On October 28, 2021, the FTC issued a press release announcing its issuance of an Enforcement Policy Statement Regarding Negative Option Marketing, and warning companies that it will be ramping up its enforcement in this area "in response to a rising number of complaints about the financial harms caused by deceptive sign up tactics, including unauthorized charges or ongoing billing that is impossible cancel.” The 15-page Policy Statement, which reads like a survey course on every auto renewal, continuity plan, and free-to-pay conversion case the agency has ever brought, is intended to put companies “on notice that they will face legal action if their sign-up process fails to provide clear, up-front information, obtain consumers' informed consent, and make cancellation easy.”
The FTC's press release highlights various practices the agency has challenged in connection with the marketing and operation of subscription services. For example, it has sued companies “that hid important payment information, or even the fact that consumers would be charged at all, behind hyperlinks, hover-overs or in inconspicuous places or buried on pages beyond the initial offer page,” “made consumers wait on hold or listen to lengthy ads before they could cancel,” and “that converted free trials to paid subscriptions before the free trial ended.”
The press release also notes that the FTC “sued a company that failed to disclose that widely advertised, material benefits of the subscription were no longer available,” referring to the Commission's June 7, 2021 action against Moviepass, where it alleged the operator of a popular unlimited movie theatre ticket subscription service “employed . . . tactics to prevent subscribers from using the service as advertised,” in violation of the Restore Online Shoppers Confidence Act (ROSCA).
The press release also warned that the agency will be ramping up enforcement against companies that deploy “illegal dark patterns that trick or trap consumers into subscription services.” Samuel Levine, Director of the FTC's Bureau of Consumer Protection, is quoted, “[t]oday's enforcement policy statement makes clear that tricking consumers into signing up for subscription programs or trapping them when they try to cancel is against the law . . . . [f]irms that deploy dark patterns and other dirty tricks should take notice.”
The press release notes three areas of primary concern to the FTC that if not followed, will result in law enforcement action, including the possible imposition of civil penalties.
- Clear and conspicuous disclosure of all material offer terms. The terms must include the cost of the product/service, when a consumer must cancel to avoid future charges, the amount and frequency of such charges if not cancelled, and how to cancel. The terms must also provide accurate information about the characteristics of and how consumers may use the advertised product/service.
- Consumer express informed consent to be charged. Sellers should obtain a consumer's affirmative, informed consent before charging them for the purchased product/service. This consent “includes obtaining the consumer's acceptance of the negative option feature separately from any other portion of the entire transaction,” a requirement that would appear to apply where a consumer can purchase a single product or have the option to receive future deliveries of the product on a continuity basis.
- Easy and simple cancellation. Sellers should provide purchasers the ability to cancel by means that are at least as easy as those used to enroll or purchase the product or service.
The FTC's issuance of the Policy Statement comes at an interesting time and frankly, surprise. We all knew something was coming from the FTC in this area, but not exactly what. As you may recall, the FTC published an advance notice of proposed rulemaking (ANPR) on the “Rule Concerning Prenotification Negative Option Plans” (16 C.F.R 425) on October 2, 2019, where it sought public comment on broadening the scope of the rule beyond its narrow applicability to the record and book clubs of yore (“Get 10 records for just a penny!”). In addition to the FTC's primary goal of amending the rule to cover almost all negative option, subscription, free-to-pay, and continuity delivery offers, it also sought to harmonize differences in how these offers are treated under ROSCA and the Telemarketing Sales Rule (16 C.F.R. 310) (TSR). To date, the FTC has not moved (at least publicly) on that initiative.
Now, just over two years after publishing the ANPR in the Federal Register, the FTC has issued the Policy Statement, which appears to achieve the conceptual goals of the ANPR, except for one big hole – the Policy Statement does not have the force of law (meaning the FTC's ability to obtain civil penalties for violations), whereas an amended rule would provide the agency with such ability. Nevertheless, the FTC can still seek civil penalties for specific violations of ROSCA (for negative option offers sold online) and the TSR (for phone sold offers), as they are an act of Congress and a trade regulation rule, respectively.