Perhaps prompted by the proliferation of subscription services during (and since) the pandemic, several states have recently passed new automatic renewal laws (ARLs) that regulate continuing or renewing contracts for goods and services. Other states have likewise amended existing ARLs to add various restrictions and requirements.
With such activity at the state level, it was only a matter of time before federal regulators joined the fray. The Federal Trade Commission (FTC) recently did so by issuing a statement regarding its nearly 50-year-old Negative Option Rule. That statement expressed concern about “major gaps” in the federal regulatory regime: the Negative Option Rule regulates only “prenotification plans” (under which sellers send products and charge customers unless they decline), the Telemarketing Sales Rule (TSR) regulates only telemarketing, and the Restore Online Shoppers’ Confidence Act (ROSCA) regulates only online purchases.
Against this backdrop, the FTC has now proposed an amended Negative Option Rule that would create a sweeping regulatory regime for not only prenotification plans but also continuous contracts, automatically renewing agreements, and free (or discounted) trials. Like the most stringent state ARLs (e.g., in California and New York), the proposed federal rule would require clear and conspicuous disclosures of automatic renewal terms, affirmative consent, and easy cancellation procedures, among many other requirements. Unlike those ARLs, however, this proposed rule would expressly apply both to consumer contracts and business-to-business contracts.
The public comment period closed on June 23, 2023. In addition to thousands of consumer comments, a number of public officials and various organizations offered their views on the proposed rule.
Notably, a coalition of 26 state attorneys general wrote to support the proposed rules and suggest clarifying language. The suggestions included requiring “an additional round of consent before charging a consumer at the completion of [a] free trial”; prohibiting “unreasonable barriers” to cancellation mechanisms; requiring cancellation mechanisms to be cost-effective, timely, and easy to use; and implementing additional cancellation methods, such as the ability to cancel via chat or text message.
By contrast, the proposed rules received criticism from a number of trade associations. For example, NCTA—The Internet & Television Association explained that the rules would exceed the FTC’s authority and would “burden, confuse, and harm consumers.” The Association of National Advertisers argued that negative option features benefit consumers and cautioned that certain proposed amendments would “create consumer frustration and unnecessary burdens for individuals who wish to purchase goods or services through negative option features.” And the Center for Data Innovation urged the FTC to limit the scope of “liability for misrepresentations” by changing the phrase “any material fact related to the underlying good or service” to “any material fact related to the underlying negative option feature.” (Emphasis added.)
Although the proposed rule may be modified to address public comments, we briefly discuss below its current requirements and restrictions. As set forth below, the FTC’s proposed amendments include new rules for disclosures, consent, renewal reminders, cancellation, misrepresentations, and enforcement.
The proposed rule would require the initial disclosure of certain information, including whether any payments will be recurring until canceled; the deadline to act before incurring additional charges; the amount, dates, and frequency of charges; and instructions on how to cancel. This information must be provided for online, print, telephone, and in-person offers—and it must be provided “clearly and conspicuously” and “immediately adjacent” to the request for consent. Although these rules are generally consistent with state ARLs, the “immediately adjacent” requirement is arguably stricter than state laws, which typically require only “proximity” between disclosures and the request for consent.
The proposed rule would require affirmative consent to the required disclosures before charging for a negative option or recurring contract. Such consent to the renewal terms would need to be separate from any consent to the transaction or contract more generally; in other words, the request for consent would need to take the form of a “check box, signature, or other substantially similar method, which the consumer must affirmatively select or sign to accept the Negative Option Feature and no other portion of the transaction.” Notably, this requirement is analogous to the separate consent required under Vermont’s ARL, which no other state statute currently requires.
Under the proposed rule, annual reminders would be required for subscriptions involving “anything other than physical goods.” Such reminders would need to “identify the product or service, the frequency and amount of charges, and the means to cancel” and be delivered in the same manner through which consent was provided.
The proposed rule would require simple and easy cancellation methods, which the FTC calls “click to cancel.” The cancellation option must be as simple as the method used to sign up, and it also must be offered through the same medium used to sell the negative option (e.g., a consumer who purchases a subscription online must be allowed to cancel online). Further, the rule would require consumer consent for a business to pitch any additional offers or modifications to a subscription at the time of cancellation.
The proposed rule would prohibit any misrepresentation of a material fact related to any part of the transaction, good, or service, regardless of whether the misrepresentation is related specifically to the negative option feature.
The proposed rule would expand the FTC’s current enforcement power, such as its ability to seek restitution, injunctive relief, and civil penalties for any alleged violations—including violations of the above-mentioned new rule concerning factual misrepresentations. Although the rule does not expressly provide a private right of action, individuals in states with broad consumer protection statutes that permit claims for violations of other laws may be able to sue for alleged violations of the new rule, in either individual or class action suits.
With the comment period now closed, the FTC will issue the rule as currently drafted, make further revisions and seek additional comments, or decline to issue the rule altogether. Assuming the rule as drafted (or substantially similar) is adopted, the FTC has made clear that the rule would not preempt state ARLs, except in cases where compliance with both laws is not possible.
Accordingly, the new rule could directly impact businesses in several ways. It would build upon the current patchwork of state ARLs, and because many of those laws do not regulate business-to-business contracts with automatic renewal provisions, the new rule would effectively increase their scope and bring many contracts under new scrutiny. Relatedly, businesses that have avoided state regulation to date (because they only do business in states without an ARL) may need to make significant changes—or face the prospect of FTC enforcement and steep civil penalties—in light of the proposed federal regime, which would be a dramatic expansion from current federal requirements under the Negative Option Rule, TSR, and ROSCA. Finally, as noted, certain specific requirements, such as the requirement that disclosures be “immediately adjacent” to the request for consent, would expand on existing ARLs that require only “visual proximity.”
Other, indirect consequences may flow from the new rule. It may deter state ARL legislation, which may no longer be viewed as necessary given strengthened federal requirements. It may also generate even more private enforcement through individual and class litigation; as discussed, individuals in states with broad consumer protection statutes (such as California’s Unfair Competition Law) may attempt to use a violation of the new federal rule as the predicate act for a claim under state law.
Given the likelihood that the new rule (or at least a modified version of it) will take effect, it would be prudent for businesses to use this opportunity to conduct a “refresh” of their disclosures, contract terms, consent processes, cancellation procedures, and the like as private lawsuits and government activity show no signs of stopping.
