FTC Proposes Broad Sweeping Updates to Recurring Subscriptions and Memberships

The Federal Trade Commission recently announced a proposed a “click to cancel” provision requiring sellers to make it as simple for consumers to cancel their enrollment as it was to enroll.

According to the FTC, if consumers are unable to easily leave any program when they want to, the negative option feature becomes nothing more than a way to continue charging them for products they no longer want.  To address this issue, the proposed rule would require businesses to make it at least as easy to cancel a subscription as it was to start it.  For example, if a consumer can sign-up online, cancellation much be able to be effectuated on the same website, in the same number of steps.

But that’s not all the FTC is proposing regarding subscriptions and recurring payments.

The FTC is also proposing:

• Expanded Scope: The proposed “Rule Concerning Recurring Subscriptions and Other Negative Option Plans” would cover all forms of negative option marketing, whether via internet, phone, through print materials, and in-person transactions.  Any persons “selling, offering, promoting, charging for, or otherwise marketing a negative option feature” would be subject to the new Rule.

• Additional Consent Requirements: The proposed rule requires marketers to obtain independent consent for the negative option feature and precludes the inclusion of additional information that could interfere a consumer’s ability to provide consent. It sets forth requirements about how consent must be obtained.  Marketers would be required to obtain consent for the whole transaction and maintain proof for three years.

• Additional Disclosure Requirements: The proposed rule requires marketers to disclose “any material terms related to the underlying good or service that is necessary to prevent deception,” regardless of whether it relates to the negative option feature, including (i) that consumers’ payment will be recurring; (ii) the deadline for consumers to stop charges, (iii) the amount or range of costs that may be incurred; (iv) the date the charge will be submitted for payment; and (v) information about how to cancel. The proposed rule also sets forth instructions about how to make disclosures.

• New requirements before making additional offers: The proposed rule would allow marketers to pitch additional offers or modifications when a consumer tries to cancel their enrollment.   However, before making such pitches, sellers must first ask consumers whether they want to hear them.  In other words, a seller must take “no” for an answer and upon hearing “no” must immediately implement the cancellation process.

• New requirements regarding reminders and confirmations: The proposed rule would require sellers to provide an annual reminder to consumers enrolled in negative option programs involving anything other than physical goods, before they are automatically renewed.  The reminders must identify the product or service, the frequency and amount of charges and how to cancel.

“Some businesses too often trick consumers into paying for subscriptions they no longer want or didn’t sign up for in the first place,” said FTC attorney and Chair Lina M. Khan.  “The proposed rule would require that companies make it as easy to cancel a subscription as it is to sign up for one.  The proposal would save consumers time and money, and businesses that continued to use subscription tricks and traps would be subject to stiff penalties.”

The notice of proposed rulemaking is part of the FTC’s ongoing review of its 1973 Negative Option Rule, which the agency uses to combat unfair or deceptive practices related to subscriptions, memberships and other recurring-payment programs.

Importantly, the new rules pertaining to what the FTC refers to as “Negative Option Programs” would be applicable to “negative option” marketing in all media, including telephone, online, print and in-person transactions.  They would effectively require all marketers engaged in automatic renewals to revisit renewal and cancellation compliance protocols.

These programs are widespread in the digital advertising marketplace and can provide substantial benefits to both consumers and businesses.  However, without first engaging in preventive compliance legal work with an FTC defense attorney they can become dangerous when marketers fail to make adequate disclosures, bill consumers without their consent, or make cancellation either difficult or impossible—such as by requiring customers to cancel in person or keeping them stuck on hold waiting to talk to customer service.

The FTC vote approving publication of the notice of proposed rulemaking was 3-1, with Commissioner Christine S. Wilson voting no.  Chair Khan issued a separate statement, in which she was joined by Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya.

Commissioner Wilson issued a dissenting statement wherein she notes that the updated rules would cover services “wholly unrelated to the negative option feature” and expand the FTC’s reach beyond the automatic renewal space.  In effect, it would enable the FTC to regulate marketers using negative option programs for misrepresentations (e.g., about the features, efficacy or characteristic of a product/service) that are not related to the automatic renewal feature, and obtain civil penalties for almost any misrepresentation.

The proposed rule prohibits negative option sellers from “misrepresenting, expressly or by implication, any material fact related to the transaction, such as the Negative Option Feature, or any material fact related to the underlying good or service.”  In her dissent, Commissioner Wilson characterized the proposed rule as an “end-run around the Supreme Court’s decision in AMG.”  The expanded authority to seek redress and civil penalties for misrepresentations is probably the most controversial aspect of the proposed rule.

The FTC has developed a fact sheet summarizing the proposed changes to the Negative Option Rule.

Consult with an experienced FTC defense attorney regarding applicable state legal regulations, and their potential applicability to any type of negative option, subscription, automatic renewal, continuity and free trial conversion campaign.

Richard B. Newman is a digital advertising lawyer at at Hinch Newman LLP.  

Informational purposes only. Not legal advice. May be considered attorney advertising.