FTC Proposes to Rewrite Negative Option Rule with Expansive Notice of Proposed Rulemaking

On March 23, the Federal Trade Commission ("FTC") announced a notice of proposed rulemaking that would significantly revise the legal framework governing automatically renewing subscriptions. The proposal would amend the FTC's existing Negative Option Rule to provide specific disclosure, consent, and cancellation requirements applicable to all negative options in all media. The Rule would formalize many of the guidelines from the FTC's October 2021 Enforcement Policy Statement Regarding Negative Option Marketing ("Policy Statement") and incorporate new requirements not previously addressed at the federal level such as renewal reminders.

Of particular note, the proposal includes new, strict cancellation requirements for companies offering automatically renewing subscriptions, including that cancellation must be "at least as simple" as the method the consumer used to sign-up and that consumers must consent before they can be presented with so-called "saves" (e.g., offers or discounts) before cancellation.

The proposed Rule also appears to be designed to further the FTC's goals of restoring its ability to obtain monetary relief for misrepresentations as to any material fact related to an underlying good or service offered as part of a negative option. If so construed, this would effectively enable the agency to claim that it can obtain monetary relief for first-time violations of Section 5, so long as the deceptive claim is made about a product or service offered as part of a negative option. And this provision would apply to sellers "promoting or offering for sale" any good or service with a negative option, which is far more expansive than ROSCA's applicability to "goods or services sold in a transaction effected on the Internet through a negative option feature."

Below, we have provided a brief summary of the legal landscape leading up to this proposal, a summary of the changes, the timeline for commenting, and an overview of the Commissioners' accompanying statements.

Brief Background

The proposed Rule would update the FTC's existing Negative Option Rule, first promulgated in 1973. That rule applies only to pre-notification plans (such as the Book of the Month Club), memberships in which sellers provide periodic notices offering goods to participating consumers and charge for those goods if consumers take no action to decline. The FTC's authority to regulate other automatically renewing subscriptions comes from a variety of sources, including Section 5 of the FTC Act, the Restore Online Shoppers' Confidence Act (ROSCA), and the Telemarketing Sales Rule. These sources create a patchwork of requirements that do not provide a consistent legal framework, which the FTC acknowledges "does not provide clarity about how to avoid deceptive negative option disclosures and procedures."

The Commission asserts that the persistence of deceptive and unfair negative option marketing warrants this new rule. The notice specifically spotlights the agency's dissatisfaction with disclosures for "free" offers, enrollment without consent, and overly burdensome cancellation procedures. The notice concedes that ROSCA itself "lacks specificity about cancellation procedures and the placement, content and timing of cancellation-related disclosures."

What Are the Key Provisions?

• Applicability: The Rule will apply to all forms of negative option marketing, including pre-notification and continuity plans, automatic renewals, and free trials that convert into ongoing subscriptions, on all forms of media.

• Misrepresentations: The Rule would prohibit misrepresentations, expressly or by implication, about any material fact related to the transaction, such as the negative option feature, or any material fact related to the underlying good or service.

• Disclosure Content: The Rule adopts disclosure requirements from the FTC's Policy Statement issued in fall 2021. Specifically, sellers would have to disclose "any material term related to the underlying good or service that is necessary to prevent deception." Sellers would also have to disclose specific terms about the negative option, including how much and how often consumers will be charged, and when and how consumers must cancel.

• Disclosure Presentation: The Rule adopts the definition of "clear and conspicuous" from the FTC's Policy Statement, which requires that disclosures related to the negative option feature appear "immediately adjacent to the means of recording the consumer's consent."

• Consent: The Rule again draws from the Policy Statement, requiring for example that consumers must consent to the negative option separately from any other portion of the transaction. The Rule provides examples of adequate consent mechanisms, such as "a check box, signature, or other substantially similar method, which the consumer must affirmatively select or sign" solely to accept the negative option. Sellers would also have to keep records of the consumer's consent.

• Cancellation: The Rule provides new requirements for cancellation of negative options, several of which are drawn from the Policy Statement. Notable requirements include:
  • Cancellation must be "at least as simple" as the method the consumer used to sign-up.
  • Cancellation must be offered through the same medium (i.e., Internet, phone, mail, or in-person) the consumer used to sign-up.
  • Sellers must allow consumers to cancel "immediately" unless the consumer affirmatively consents to receiving additional offers, modifications, or any reasons to retain the negative option.

• Annual Reminders: For all subscriptions that do not involve delivery of physical goods, sellers would have to provide reminders, at least annually, identifying "the product or service, the frequency and amount of charges, and the means to cancel." The reminder must be provided in the same medium the consumer used to consent.

• Preemption: The Rule specifies that it would not preempt the state automatic renewal laws except to the extent they are directly inconsistent and expressly protects state laws that are more protective of consumers.

The FTC declined to adopt a provision addressing notice of material changes to subscriptions, because of the fact-specific nature of such inquiries.

Comment Period

Stakeholders interested in commenting on the notice will have 60 days from the date that the notice is published in the Federal Register. As of the date of this blog post, the notice has not yet been posted.

Statement of Chair Khan and Commissioners Slaughter and Bedoya

The majority issued a statement supporting the proposal. The statement (like the FTC's press release) focuses on cancellation provisions and identifies examples of cancellation procedures that (in the agency's view) are not simple, including certified mail requirements or lengthy telephone holds.

Dissenting Statement of Commissioner Wilson

Commissioner Wilson, who announced her departure from the Commission earlier this month, dissented. She raised concerns about the breadth of the proposed Rule, specifically relating to the new section on "misrepresentations," which prohibits, in connection with promoting or offering a negative option, any misrepresentation of material fact related to the transaction or the underlying good or service. She expressed concern that this Rule pushes the boundaries of the FTC's authority, and is not consistent with ROSCA, which are concerns she has raised previously, including in her separate statement in the WealthPress settlement from January of this year.

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