Background 

In March 2023, we analyzed the FTC's rule in its notice of proposed rulemaking ("NPRM") stage. The NPRM aimed to "modernize" the existing 1973 Negative Option Rule, which only applied to prenotification plans and was misaligned with other laws that governed subscriptions more broadly—including section 5 of the FTC Act, the Restore Online Shoppers' Confidence Act (ROSCA), the Telemarketing Sales Rule (TSR), the Postal Reorganization Act, the Electronic Funds Transfer Act, and a patchwork of state laws. This disparity persisted, even though both the existing 1973 Negative Option Rule and the aforementioned laws and rules all included an identical term that allowed a seller to interpret a customer's silence as acceptance of an offer.

As part of the rulemaking, the FTC garnered more than 16,000 comments from consumers and federal and state government agencies, consumer groups and trade associations. Comments varied, with some applauding its strong consumer protections while others criticized its burdensome transparency and privacy requirements. Notably the Final Rule noted that many major retail and internet companies already voluntarily comply with the proposed FTC rule by providing upfront pricing and making it as easy to cancel as it was to sign up. In October 2023, the Biden-Harris Administration weighed in and made the proposed FTC rule a part of its efforts to crack down on "junk fees". Ultimately, the Commission voted 3-2 in favor of the rule. 

In Depth

As stated by Commissioner Slaughter, in her separate statement, the "Final Rule that the Commission promulgates is. . . clarified, narrowed, and ultimately improved by the process of grappling with the substantial record of comments submitted by the public." 

While many of the provisions from the proposed rule were either modified or abandoned by the final rule, others remained unchanged by the NPRM process:

• Expanded Scope: The finalized rule is identical to the proposed version as it still expands the original 1973 Negative Option Rule from only regulating prenotification plans, where a seller provides periodic notices offering goods to consumers and then sends (and charges for) goods if the consumer neglects to affirmatively decline the offer, to all negative option features, regardless of the form of the offer or the medium in which it's made. Under the final rule a "negative option feature is defined as "a contract provision under which the consumer's silence or failure to take affirmative action to reject a good or service or to cancel the agreement is interpreted by the negative option seller as acceptance or continuing acceptance of the offer." Modern forms of recurring subscriptions include: (1) Continuity plans in which a consumer agrees in advance to receive goods periodically until the consumer cancels the agreement; (2) Automatic renewals in which a seller automatically renews a consumer's subscription upon its expiration, unless the consumer affirmatively cancels; and (3) Free trial conversion offers in which a consumer receives goods or services without charge or at a discount for an initial period, but is then charged for goods and services in full following the expiration of the free trial period. 

• Prohibitions against Misrepresentations: The final rule makes it unlawful for any negative option seller to misrepresent any material fact related to the transaction or the underlying good or service. "Material" is defined as "likely to affect a person's choice of, or conduct regarding goods or services." The FTC removed a list of actionable material facts from the finalized rule version. This omission was presumably made to increase the rule's chances of passage as Commissioner Wilson originally withheld her support from the rule based on the inclusion of "product efficacy" in the list of material facts. However, this omission itself remains controversial with Commissioner Holyoak issuing a dissent stating that, "the rule fails to define with specificity acts or practices that are unfair or deceptive, improperly generalizing from narrow industry-specific complaints and evidence to the entire American economy."    

• Prescriptive disclosure requirements: Also unchanged from the proposed rule, the final rule requires disclosure of all material terms prior to obtaining billing information from the customer. Material terms include (but are not necessarily limited to) those relating to the negative option offer such as: (1) that consumers' payments will be recurring; (2) the deadline by which consumers must act to stop charges; (3) the amount or ranges of costs consumers may incur; (4) the date the charge will be submitted for payment; and (5) information about the mechanism consumers may use to cancel the recurring payments.           

• New consent requirements: The final rule requires the seller to obtain unambiguous affirmative consent to the negative option feature. Notably, the FTC has removed the requirement that sellers also obtain a separate consent to "the rest of the transaction" because of its repetitiveness. Additionally, the FTC has responded to privacy and burden concerns noted in the NPRM comments, by axing the requirement that marketers obtain and maintain verification of such consent for the later of three years or a year after cancellation.  

• A simple cancellation mechanism: The finalized rule includes a click-to-cancel provision, requiring businesses to make it "as easy as" the mechanism the consumer used "to consent" to the negative option feature—rather than, as suggested in the proposed rule, as it was to start it. This amendment is said to prevent loopholes or ambiguity. Additionally, the rule requires a cancellation mechanism to be offered in the same medium it used to enroll the customer. Lastly, for consent obtained in person an in-person method similar to that which the consumer used for consent as well as a simple mechanism through an Interactive Electronic Medium or by providing a telephone number must be offered.  

• Requirements before making additional offers: In the final rule, the FTC has omitted the proposed definition of "save" because they "did not achieve the right balance between protecting consumers from unfair tactics and allowing sellers to provide necessary and valuable information about cancellation." Thus, the FTC reinstated the ability for sellers to pitch saves, such as lower pricing and different term length, when a consumer tries to cancel their enrollment. The Commission plans to seek further comment on this issue through a supplemental NPRM.

• Requirements regarding reminders: The FTC has also eliminated the requirement that sellers provide an annual reminder to consumers enrolled in negative option programs involving anything other than the automatic delivery of physical goods before they are automatically renewed. Commissioner Slaughter explained that the Commission declined to require reminders because, "our authority under the FTC Act to issue rules under section 18 has limits . . . [that] prevent us from codifying in a rule practices that we might, as a matter of policy."

     Commentary 

The FTC's "Click-to-Cancel Rule" is controversial and has already received pushback from both industry and government. Commissioner Holyoak issued a scathing dissent claiming "the Rule presents a missed opportunity to make useful amendments to the preexisting negative option rule within the scope of the Commission's authority." Within a week of the rule's publication, the industry bodies representing the media, interactive advertising and electronic security communities filed a Petition for Review challenging the FTC rule in the U.S. Court of Appeals for the Fifth Circuit. 

Laws restricting automatic renewal and other negative option features have been enacted by many states, including California, Florida, Utah, Vermont, North Dakota, Oregon, Virginia, and D.C. The state laws vary drastically in terms of renewal terms and notification requirements, with some including the annual reminder requirement that the FTC omitted, such as Virginia's House Bill 744, which was signed into law in April. 

What's Next

Companies still face a challenging compliance environment as the finalized rule adds to a tapestry of existing statutes and regulations at the state and federal levels governing recurring subscriptions and memberships. Therefore, businesses should read the FTC's finalized rule fact sheet and start taking steps towards compliance. Companies only have 60 days after the rule's publication in the Federal Register to comply with the misrepresentation provisions and 180 days from publication to comply with the disclosure, consent, and click-to-cancel provisions.

Companies should prepare to comply with the FTC's "Click-to-Cancel" rule by taking the following steps:

1. Audit renewing subscription sign-up processes to ensure information is factually complete, accurate and include all required information.
2. Establish mechanisms to obtain consumers' consent for membership and subscription fees in a manner that shows it was demonstrable, express and informed.
3. Streamline cancellation processes so that it is as easy as it was when the customer consented.
4. Review automatic subscription practices against applicable state law requirements which exist in parallel to the new FTC rule.