The New Cancel Culture: The FTC's "Click to Cancel" Rule

The Federal Trade Commission (FTC) has made several amendments to the prior Negative Option Rule (Rule) that alter how subscription- and membership-based businesses will need to operate. This Holland & Knight alert summarizes and analyzes the changes wrought by the Rule, as well as details the potential implications and industry concerns.

Summary of Changes Wrought by the Rule

The Rule (officially titled the Rule Concerning Recurring Subscriptions and Other Negative Option Plans) addresses issues related to negative option marketing, including misrepresentations, disclosures, consent and cancellation. The Rule seeks to consolidate all requirements for negative option marketing, including those previously found in the Telemarketing Sales Rule and Restore Online Shoppers Act (ROSCA), which applied to telemarketing and online negative option sales only.

The Rule has several practical implications for businesses engaged in negative option marketing and sales. The Rule requires all businesses that utilize negative option marketing, including those that market and sell using traditional print media and face-to-face transactions, to:

• provide a cancellation method at least as simple and capable of being initiated through the same method used to initiate the transaction
• disclose the terms of the transaction, including the existence of the negative option and how the customer can terminate their agreement, prior to collecting the consumer's billing address
• obtain a consumer's consent to the recurring charges, automatic renewals or other negative option method utilized
• maintain proof of the consumer's consent for three years or one year after cancellation of the customer's account
• refrain from making misrepresentations in connection with negative option transactions

Of note, the FTC did not include in the final Rule a requirement that sellers provide annual reminders to consumers of the negative option feature of their subscription, a proposition considered by the FTC during rulemaking.

The section immediately following includes more detailed descriptions and an analysis of each change.

Expanded Coverage: All Negative Option Arrangements Now Regulated

The updated Rule expands coverage from just negative option purchases made online to negative option programs in any media, including telephone, in-person and printed material. It defines the negative option feature as "a contract provision under which the consumer's silence or failure to take affirmative action to reject a good or service or to cancel the agreement is interpreted by the negative option seller as acceptance or continuing acceptance of the offer." Included in this definition are automatic renewals, continuity plans, free-to-pay conversions or fee-to-pay conversions and prenotification negative option plans, regardless of the medium over which they are offered to consumers.

Simple Cancellation Method Required

The Rule requires sellers to provide a simple, clearly labelled cancellation mechanism that enables a consumer to immediately halt any recurring charges. It requires the mechanism to be at least as simple and capable of being initiated through the same method used to initiate the charge. For example, to meet the simplicity requirement, any telephone call used for cancellation cannot be more expensive than the call used to enroll.

Critically, a company must also permit cancellation through the same medium a customer used to sign up for the service and not require additional steps. For example, online cancellation may not require a customer to interact with a live representative.

Disclosure Requirements

The Rule requires sellers to provide the following "important information" prior to obtaining the consumer's billing information:

1. that consumers' payments will be recurring, if applicable
2. the deadline by which consumers must act to stop charges
3. the amount or ranges of costs consumers may incur
4. information about the mechanism consumers may use to cancel the recurring payments

The final Rule requires marketers to present this information "clearly and conspicuously" in a way that is not easy to miss and easily understandable by ordinary consumers. To present this information "clearly and conspicuously," the required information may not contain any other information that undermines the ability of consumers to understand the required information, including any information not directly related to the material terms and conditions of any negative option feature.

Affirmative Consent Required Prior to Collecting Billing Information

The Rule requires negative option sellers to obtain consumers' express informed consent before charging them. The final Rule requires marketers to:

1. obtain the consumer's unambiguously affirmative consent to the negative option feature separately from any other portion of the offer
2. refrain from including any information that "interferes with, detracts from, contradicts, or otherwise undermines" the consumer's ability to provide express informed consent
3. keep or maintain (for three years or a year after cancellation, whichever is longer) verification of the consumer's consent

The net effect of these changes is the imposition of a stricter informed consent standard. For example, the requirement for a separate negative option consent prohibits certain negative option enrollment methods, such as the use of retail sales receipts or check endorsements, in which the customer's signature serves a dual purpose (e.g., negative option enrollment and promotional check cashing). Likewise, for sellers making written offers, the Rule expressly authorizes a limited set of methods, including the use of check boxes and signatures, where the consumer must affirmatively select or sign to accept the negative option feature and no other portion of the offer. (Marketers may still use other methods that meet the express informed consent standard.)

In the free trial context, although marketers must obtain a consumer's express informed consent prior to being charged, the proposal does not require sellers to obtain an additional round of consent after the trial's completion.

Misrepresentations Prohibited

The Rule prohibits any person from misrepresenting, expressly or by implication, any material fact regarding the entire agreement. This is an expansion of existing requirements that only prohibited misrepresentations related to the negative option feature. Deceptive claims that the FTC seeks to prevent include misrepresentations related to costs, product efficacy, free trial claims, processing or shipping fees, billing information use, deadlines, consumer authorization, refunds, cancellation or any other material representation. This change will permit the FTC to broadly enforce and seek greater civil penalties for any misrepresentations made in connection with subscriptions and memberships, increasing the risk posed by these sales models.

Impact of Changes and Anticipated Challenges for Marketers

The Rule will drastically change the current regime governing negative option marketing. The Rule will expand the FTC's authority to allow it to police any negative option marketing. The Rule allows the FTC to seek civil penalties where such remedies are currently unavailable such as deceptive or unfair practices involving negative options offered in traditional print materials and face-to-face transactions (i.e., in media not covered by the existing negative option requirements contained in ROSCA and the Telemarketing Sales Rule (TSR)).

The informed disclosure requirement similarly represents a significant change to the statute. It will add new requirements that some industry leaders have already described as overly prescriptive, a burden to business, a restriction to innovation and confusing to consumers. On Jan. 16, 2024, the Interactive Advertising Bureau (IAB), National Cable & Telecommunications Association (NCTA), Performance Drive Marketing Institute, International Franchise Association and TechFreedom voiced such concerns in an informal hearing on the proposed amendments to the Rule. Further, the NCTA and IAB are petitioners in a challenge to the rule brought before the U.S. Court of Appeals for the Fifth Circuit. In their petition, they argue that the Rule imposes onerous regulatory burdens on businesses by requiring them to make subscription cancellations as easy as sign-ups.¹

How to Prepare for the New Rule

Any business that engages in negative option marketing has a vested interest in the outcome of the final Rule. Businesses can prepare by gaining an in-depth understanding of how their current practices must change and what systems will need to be put in place to implement the Rule. The FTC may seek up to $51,744 in civil penalties per violation of the new Rule's requirements.

How Holland & Knight Can Help

If your company engages in negative option marketing, Holland & Knight's Consumer Protection Defense and Compliance Team can help you understand the impact of this new Rule on your business and what changes your brand may need to make in order to come into compliance with the Rule.

Holland & Knight's Consumer Protection Defense and Compliance Team includes a robust FTC practice, with experienced attorneys who are recognized thought leaders in consumer protection and competition issues, including issues related to negative option marketing. The team has represented clients in investigations involving allegations of violations of ROSCA as well as deceptive and unfair practices related to negative option marketing and sales.

Notes

¹ Electronic Security Association v. FTC, Case No. 24-60542.