Proposed FTC Rule Tightens Leash on Automatic Renewals

The upshot, for busy people: 

• On March 23, 2023, the Federal Trade Commission (FTC) released a notice of proposed rulemaking to overhaul the agency’s rule regarding negative option plans—contracts and subscriptions for goods and services that automatically renew if the consumer takes no action. Once the proposed rule is filed in the Federal Register, stakeholders will have 60 days to provide comments.
• Among other things, the proposed rule would prohibit certain types of misrepresentations, require certain disclosures, and require an easy means of cancellation, with very limited opportunities for companies to save the transaction. 
• Violations of the proposed rule would allow the FTC to seek consumer redress and civil monetary penalties of more than $50,000 per violation. 
• Even if the FTC does not finalize the proposed rule, companies that sell products or services using negative options should review the rule carefully, as it reflects in many respects what the FTC believes is already required by the FTC Act and other statutes it enforces on negative options.

Background on the FTC and Negative Options 

The FTC has long included negative option plans within its overall enforcement program via a patchwork of legal authorities. The Telemarketing Sales Rule provides basic disclosure requirements for negative options sold via telemarketing. The Restore Online Shoppers Confidence Act (ROSCA) requires certain disclosures and an easy means of cancellation. Section 5 of the FTC Act generically prohibits unfair and deceptive practices in any medium. And the Commission’s 1973 Negative Option Rule covers only pre-notification plans such as book- or record-of-the-month clubs.

But recently, negative options have become a more prominent feature of the FTC’s work. For example, in 2021, the agency issued an enforcement policy statement outlining its expectations on disclosures, consumer consent, and cancellation practices. Negative options also have featured prominently in the agency’s recent focus on repackaging law violations as “dark patterns.” For example, the enforcement statement was described as an effort to combat “illegal dark patterns,” and cancellation practices featured prominently in the agency’s 2022 report outlining the types of practices it viewed as “dark patterns.” 

The Proposed Rule

Released on March 23, 2023, the proposed rule is comprehensive and would fully replace the 1970s-vintage Negative Option Rule. The agency actually began this rulemaking process years ago, with an Advanced Notice of Proposed Rulemaking released in 2019, a procedural step required by the FTC’s statutory authority to define unfair and deceptive acts and practices.

The new proposed rule has a number of key provisions. It purports to regulate any automatically renewing contract, program, or subscription sold through any medium (internet, telephone, print, or in-person) and would sit alongside the FTC’s other authorities related to negative option plans (the Telemarketing Sales Rule, ROSCA, and Section 5 of the FTC Act). The majority of the proposed rule’s provisions track requirements already imposed by those states that have passed statutes regulating automatic renewals, but several elements significantly extend existing compliance obligations.

Some sections of the proposed rule will look familiar to businesses operating in this space:

• “Clear and Conspicuous” Material Disclosures: Before the transaction is completed, the business must inform the consumer: (1) that the payment will be recurring; (2) the deadline by which the consumer must act to prevent the next charge; (3) the amount or range of the charge to the consumer; (4) the date the charge will take place; and (5) information about the cancellation mechanism. The “clear and conspicuous” requirements state that the disclosures must (a) be “easily noticeable,” (b) not contain any other information that could be distracting, and (c) be located adjacent to the request for the consumer’s consent.
• Consent: The business must obtain express, informed, and affirmative consent to the negative option feature separate from any other portion of the offer, as well as affirmative consent to the entire transaction. The business must also maintain a record of that consent for three years, or for a year after cancellation, whichever is longer. The rule makes clear that a business offering a free trial or discount period does not have to obtain a second consent at the end of that period.
• Simple Cancellation and “Save” Efforts: The business must provide a means of cancellation (1) through the same medium the consumer used to initiate the transaction that (2) is “as simple as” the method the consumer used to sign up. The proposed rule would prohibit any attempt to “save” the transaction prior to cancellation unless the consumer affirmatively consents to receive the save attempt. The business must retain a record of the consumer’s response to this question as well.
• Annual Reminder: For automatic renewal programs involving anything other than physical goods, the proposed rule would require the business to send the consumer a notice at least annually stating the product or service, the frequency and amount of charges, and how to cancel. Notification must be through the same medium that was used to consent to the negative option feature.

The aspects of the proposed rule that represent an expansion of the typical scope of automatic-renewal regulation are:

Misrepresentations. The rule prohibits misrepresentations in connection with a transaction involving an automatic-renewal feature—not simply a misrepresentation related to the automatic renewal program, but any misrepresentation at all related to the transaction or the underlying good or service, regardless of whether it is connected to the automatic renewal. 

Business-to-Business Transactions. The rule purports to cover “any form of negative option plan in any media,” which would arguably implicate business-to-business transactions involving automatic renewal provisions as well. While this practice is consistent with the FTC’s view that businesses can be “consumers” under Section 5 of the FTC Act, the vast majority of state automatic renewal laws are limited to transactions involving individual consumers. 

Violations of the proposed rule (if finalized) would be subject to civil penalties under Section 5(m)(1)(A) of the FTC Act, with means of customer redress set forth in Section 19.

The rule also expressly states that it does not preempt similar state laws, other than when compliance with both the federal rule and state law is impossible. In practice, this means that the proposed rule would add another layer of obligations on top of the patchwork of existing federal and state laws on automatic renewals, all of which must be tracked down to the finest detail by any business (such as the number of days before an automatic renewal that a reminder notice must be sent).

Commissioner Christine S. Wilson, who dissented from the proposed rulemaking, voiced concerns about the considerable expansion of the FTC’s regulatory authority that appears to underlie the rule. She noted that the proposed rule’s effort to bar any misrepresentations related to the transaction, even if the statement has nothing to do with the negative option feature, was an improper end-around of the Supreme Court’s decision in AMG Capital v. FTC, 141 S. Ct. 1341 (2021), which curtailed the FTC’s ability to seek civil penalties under Section 13(b) of the FTC Act.

What Does This Mean for My Business?

Companies and industry groups should consider whether to submit a comment. Businesses likely have unique perspectives on a number of the practices here, including why a one-size-fits-all cancellation requirement may not be appropriate for certain products or services. 

Until the rule is finalized, the proposed rule is just that, and does not itself impose any obligations. That said, the proposed rule is in line with the FTC’s recent statements regarding the application of its existing authorities, such as ROSCA. Companies should consider reviewing their subscription programs, from the initial buy-flow process through completion of the transaction and subsequent notices to the consumer.