Here is our review of and observations on the FTC's recent Negative Option Rule rulemaking. Our “Full Story” write-up below, as long as it may seem, is a lot shorter than the 83-page proposal, so buckle up and grab some popcorn! Or, if too much for you right now…consider going a bit lighter on the brain, and start season three of Ted Lasso (love Roy!), or work on your Jenna Ortega Wednesday Dance. And speaking of Jenna, did you happen to catch her and Aubrey Plaza at the SAG Awards? Brilliant. Note: This is not a paid ad or endorsement for Ted or Jenna.
TL:DR. As previously advised, last week the FTC announced a proposed rulemaking to expand the scope of the current Negative Option Rule and add new requirements for companies that use a negative option feature in their offers. The key changes the FTC highlighted in its press release last week* would require these sellers to (i) provide a cancel option that is at least as easy as it was to enroll, including a "click to cancel" option for online sales, (ii) obtain a consumer's consent to hear a new offer or save attempt when they seek to cancel a subscription, and (iii) send an annual reminder notice for these programs.
*While the FTC mentioned only these changes in its press release, other, more subtle changes loom in the NPR that are much more dangerous and troubling, including (i) prohibiting any misrepresentation in a negative option offer, even if unrelated to the auto renewal, (ii) requiring sellers to obtain a consumer's agreement to the negative option feature separate from the overall transaction, possibly via a separate check box, and (iii) insane record keeping requirements. Given the FTC's highlighting certain changes in its press release and conveniently omitting the more subtle and troubling aspects of its proposals (say it with me kids...“cherry picking”), curious whether we might have an ironic Section 5 action here.
The FTC seeks public comments on the proposal, which are due 60 days from when the notice is posted in the Federal Register (unknown as of now).
The Full Story
So…the FTC is finally getting around to updating the current “Rule Concerning Prenotification Negative Option Plans” (16 C.F.R 425) (the “Rule”) which was originally promulgated in 1973 to combat abuses by marketers offering free or low price products ("Get 10 books for just a penny!") to enroll consumers in auto ship programs with a commitment to buy additional products at higher prices. Since then, the FTC has reviewed the Rule for continued relevance and has made some technical changes to it, but in a 2009 rulemaking review, declined to “expand or enhance the Rule, concluding that amendments were not warranted … because the enforcement tools provided by the TSR and, especially, (the newly enacted) ROSCA ... might prove adequate to address the problems generated by deceptive or unfair negative option marketing.” However, at that time, the FTC noted that “if ROSCA and its other enforcement tools failed to adequately protect consumers, [it] would consider whether and how to amend the Rule.”
In October 2019, the FTC initiated an Advanced Notice of Proposed Rulemaking (“ANPR”) to explore expanding the scope of the Rule to cover a broader array of negative option, subscription, and continuity offers, as well as free trials. In addition, the FTC sought to harmonize differences in how these offers are treated under the Restore Online Shoppers Confidence Act (“ROSCA”) which only governs online negative option offers, and the Telemarketing Sales Rule (16 C.F.R. 310) (“TSR”). Comments to this proposal were due in December 2019 and we heard nothing further on that initiative until now.
A little more than two years following the ANPR, the FTC issued an Enforcement Policy Statement Regarding Negative Option Marketing (“Policy Statement”) on November 4, 2021, identifying how the agency expects companies making these offers to conduct themselves, and warning that it will be ramping up its enforcement in this area (which it did). Key to the Policy Statement was the FTC's expectation that enrollment terms be provided clearly and conspicuously, sellers obtain consumers' informed consent to enroll, and make cancellation easy.
Fast forward to today…where the FTC just announced its intention to update the Rule through a Notice of Proposed Rulemaking (“NPR”), based on responses received to the ANPR and various cases it has brought against companies since then with the goal of combating “unfair or deceptive practices that include recurring charges for products or services consumers do not want and cannot cancel without undue difficulty.”
A good portion of the 83-page NPR discusses cases the FTC and other law enforcement agencies have brought in the negative option space as well as the concerns these practices present, which we don't summarize here for purposes of brevity (and sanity). But in a nutshell, the NPR addresses concerns with confusing and deceptive free trial offers that roll to a paid subscription, failing to disclose offer terms clearly and conspicuously, and making it difficult for consumers to cancel. These concerns underlie the proposed changes to the Rule in the NPR.
The New Rule
The NPR proposes renaming the Rule to the “Rule Concerning Recurring Subscriptions and Other Negative Option Plans” (the “New Rule”). The New Rule would replace the current Rule in its entirety, address “the most important issues related to negative option marketing, including misrepresentations, disclosures, consent, and cancellation,” and apply to all forms of negative option marketing, including prenotification and continuity plans, automatic renewals, and free trial offers, thus “establishing a common set of requirements applicable to all types of negative option marketing.”
Section 425.1. Scope. The New Rule would apply to any form of Negative Option Offer, such as an automatic renewal, continuity plan, free-to-pay conversion or fee-to-pay conversion, or pre-notification negative option plan, in any media, including, but not limited to, the Internet, telephone, in-print, and in-person transactions.
Section 425.2. Definitions (only addressing clear and conspicuous here).
(c). Clear and Conspicuous. Generally, the New Rule would require that “disclosures be easily noticeable (i.e., difficult to miss) and easily understandable by ordinary consumers.” Unlike many state auto renewal laws, the FTC does not adopt the California definition (Cal. Bus. Prof. & Code 17601(c)), which defines with particularity how disclosures must be made, but makes up for it in other ways, such as:
Section 425.3. Misrepresentations.
Of all the proposed changes, one of the most concerning is new Section 425.3 (p.42 of the NPR), which would prohibit a seller from “misrepresenting, expressly or by implication, any material fact regarding the entire agreement” – not just facts related to a negative option feature. The NPR notes that “FTC enforcement experience demonstrates misrepresentations in negative option marketing cases continue to be prevalent and often involve deceptive representations not only related to the negative option feature but to the underlying product (or service) or other aspects of the transaction as well.” Further, “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.”
This proposal is extremely concerning because it would empower the FTC to seek and obtain civil penalties under the New Rule for any aspect of a negative option offer that may be misleading or deceptive, such as a product performance claim or other attribute, whereas the FTC would not otherwise have such ability under its general Section 5 authority for first time violators (aka “de novo” actions). As readers of this alert know, the FTC has in recent years lost a number of cases, some at SCOTUS, that have curtailed its ability to obtain consumer redress for first time general deception offenses (See AMG Capital Mgmt., LLC v. FTC, 141 S. Ct. 1341 (2021)). As a result, it has sought other ways to obtain financial relief in its cases, such as relying on the obscure (and recently unearthed) Notice Of Penalty Offense authority (15 U.S.C. §45(m)(1)(B)) to obtain civil penalties against companies that receive actual notice of particular conduct the agency has deemed by written decision as being unfair or deceptive under the FTC Act.
And we're not the only ones thinking there's something rotten at 601 Pennsylvania Avenue. Commissioner Christine Wilson also expressed these concerns in her dissent to the NPR,
The broadened scope of the Rule would extend far beyond the negative option abuses cited in the ANPR, and far beyond practices for which the rulemaking record supports a prevalence of unfair or deceptive practices. In fact, the Rule would capture misrepresentations regarding the underlying product or service wholly unrelated to the negative option feature.
She further notes,
Importantly, we did not seek comment in the ANPR about whether an expanded negative option rule should address general misrepresentations; no comments are cited in the NPRM to support the inclusion of these provisions. Absent the above quoted brief explanation with the accompanying case cites, the Notice does not offer evidence that negative option marketing writ large is permeated by deception. If that were the case, it might be appropriate to fold in representations about any material fact.
Ultimately, she encourages “the public to address these issues in their comments in response to this Notice.”
If this proposal is adopted as is, subscription marketers will need to review and ensure that all aspects of their offers with a negative option feature are truthful and not misleading in any sense, or possibly violate any other FTC guidance, so as to avoid an enforcement action that can include civil penalties.
425.4 Important Information.
The New Rule would require sellers to disclose all material terms of the offer clearly and conspicuously prior to obtaining the consumer's billing information, such as
Not much to see here, folks, as these disclosures align with various state laws in this area, but we note that bullet #4 may be problematic if particular billing dates are unknown at the time of enrollment and whether a generic “you will be charged after your trial,” or “you will be charged monthly/annually” will suffice.
As for placement, if the above disclosures directly relate to the Negative Option Feature, they must appear immediately adjacent to the means of recording the consumer's consent for the Negative Option Feature (See Consent discussion below), or if not, before a consumer decides to buy (e.g., before they “add to shopping cart”).
Sellers must obtain a consumer's express informed consent to the Negative Option Feature before charging the consumer, which includes:
Requirements one and four warrant comment.
Re bullet #1, we saw this exact language in the FTC's 2021 Policy Statement (at p.13), and at that time were concerned it meant the FTC expected sellers to obtain a consumer's consent to the Negative Option Feature separate from the overall transaction through, for example, a check box, even if not expressly stated. But we also noted then that this requirement was not codified in any law (save Vermont and DC in certain circumstances) and took some comfort in knowing that the Policy Statement was merely guidance and did not have the force of law. But now, if this proposal is adopted as is, the FTC may possibly expect sellers to obtain a separate opt-in for the Negative Option Feature, which could include, for online offers, a check box in addition to a submit button, and for phone sales, a second verbal acceptance for the Negative Option Feature.
And here is where it gets confusing. The new proposed Section 425.5 does not expressly require a separate check box to obtain consent for online offers, but certain language in the NPR suggests otherwise. The NPR (at p.49) indicates that in response to the ANPR, certain commenters (i.e., state AGs and TINA) suggested requiring “consumers to take a separate, affirmative action” to consent to negative option features, such as “clicking an ‘I Agree' button to accept the trial product” accompanied by disclosures about the “terms of the offer, including the amount and frequency of payments.” These commenters, the NPR notes, expressed concern with “sellers offering negative option features through in-person transactions [that] frequently use consumers' signatures on the entire purchase as consent for the negative option…” and “….use 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).”
In light of these comments, the NPR states that “for all written offers (including over the Internet), sellers may obtain express informed consent through a check box, signature, or other substantially similar method, which the consumer must affirmatively select or sign to accept the negative option feature, and no other portion of the offer.”
Check box…ouch! But before we begin advising clients to hoard eggs, milk and bread and hide the kids in the basement, we note a couple of comments in the NPR that may offer some comfort. First, the language in the NPR above says “may” and not “must,” which suggests a checkbox is not mandatory, but may satisfy the “separate consent” requirement. So that's kinda good.
Second, when discussing the check box, the NPR does not cite to any actual cases or laws that support a separate opt-in, just a statement that baldly references statutory and judicial support for it, “In addition, consistent with ROSCA, judicial decisions applying Section 5, and cases brought by the Commission, the seller should obtain the consumer's acceptance of the negative option feature offer separately from any other portion of the entire transaction.” (NPR at 14). Also note the use of “should” here and not “must.”
Third, the exact wording of the New Rule requires sellers to “[o]btain the consumer's unambiguously affirmative consent to the Negative Option Feature offer separately from any other portion of the transaction.” If the entire offer is a Negative Option Feature, there is no “other portion of the transaction” warranting a separate consent, and thus the concern with obtaining a separate consent for these types of offers may be moot. On the other hand, if the offer includes a free or low-cost trial prior to automatically renewing, the FTC might interpret the recurring charge following the trial as “another portion” of the transaction, thus warranting the separate opt in. But here we found language in the NPR that suggests no additional action is necessary in these cases. In the context of discussing whether to adopt suggestions by several AGs and TINA to require sellers to obtain an additional (or alternative) consent after completion of a trial, the FTC rejects this proposal (more on this below), noting “…if sellers follow the proposed Rule's disclosure and consent requirements, consumers should understand they are enrolled in, and will be charged for, the negative option feature once the free trial ends.” (NPR at 50).
On the issue of whether a seller must obtain a consumer's consent to be charged following a trial, the FTC rejects this proposal in the NPR, but we are not out of the woods yet, as the NPR invites comment on whether such “additional (or alternative) measures are necessary to prevent unfairness or deception and ensure consumers have adequate notice concerning the initiation of recurring purchases or payments following the completion of a free trial. For example, the Commission seeks comment on whether sellers offering free trials should be required to obtain an additional round of consent before charging a consumer at the completion of the free trial.” Yikes. Obviously this needs to be addressed in comments to the NPR, stat.
Oh, and let's not forget requirement #4…recordkeeping. The New Rule would require sellers to keep or maintain verification of consumers' consent to a Negative Option Feature for (i) three years, or (ii) one year after the contract is terminated, whichever is longer. So….using some back of the envelope math...if a consumer agrees to try your service for a 3-month trial that rolls to a paid subscription and cancels before being charged, you still have to keep that record for three years, even if you never charged them? Seems harsh. Assuming the consumer doesn't cancel and remains a subscriber for 10 years, you have to keep the original consent, in some form, for effectively 11 years. Also pretty harsh. That said, many sellers in their ordinary course of business retain either exact copies or records of consumer enrollments in some form in anticipation of possible challenge or litigation, so this issue may be moot for many. But mandating companies to maintain these records seems a bit overreaching, regardless.
As readers of this alert may recall, in May 2022, the FTC proposed similar requirements in a Notice of Proposed Rulemaking for the Telemarketing Sales Rule, where it sought to expand the amount and types of information companies must maintain in connection with calling campaigns. Without rehashing that proposal here, we noted at that time that the FTC had introduced the idea of expanded recordkeeping in an earlier rulemaking process, seeking comments on the costs and burdens these requirements would impose, and in response reported receiving no specific data from industry representatives, other than they generally oppose it,
Industry comments generally opposed any mandatory requirement to maintain call detail records, arguing that imposing such a requirement would be overly burdensome, particularly for small businesses. None of the industry comments, however, provided concrete information or data on the costs associated with requiring telemarketers to maintain call detail records, nor did they suggest any alternative solutions that address the Commission's law enforcement challenges while minimizing the burden on industry.
We noted then that companies would need to submit specific data to the FTC to show how the proposal would result in added costs and burdens to their business and we reiterate that suggestion here. To the extent you are able to quantify the additional costs and burdens this requirement would impose, we suggest gathering that information and submitting such data to the FTC to challenge this proposal.
425.6 Simple Cancellation.
Proposed new section (a) would require sellers to provide consumers with a simple mechanism to cancel a Negative Option Feature to avoid being charged for a good or service and immediately stop any recurring charges. Ok, currently required by ROSCA, so simple enough.
Proposed new section (b) would require the “simple mechanism” to be as easy to use as the method the consumer used to initiate the Negative Option Feature. Also seems fair enough.
Now we get into the weeds. Proposed new section (c) would require the “simple mechanism” to be through the same medium the consumer used to consent to the Negative Option Feature (e.g., Internet, telephone, mail, or in-person). For Internet cancellation, the “simple mechanism” must be over the same website or web-based application the consumer used to purchase the Negative Option Feature, which the NPR refers to as “Click to Cancel.” The NPR offers little guidance around how the “click to cancel” method must work, such as dictating the location of the cancel button or whether sellers may require a consumer to be logged into their account, and instead provides flexibility for sellers to meet this requirement in lieu of prescribing specific requirements, “[t]he lack of detailed requirements affords businesses flexibility in meeting the proposed Rule's simple cancellation standard.” (NPR at 51).
For telephone cancellation, the “simple mechanism” must include, at a minimum, a telephone number to call where calls are “answered promptly during normal business hours and are not more costly than the telephone call the consumer used to consent to the Negative Option Feature.” Unclear exactly what “promptly” means here, but the NPR notes that comments submitted by several AGs to the ANPR reported that “many businesses have created unnecessary and burdensome obstacles in the cancellation process, including forcing uninterested consumers to listen to multiple upsells before allowing cancellation, that are not outweighed by countervailing benefits to consumers or competition.” (NPR at 53). So, at a minimum, multiple save attempts may not pass muster.
For in-person sales, the “simple mechanism” to cancel must include an online or telephone method, and, where practical, an in-person method similar to that which the consumer used to enroll. If a telephone number is used, as above, calls must be answered during normal business hours and, if applicable, must not be more costly than the telephone call the consumer used to consent to the Negative Option Feature.
And now we come to another controversial topic…Saves! If a consumer requests to cancel a Negative Option Feature using one of the methods described above, under the the New Rule, sellers
must immediately cancel the Negative Option Feature upon request from a consumer, unless the seller obtains the consumer's unambiguously affirmative consent to receive a Save prior to cancellation. Such consent must apply only to the cancellation attempt in question and not to subsequent attempts. The Negative Option Seller must keep or maintain verification of the consumer's consent to receiving a Save prior to cancellation for at least three years, or one year after the contract is otherwise terminated, whichever period is longer.
Let's unpack this. First, the obvious…before making a save attempt, a seller would need to obtain the consumer's consent. At first blush this requirement seemed somewhat overreaching and potentially violative of free speech rights, but as we thought through this and considered our experience in working with clients and their customer retention efforts, we realized that many save attempts do actually start with a question, such as “What if I can lower the price on your subscription, would that interest you,” or “Before you cancel, would you like to try the program for another 30 days at no cost?” These questions are not so dissimilar to sample language the FTC offers in the NPR as being acceptable for obtaining the required consent, “Would you like to consider a different price or plan that could save you money?” But we also recognize that some save attempts may be offered without first asking for permission, so if this proposal goes into effect as is, sellers will need to review their retention processes to ensure the New Rules are followed. In the meantime, we have spoken with several clients who intend to challenge this requirement on free speech grounds, which raises larger and more thorny constitutional issues, but may nevertheless be successful.
We also note that the NPR limits a save consent to only the cancellation attempt in question, and not to subsequent attempts. And, consistent with the record keeping requirements discussed above for enrolling in a Negative Option Feature, sellers must keep or maintain verification of a consumer's consent to receive a save attempt for at least three years, or one year after the agreement is otherwise terminated, whichever period is longer. Collective groan….
425.7 Annual Reminders for Negative Option Plans Not Involving Physical Goods.
The New Rule would require sellers of non-physical products/services to send consumers enrolled in their auto billed programs reminders of their enrollment, at least annually, identifying the purchased product or service, the frequency and amount of charges, and the methods to cancel. At a minimum, the reminders must be provided through the same medium (such as Internet, telephone, or mail) through which the consumer enrolled in the program/subscription. For in-person sales, sellers must provide the reminder through the Internet or by telephone in addition to, where practical, an in-person method similar to that the consumer used to enroll.
This proposal, while on its face seemingly consistent with many state laws requiring annual renewal notices for auto billed subscriptions, is actually quite different in that it is not necessarily a renewal notice, but a reminder that the consumer is enrolled in a recurring billing program. The rationale for this requirement is found at p. 54 of the NPR, where the FTC notes that
[s]ubscriptions and other negative option arrangements that do not involve physical goods, however, present a different issue. As some commenters explained, because these services may have no regular, tangible presence for consumers (e.g., data security monitoring or subscriptions for online services), many consumers may reasonably forget they enrolled in such plans and, as a result, incur perpetual charges for services they do not want or use. Thus, the failure to provide reminders for such contracts meet all three elements of unfairness.
The concerning aspect of this requirement is that there is no triggering time period for the notice, such as a year or six-month term, but rather applies to any billing frequency, such as monthly. As such, any seller of a non-physical good/service that auto bills customers, regardless of billing frequency, must send a notice to those customers no less than every twelve months with information about the subscription and instructions on how to cancel.
This requirement is similar to recently enacted legislation in Colorado and Delaware that require sellers to send consumers enrolled in auto billed programs with renewal terms of less than 12 months, a reminder notice upon reaching 12 consecutive billing intervals. While efforts to stop this legislation failed in these states, similar bills in other states met with significant (and successful) industry opposition based on simple policy and practical grounds…that charges for subscriptions billed on a regular and frequent (e.g., monthly) basis, along with information on how to cancel to avoid future charges, are seen (or should be seen) by consumers on their monthly billing statements, or even more frequently if they access their credit card statements online. While the FTC's rationale for proposing this notice requirement is rooted in the fact that consumers may not receive or “see” an intangible product or service for which they are charged, the agency conveniently ignores consumers taking responsibility for checking their monthly credit card or bank statement where they will see these charges. This fact needs to be made clear to the FTC in comments to the NPR.
425.8 Relation to State Laws.
The New Rule would not pre-empt, supersede, or affect any state law, regulation, order, or interpretation relating to negative option requirements, except to the extent same is inconsistent with the provisions of the New Rule, and then only to the extent of the inconsistency. Further, any greater protections afforded consumers by state law would not be considered to be inconsistent with the New Rule.
Obviously a lot to unpack here. And as always, we are here for questions.