The legal world is buzzing about the Federal Trade Commission (FTC) proposed non-compete rule (with good reason). But the FTC has recently issued another proposed rule that deserves attention: On March 23, 2023; the FTC proposed a new rule that would create additional requirements for companies that use subscriptions, automatic renewals, and other similar programs to sell their goods and services. Under the FTC’s proposed rule, companies must make it as easy to cancel subscriptions or memberships as it is to sign up. They also must provide more detailed information and notices about the subscriptions or memberships. While it is impossible to know the content of the final rule—which will not be published until after a notice-and-comment period—businesses should proactively take stock of their subscription and membership practices now to comply with the final rule.
The Current Regulatory Landscape
The FTC’s new “click to cancel” rule is an extension of its current Prenotification Negative Option Rule, first implemented in 1973. The Prenotification Rule is very limited; it applies only to prenotification plans, such as record-of-the-month clubs, where a seller sends a product and charges a participating consumer unless the consumer declines the periodic notice that the product will be sent. The rule requires prenotification plan sellers to disclose the plan’s material terms clearly and conspicuously, including minimum purchase obligations, billing and postage charges, and how to reject merchandise or cancel the plan.
The FTC’s Telemarketing Sales Rule also touches on “negative option” practices but applies only to negative-option sales made over the phone. In addition, in 2010, Congress passed the Restore Online Shoppers’ Confidence Act (ROSCA). This Act prohibits charging or attempting to charge consumers for goods or services sold on the Internet through negative option features unless the seller discloses material terms about the transaction, obtains express consent, and provides a simple mechanism to stop recurring charges.
Recent FTC Actions
In 2019, the FTC sought comment on whether and how to improve the Prenotification Rule. Very few comments were filed in response to the FTC’s request, though the FTC has noted that it receives thousands of consumer complaints about negative option plans.
The FTC has also filed several actions under Section 5 of the FTC Act in response to consumer complaints. These cases address a number of different types of negative option programs, including in-app purchases without a mechanism for consent, websites offering “free” samples that became subscriptions, and supposed “risk-free” trials of skin care products with hidden charges. See Fed. Trade Comm’n v. Amazon.com, Inc., No. C14-1038-JCC, 2016 WL 10654030, at *8 (W.D. Wash. July 22, 2016) (in-app purchases); FTC v. JAB Ventures, No. CV08-04648 (C.D. Cal. 2008) (“free” samples); FTC v. Bunzai Media Group, Inc., No. CV15-04527-GW(PLAx) (C.D. Cal. 2018) (skincare).
The FTC’s New Proposed “Click to Cancel” Rule
FTC’s proposed rule would greatly expand the current Prenotification Rule, covering a much larger scope of activity and imposing many more substantial requirements. The new rule would apply to all forms of negative option marketing in all media—e.g., Internet, telephone, print media, and in-person). The FTC has explained that it views negative-option marketing as primarily falling into four categories: prenotification plans, continuity plans, automatic renewals, and free trial conversions. While the current Prenotification Rule applies only to prenotification plans, the new proposed rule would apply to all four categories.
The new proposed rule also expands the substantive requirements on sellers. Perhaps most importantly (and why the rule is informally called the “click to cancel”), the rule would require canceling a negative option program to be as easy as signing up. And the cancelation method must be available through the same means as signing up. So, if a company offers “one-click” membership through its website, it must also offer “one-click” cancelation through the website.
Other substantive requirements of the proposed rule include required annual reminders for customers of programs that do not involve the shipment of physical goods, pre-billing disclosure requirements, express consent for subscription terms separate from the rest of the transaction, and limits on the ability to offer special deals to customers attempting to cancel (special offers can be made but the company must first ask if the customer wants to hear them). The FTC is taking comments on the proposed rule through June 23, 2023.
How Should Companies Prepare?
Although the new proposed rule may change before it is finalized, companies should begin examining their practices to ensure they understand what may need to change to comply with the final rule. Companies should first catalog their negative option marketing offerings under the broader definition provided by the FTC under the proposed rule. It will be necessary for companies to take a comprehensive approach to ensure that covered practices are not missed. Next, companies should review the processes associated with these offerings from beginning to end. Companies should review the representations they make concerning any aspect of a product or service involving negative option marketing to ensure those they are accurate and supported.
Companies should also review pre-billing disclosures to ensure that all material terms of the deal are disclosed to consumers before they enter their billing information and that express consent to the subscription is obtained. Finally, companies should begin discussions with their IT and other technical personnel to begin designing a simple cancellation procedure that customers can use to cancel their participation in negative option programs and to set up appropriate annual notifications to customers. Having an understanding ahead of the final rule of how a compliant cancelation process can be implemented will be essential. Involving IT and other technical personnel early in the process will likely to lead to greater efficiency when the final rule is published.
J. Nicci Warr is a partner at Stinson LLP. She may be reached at [email protected] for any questions.
Emily M. Asp is an associate at Stinson LLP. She may be reached at [email protected] for any questions.