those listed in the Practical Implications section above. As a reminder, the FTC may seek up to $51,744 in civil penalties per violation of an FTC Rule.

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United States: It's Simple To "Click To Cancel"