The Bottom Line
- The long-awaited final rule will trigger an industry-wide shift in how subscription offers are handled. The new rule applies to virtually all negative option marketing – whether online, over the phone or in person.
- The final rule deviates from or clarifies the proposed rule in several respects, including by expressly confirming the rule applies to B2B transactions and walking back the proposed prohibition on consumer “save” attempts.
- Marketers need to take action now, as the law will go into effect 180 days after publication in the federal register (with the prohibitions against misrepresentation of material facts going into effect 60 days from publication).
The Federal Trade Commission (FTC) has long regulated negative options – such as prenotification plans, continuity programs, automatic renewals and free-to-pay conversions – through the Negative Option Rule and strategic enforcement actions. Now, the FTC has concluded a multi-year process, incorporating input from thousands of public comments from consumers, the retail industry, law enforcement partners and others, to publish a final Rule Concerning Recurring Subscriptions and Other Negative Option Programs that regulates automatic renewal programs comprehensively in any and all media (e.g., telephone, internet, traditional print media, and in-person transactions).
While many marketers are familiar with the proposed updates, there are some notable deviations and key points of clarification in the final rule that marketers should be keenly aware of.
Key Material Changes from the Proposed Rule
Consumer “Save” Attempts
In a surprise twist, the FTC has declined to adopt its much-maligned prohibition on consumer “saves”. This proposed clause would have prohibited a business from serving any upsells, other offers, or explanation of subscription benefits to a consumer who wants to cancel unless they first receive the consumer’s consent to receive such offers. This triggered an uproar in the industry since it seemed to place a chokehold on companies’ ability to engage in consumer retention efforts. The FTC has now acknowledged that the proposed “saves” provision didn’t strike the right balance between protecting consumers from unfair tactics and allowing sellers to provide necessary and valuable information about cancellation. Note: The FTC is leaving the record open on this point, since they may engage in a supplemental notice of proposed rulemaking specifically on this point in the future. However, as of now, “saves” are no longer defined or specifically addressed in the new rule.
- While the FTC has not adopted this provision, the FTC rule will not pre-empt state laws that afford greater protection to consumers – so following California’s current “one save” rule would be a good rule of thumb at the current moment.
- The FTC has clarified that the removal of the “saves” proposal from the Rule is not a license to erect unreasonable barriers to cancellation. Save attempts that interfere with cancellation by requiring consumers to jump through hoops and navigate through multiple upsells may still be considered a generally deceptive “dark pattern.”
P.S. The FTC received more than 16,000 comments on its proposed rule. These comments clearly informed the FTC’s decision to move away from its proposed restrictions on “saves.” Companies should not underestimate the notice and comment process – this process often provides meaningful opportunities to try to impact the scope of regulations.
“Click to Cancel” Rule
The FTC clarified that its “simple cancellation” requirement essentially means that the cancellation mechanism should be as simple to use – in terms of time, burden, expense, ease of use, and the like – as the enrollment mechanism.
It does not require use of the exact same mechanism. The FTC expressly acknowledged that consumers may have to, for example, verify or authenticate their identity before cancelling. However, any such procedures should not create distinctly asymmetrical experiences. This focus on “symmetry” aligns with the CPPA and state regulators’ view on “dark patterns” in design generally.
Express Affirmative Consent and “Separate” Consent to a Negative Option Feature
The definition of “express affirmative consent” to a transaction hasn’t changed, but the FTC continues to point to an unchecked check box or other affirmative signature as the gold standard.
- Notably, while the FTC has adopted its proposed requirement for the consumer to consent to the negative option feature “separately from the rest of the transaction,” (consistent with its prior reading under ROSCA), it has declined to require a second separate consent to the “rest of the transaction” because it is unnecessary and could be confusing and hard to implement.
B2B Applicability
The FTC has expressly clarified that the Rule will apply to B2B transactions – not just B2C. Notably, the FTC explained that final Rule is not intended to prevent businesses from entering into agreements with individually negotiated negative option terms. Instead, by requiring the cancellation mechanism to be “at least as easy to use” as the consent mechanism, the final Rule incorporates a symmetrical standard that accounts for individually negotiated B2B agreements.
Therefore, B2B marketers who may previously have disregarded the rule as a consumer-focused law will need to take note.
Material Misrepresentations
The new Rule will also prohibit sellers from making any material misrepresentations about any aspects or facts related to a negative option transaction (which would include claims about the product). Note that this specific clause will go into effect 60 days from publication of the rule in the Federal Register, rather than 180 days for the rest of the rule.
Reminder Notices
The new Rule also declines to adopt the requirement for negative option sellers to send a reminder notice in the 12th month of a plan, even if the plan is not annual (i.e. month to month). So, Colorado still remains an outlier with respect to this requirement.
Requirements to Remember
In addition to the above nuances, the following provisions of the proposed Rule are now final:
Mandatory Disclosure of All Material Terms
Businesses must disclose all material terms upfront, including charges, cancellation deadlines and renewal terms. This information must be clearly displayed before a consumer agrees to subscribe. Material terms might include how much and how frequently the business will charge people, when free trials or promotional offers will end, deadlines to withdraw from the program and how to cancel. All this information should be clear, conspicuous and available to customers before they enroll. And certain key information related to charges and cancellation must appear right when and where the customer agrees to the negative option.
Telemarketing and Recordkeeping Requirements
For subscriptions initiated over the phone, businesses must also comply with the Telemarketing Sales Rule, ensuring that customers receive adequate disclosures and that records of consent are maintained. For all negative option programs, marketers must obtain proof of consent and maintain it for at least three years.
Enforcement and Preemption
The FTC has made it clear that violators of the rule will face penalties, including civil fines (of up to $51,744 per violation, adjusted annually for inflation). Further, regulators are taking the position that compliance should not require significant changes to website architecture or significant cost, so they will likely not be sympathetic to marketers who don’t comply with the new rules.
Note that state requirements that they afford greater protection to any consumer are not preempted. This means that, for example, a state law that requires sellers to remind consumers at the end of a free trial that they are about to be billed would provide greater protection to consumers and not be inconsistent with the Rule.
Dissent and Potential for Challenge
Note that the Rule passed by a 3-2 vote. Commissioner Holyoak issued a separate dissenting statement, arguing that the Rule represents an elevation of political goals (given its “rush” publication shortly before an election) over policy efforts that might otherwise benefit consumers, and ultimately undermines the Commission’s legitimacy.
Specifically, Commissioner Holyoak opined that the Rule fails to comply with the FTC Act’s Section 18 requirements for rulemaking because:
- the Rule is much broader than proposed by the advance notice of proposed rulemaking
- 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; and
- the Rule fails to demonstrate that the unfair or deceptive acts or practices related to negative option billing are prevalent.
Commissioner Holyoak further hinted at a potential chilling effect, as the Rule’s breadth may incentivize companies to avoid negative option features that honest businesses and consumers find valuable. For example, by singling out representations made in connection with negative option billing models and subjecting these representations to civil penalties or other monetary relief, businesses may avoid using negative option billing models in over to avoid heightened risks.
The Commissioner indicated that the Rule seems likely to be challenged in court. Particularly in the wake of Loper Bright, companies should follow any challenges to the Rule closely.