FTC Final Negative Option Rule: Changes and Impacts

As previewed in our spring 2023 overview of the proposed Rule, the FTC drafted the final revisions with the intent to combat practices – such as recurring charges and misleading cancellation policies for products or services that consumers no longer want but cannot cancel without undue difficulty – that it believes are unfair or deceptive. The FTC’s revisions to the Rule require consumer refunds for recurring subscriptions in the following circumstances:

1. Where businesses are not truthful or leave out material information,
2. Where consumers are billed without agreeing to pay for products/services, and
3. Where sellers make it difficult – or nearly impossible – to cancel.

While the FTC ultimately did not incorporate burdensome proposed requirements for annual reminders or prohibitions on “saves”[1], the agency’s final Rule imposes significant new burdens on any company offering programs via which a seller interprets a customer’s silence, or failure to take an affirmative action, as acceptance of the offer.

• The FTC expanded the final Rule to cover all negative option marketing. Negative option programs typically fall into four categories: prenotification plans, continuity plans, automatic renewals, and free trial conversion offers. While the prior version of the Rule applied only to prenotification plans[2] for the sale of goods, the Rule is now expanded to apply to nearly all forms of negative option programs in any media – i.e., essentially, any offer or provision under which a consumer’s failure to take affirmative action, or silence, is interpreted as acceptance of the offer. The Rule applies to both business-to-business and business-to-consumer transactions.
• Sellers must disclose all material information and not mislead. Prior to enrolling consumers in any negative option plan, businesses must clearly and conspicuously disclose all material terms and conditions (namely, any provision of the product/service offering that would be considered by consumers or influence consumers’ decision to sign up). Material information – including the frequency and amount of charges, how to cancel, and key deadlines – must be located in close proximity to where the consumer consents to the negative option program and at every point of consent. All marketing representations related to the negative option program must be truthful, accurate, and easy to comprehend.
• Sellers must obtain and maintain consent. Sellers must obtain proof of consumers’ “unambiguously affirmative consent” to all negative option plans prior to charging consumers. They must also maintain such proof for at least three years from the date of consent unless “sellers can show by a preponderance of the evidence they use processes that make it technologically impossible for a consumer to purchase the good or service without consent.” While the proposed Rule required businesses to obtain consumers’ consent to the negative option feature separately from, and in addition to, consent to any other part of the transaction, the FTC elected not to incorporate a requirement for separate consent to “the rest of the transaction” into the final Rule, citing complexity and burden on businesses, along with potential consumer confusion.
• “Click to cancel.” Businesses must provide a simple way for consumers to cancel enrollment in any negative option plan. In other words, it must be as easy for consumers to cancel as it is to sign up, and cancellation must be offered via the same medium through which consumers enroll (e.g., if consumers sign up online, sellers cannot demand that they speak with a live or virtual representative to cancel).

NEXT STEPS AND TAKEAWAYS

While most of the provisions of the FTC’s final Rule will take effect 180 days after publication in the Federal Register, businesses must comply within 60 days of publication (if they have not already) with the provisions of the Rule prohibiting any misrepresentations in connection with a negative option feature, as existing law currently requires businesses to be truthful and not misleading when making marketing representations. According to the FTC, these provisions “should not impose an added time or cost burden on businesses operating lawfully.”

We anticipate that the FTC will enhance its existing enforcement and investigations into noncompliant activities. Prudent legal risk management calls for companies to evaluate current or planned offers for recurring subscriptions, or other negative option features, to determine whether they are compliant with the requirements of the new Rule. Where changes are necessary, legal counsel can help modify existing and planned programs to ensure compliance with the new provisions while preserving the effectiveness and consumer value of these offers.