Click to Cancel: FTC Proposes Rule for Automatic Renewals

The Federal Trade Commission (FTC) recently issued a proposed rule to govern negative option (also known as automatic renewal) plans as part of the FTC’s ongoing review of its 1973 Negative Option Rule, which the FTC uses to combat unfair or deceptive practices related to subscriptions, memberships, and other recurring-payment programs. If enacted, the proposed rule would significantly alter required disclosures and grant the FTC authority to seek redress and civil penalties for misrepresentations regarding the entire sale agreement—not just facts related to a negative option/automatic renewal feature. The FTC’s proposed rule comes on the heels of increased litigation in this area, as well as continued state legislation on this topic, including laws in Idaho and Tennessee that took effect on January 1, 2023 and a law in New Jersey that will take effect on August 1, 2023.

Ease of Cancellation: Negative option features come in a variety of forms (e.g., club memberships, subscriptions, and scheduled refill programs), but all share the central feature that  they allow a seller to interpret a customer’s silence, or failure to take an affirmative action, as acceptance of an offer, resulting in continuation and automatic renewals until a customer takes affirmative action to cancel. While the FTC has found that negative option plans can provide substantial benefits for sellers and consumers, it also has found that consumers cannot reap these benefits when sellers make cancellation difficult or impossible.

Among other things, the proposed rule would require that cancellation be at least as easy to use as the method the consumer used to initiate the negative option feature, which requires a seller to provide the cancellation mechanism through the same medium (such as Internet, telephone, mail, or in-person) that the consumer used to consent to the negative option feature. For example, if a consumer can sign up online, they must be able to cancel on the same website, in the same number of steps. Further, under the proposed rule, sellers must obtain consent before trying to “save” a cancellation attempt, such as by presenting additional offers, modifications to the existing agreement, reasons to retain the existing offer, or similar information.

Expanded Disclosure Requirements: The proposed rule would broadly require sellers to disclose “any material terms related to the underlying good or service that is necessary to prevent deception” regardless of whether such terms relate to the negative option feature. At a minimum, the proposed rule would require the following disclosures: (1) that consumers’ payment will be recurring, (2) the deadline by which consumers must act to stop charges, (3) the amount or range and frequency of costs the consumer may incur, (4) the date(s) the charge will be submitted for payment, and (5) information necessary for cancellation. These disclosures must appear immediately adjacent to the means of recording the consumer’s consent for the negative option feature, and any other disclosures not directly related to the negative option feature must appear before a consumer decides to buy (e.g., before they “add to cart”).

Annual Reminders: Many negative option plans involve services, such as streaming services, internet services, and maintenance services, rather than physical goods. Under the proposed rule, for negative option plans not involving physical goods, consumers must receive reminders, at least annually, identifying the product or service, the frequency and amount of charges, and a means to cancel. Like the cancellation mechanism, sellers must provide such reminders through the same medium the consumer used to consent to the negative option feature (and by internet or phone for in-person sales).

Enforcement: The FTC enforces the Negative Option Rule pursuant to Section 5 of the FTC Act, so violations of the proposed rule may amount in penalties up to $50,120 per violation. The proposed rule states that a seller’s misrepresentation, whether express or implied, of any material fact related to the transaction or the underlying good or service—not just the negative option feature—is a violation of the proposed rule and, thus, a violation of the FTC Act subject to potentially steep penalties. This could significantly expand sellers’ potential liability and risks.

State Laws: The proposed rule explains that it does not preempt state laws relating to negative option requirements, except to the extent that such laws are inconsistent with the proposed rule, and then only to the extent of the inconsistency. As state laws that provide consumers with greater protections than those provided under the proposed rule are not inconsistent with the proposed rule, sellers need to ensure compliance with the many state laws also regulating negative option plans. While many states have had statutes regulating automatic renewal clauses for years, others continue to enact such laws, creating a dynamic legal landscape.  Sellers will need to navigate the legal landscape on both a federal and state level, especially since litigation has increased across the board when it comes to these types of laws.

In its announcement of the proposed rule, the FTC Chair explained that the rule “would save consumers time and money, and businesses that continued to use subscription tricks and traps would be subject to stiff penalties.” Although the rule is only proposed at this point, it signals the FTC’s position and increased scrutiny with respect to negative option and automatic renewal plans.

Comments are due within 60 days once the proposed rule is published in the Federal Register. A copy of the proposed rule is available here.

If you need assistance with complying with federal and state automatic renewal laws or structuring your subscription service, please contact one of the authors of this alert.