Well, it took a little longer than we had hoped, but we finally got through the FTC's New Negative Option Rule!  And what a slog it was!  While many of you likely spent last night binging the current “it” show Nobody Wants This (did you see that ending coming!?!) or watching our (ok, Marc's) Mets get shellacked by the LA Dodgers in game 3 of the NLCS, or maybe just getting some early shut eye, we at Cobalt were burning the midnight oil, curled up with 230 pages of pure FTC scrumptiousness, along with multi-colored highlighters and more sticky-notes than Aunt Ida's Passover cookbook.  But, as always, we do this work so you don't have to.  So, grab yourself a cup of kombucha, sit back, and enjoy the show!

TL;DR

The FTC's Final Negative Option Rule issued yesterday is a lot better than what was originally proposed in last April's Notice of Proposed Rulemaking.  Notably, it does not require sellers to (i) ask consumers who seek to cancel a subscription for their consent to hear a save attempt, and (ii) send consumers annual reminder notices of their subscription.  So that's good.  It also clarifies that a check box is not in fact required to obtain a consumer's express informed consent to a negative option feature, but offers it up as a compliance “exemplar” or “safe harbor” for those who choose to do so.  It's kind of like visiting your grandparents in Co-Op City; it's a pain to get to and you may not want to do it, but it's really nice, and pays dividends if you do.  On the flipside, the Final Rule still declares any misrepresentation made in connection with a negative option offer a violation of the rule (and subject to $51,744 civil penalties), makes it easier for consumers to cancel, and is more confusing than ever as to what is intended by requiring sellers to obtain consent for a negative option feature separate from any other portion of the offer.

Key Elements of the Final Rule

• Prohibits misrepresenting any material fact made while marketing using a negative option feature (§ 425.3)
• Prohibits failing to clearly and conspicuously disclose material terms prior to obtaining a consumer's billing information in connection with a negative option feature (§ 425.4)
• Prohibits failing to obtain a consumer's express informed consent to the negative option feature before charging the consumer (§ 425.5)
• Prohibits failing to provide a simple mechanism to cancel the negative option feature and immediately halt charges (§ 425.6).

Timing of Effectiveness.  The prohibition on Misrepresentations (§ 425.3) goes into effect 60 days following publication of the Rule in the Federal Register, and Sections 425.4 (Disclosure of Important Information), 425.5 (Consent), and 425.6 (Cancellation), go into effect 180 days following publication.

The Full Story

Before diving into the minutiae of the Final Rule, let's cover some basic abbreviations we'll be using today:

• “SBP” refers to the Statement of Basis and Purpose, which is the 230 page document explaining the history of and justification for the Final Rule.
• “NPRM” is the Notice of Proposed Rulemaking published by the FTC in April 2023 that preceded the Final Rule and on which comments were sought.
• “Rule” or “Final Rule” means the Final Rule published yesterday here.
• “NOF” refers to a Negative Option Feature in the Final Rule.

Eighteen months following its publication of the NPRM, the FTC concluded its rulemaking process and yesterday issued its final amendments for the Final Rule, which has been renamed the “Rule Concerning Recurring Subscriptions and Other Negative Option Programs.”  This rulemaking sought to harmonize and fill in gaps among various existing federal laws and FTC advisories governing the offering and operation of negative option offers.  We covered the NPR in detail last year in this blog post, and today primarily address only those provisions that were changed or proposals that were rejected in the Final Rule.  As detailed as we tried to be in presenting this information (without boring y'all to death), there will no doubt be questions about specific areas that are not fully covered or remain unclear.  As always, we are here to answer your questions, to the best we can.  

Major Differences Between the NPR and Final Rule

• No annual reminder notices.
• No requirement to ask consumers if they want to hear a save attempt when they attempt to cancel.

Despite jettisoning these proposals, the FTC indicated it is keeping the record open on these issues and will be seeking further comment on these proposals in a supplemental NPRM.

The Final Rule

Scope § 425.1 Scope.

In addition to expanding its coverage to all types of negative option offers, including auto renewal, continuous service, and free-to-pay-conversions, and in all media (online, print, phone, in store), the Final Rule defines and includes within its coverage offers made in an “Interactive Electronic Medium,” which is defined at § 425.2(d) as “any electronic means of communicating (except via telephone calls), including Internet, mobile application, text, chat, instant message, email, software, or any online service.”  This addition was intended to address electronic media beyond just the Internet.

The Rule also makes clear it applies to B-B offers and transactions and is not just limited to B-C sales.

Definitions  § 425.2

As noted above, the Final Rule now defines Interactive Electronic Medium, which is referenced in § 425.1 (Scope) and § 425.6(c)(1)(3) (Simple Cancellation).

The Final Rule also now defines Material at § 425.2(e) to mean “likely to affect a person's choice of, or conduct regarding, goods or services,” mirroring the agency's longstanding definition in its 1983 Deception Policy Statement. It is referenced in §425.3 (Misrepresentations) and § 425.4(a) (Disclosure of Important Information).  

The Final Rule also defines Negative Option Seller at § 425.2(g) as “the person selling, offering, charging for, or otherwise marketing a good or service with a Negative Option Feature.”  Industry commenters expressed concern that this broad definition can sweep in unintended parties that do not actually sell or charge for negative option plans, such as creative and media buying agencies, affiliate partners, credit card processing companies and other payment intermediaries.  The FTC gave some comfort to entities in the payment ecosystem, noting on p44 of the SBP that it has “not enforced ROSCA against payment intermediaries solely for their conduct in effecting funds transfers” and will continue to “apply the same principles to the Rule.”   As for other participants involved in the marketing and supporting of negative option offers, the FTC notes in the SBP (p43) that while it removed the term “promoting” from the definition of “Negative Option Seller,” it declined to create status-based exemptions for other participants.

Misrepresentations  § 425.3

In response to industry comments expressing concern with the overly broad, and potentially unfair overreaching of the NPR proposal to declare that “any material fact related to the transaction, such as the negative option feature, or any material fact related to the underlying good or service” will be considered a violation of law, the FTC replaced that proposal with slightly different, but a still concerning prohibition on misrepresenting  “a Material fact” in connection with a NOF.  The Final Rule reads, “In connection with promoting or offering for sale any good or service with a Negative Option Feature, it is a violation of this Rule and an unfair or deceptive act or practice in violation of Section 5 of the FTC Act for any Negative Option Seller to misrepresent, expressly or by implication, any Material fact,” which includes the NOF or any term thereof, such as consumer consent, any deadline to prevent or stop a Charge, or the cancellation of the NOF.  It also includes a non-exclusive list of examples of misrepresentations the FTC has found material in regard to product offerings in prior cases, such as cost, purpose or efficacy, and health and safety. This provision remains concerning and is a key subject of Commissioner Holyoak's scathing dissent as it would make any false or deceptive statement or practice in connection with a NOF a violation of the Rule, and subject to civil penalties.  It is therefore more important than ever to ensure that any statement or representation, whether by words, image or sound, made in connection with a negative option offer, be truthful, accurate and not misleading or deceptive.

Disclosure of Important Information  § 425.4

In response to comments to the NPR, the FTC revised the initial disclosure requirements for a NOF as noted in red with deletions discussed below, “(1) that consumers' payments will be recurring, if applicable; (2) the deadline (by date or frequency) by which consumers must act to stop the charges; (3) the amount (or ranges of costs) consumers may incur; and (4) information necessary for the consumer to find the simple cancellation mechanism required pursuant to section 425.6.”

Some noteworthy changes here from the NPR.  First, by adding the parenthetical “(by date or frequency)” in (2), the FTC provides sellers with flexibility when identifying when consumers can cancel to avoid a renewal charge, where the precise date is not known.  As such, it may be acceptable to use “prior to the end of the then current term” or “every thirty days.”   Second, adding the parenthetical “(or range of costs)” to (3) will be helpful if a precise renewal price is not known at the time the offer is made and accepted, but the FTC appears to expect sellers to include a range of renewal prices a consumer can expect, even if not exact, but “a reasonable approximation” (p.84) and perhaps not the commonly used “then current rate in effect.”

Third, and music to many sellers' ears, the FTC removed the requirement to disclose “the date the charge will be submitted for payment” to address concerns that precise billing dates may not be known.

Last, the FTC changed the NPR requirement in (4) to disclose “information about the mechanism consumers may use to cancel the recurring payments” to “information necessary for the consumer to find the simple cancellation mechanism.”  This change effectively allows sellers to inform consumers where they can go to cancel, such as “go to your account” rather than providing a detailed and perhaps lengthy explanation of the cancel mechanism in the enrollment terms.

Surprisingly, but very welcomed, the FTC notes in the SBP (p87) that it removed a sentence from the NPR to address commenter concerns about prohibiting methods of disclosing material information in space constrained media. By removing “A disclosure is not Clear and Conspicuous if a consumer must take any action, such as clicking on a hyperlink or hovering over an icon, to see it,”  the FTC notes that where sellers may not have ample room to make the required disclosures (aka space constrained), they may, as a requirement of displaying a consent button to accept the offer, and thus be unavoidable, require a consumer to take certain actions, such as scrolling down to a disclosure and click a button indicating they have seen the disclosure.

Consent  § 425.5

In addition to a more fulsome coverage of these requirements in our prior blog post, two big issues addressed in the Final Rule and SBP are discussed here…. “obtain consent separately from” and need for a check box for consent.

§ 425.5 of the Final Rule reads “In obtaining such expressed informed consent, the Negative Option Seller must: (1) Obtain the consumer's unambiguously affirmative consent to the Negative Option Feature offer separately from any other portion of the transaction.”  Ok, clear enough.  But in the SBP, when addressing industry concerns regarding the need for obtaining consumer consent separate from other portions of the offer, the FTC very clearly, definitively and unequivocally concludes, “Based on the comments, the Commission finds requiring consumer consent to “the rest of the transaction” apart from the negative option feature is unnecessary, potentially confusing, and may be hard to implement.” (SBP p. 100).  Clear as Louisiana Mud.

So, what does this all mean…do you need to obtain consent for the NOF separate from other portions of the offer?  Um…maybe…and depends on what “other portions of the offer” mean, and since neither the SBP nor the Final Rule define this term, we remain unclear on its meaning or intent. But we believe the FTC is looking for the NOF consent to be separate from other copy or agreement to other terms of the offer, such as agreement to the seller's Terms of Use or privacy policy.  But even here we can't be positive this is what the FTC intended.

And what about a checkbox… is that needed to satisfy obtaining a consumer's “express informed consent” for a NOF?  Subsection 425.5(c) of the Final Rule (titled “Documentation of Unambiguously Affirmative Consent for Written Offers”) states that sellers will be deemed to be in compliance (emphasis added) with obtaining a consumer's “unambiguously affirmative consent to a Negative Option Feature” in a written offer (which includes Internet or phone applications) if they obtain “the required 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 transaction.”  Putting aside that pesky “and no other portion of the transaction” language, we note that the FTC provides these options as an “exemplar” or “safe harbor” for sellers to employ to ensure compliance.

But does the Final Rule require a check box to obtain consent to the NOF?  In responding to commenters asking for clarity around the NPR's proposed use of a check box, signature, or substantially similar method to obtain a consumer's unambiguously affirmative consent to a NOF, the FTC states in the SPB (p104) “The Commission further notes this provision does not require a check box or signature. The Commission offered these methods only as examples a seller can use to obtain unambiguously affirmative consent, not the only ways to do so.”  Boom!

But as the FTC giveth, it also taketh away, as seen on p104 of the SPB, where the Commission rejects a commenter proposal to allow express informed consent to be achieved through enhanced font formatting, “Further, the Commission declines to modify the final Rule to allow sellers to obtain express informed consent by merely “disclosing” the negative option more clearly through, e.g., bolded or underlined font, rather than obtaining expressed informed consent separately for the negative option feature.”  This comment is concerning as many sellers currently present their NOF terms in bold or use a bolded header for them to comply with the California (and other states') auto renewal law definition of “clear and conspicuous” (at Cal Bus & Prof Code 17601(c)) that allows terms to be presented “ ... in contrasting type, font, or color to the surrounding text of the same size, …. in a manner that clearly calls attention to the language.”

Section 425.5 (a)(3) requires sellers to maintain verification of consumers' consent for at least three years.  This is a change from the NPR proposal for sellers to keep records for the longer of 3 years and 1 year following termination of the subscription.  So that's good!

Notably, and thankfully, the FTC did not adopt various commenters' suggestions for sellers to obtain a consumer's separate consent to continue billing for a subscription following the end of a free trial.

§ 425.6 Simple Cancellation

The Final Rule generally follows the same approach toward cancellation as the NPR proposal, that is, sellers must provide a simple mechanism for a consumer to cancel a NOF, which must be at least as easy as the mechanism, and in the same medium, they used to consent to the NOF.

New to the Final Rule is the inclusion in subsection (c) (1) for “Interactive Electronic Medium,” which must be easy to find when the consumer seeks to cancel.  The cancel option must be obvious and not burdensome to locate.  The Final Rule also prohibits a seller from requiring a consumer to interact with a live or virtual agent (such as a chatbot) to cancel, unless the consumer consented to that method.  This is not a prohibition on offering a chatbot as a way to cancel, but a seller may not require this method as the sole way to cancel.

Notably, the FTC removed the requirement to have consumers consent to hear save attempts when seeking to cancel, and actually acknowledged in the SBP that the proposal wasn't workable, noting “the proposed saves provision did not achieve the right balance between protecting consumers from unfair tactics and allowing sellers to provide necessary and valuable information about cancellation.”  But the FTC indicated it would revisit this issue in a supplemental NPRM.

§ 425.7 Relation to State Laws

The Rule does not preempt any state law or regulation relating to negative option requirements, except to the extent it is inconsistent with the Rule.

§ 425.8  Exemptions – NEW Section

Sellers can apply for an exemption from the Final Rule, or the FTC can on its own issue partial or full exemptions, if it finds the Rule's requirements are not necessary to prevent the acts and practices to which the Rule relates.  Exemptions may be conditioned on alternative standards or requirements prescribed by the FTC.