Yesterday, the Eighth Circuit vacated the Federal Trade Commission’s (FTC) Negative Option Rule (Click-to-Cancel Rule or Rule) that was set to go into effect on July 14.
As a quick refresher, in October 2024, several trade associations filed petitions for review in four circuit courts challenging the validity of the Negative Option Rule. Custom Communications, Inc. v. Federal Trade Commission, No. 24-3137 (8th Cir. Oct. 22, 2024). The litigation was consolidated in an action in the Eighth Circuit, which denied the petitioners’ motion to stay the Rule while the litigation was pending. In other words, businesses and consumers were under the impression until today that the Rule would take effect on July 14.
Instead, the Eighth Circuit vacated (struck down) the Rule on procedural grounds. Specifically, the court found that the FTC failed to conduct a required “preliminary regulatory analysis” after the administrative law judge found that the Rule would have an annual effect on the economy surpassing the $100 million threshold. The court also rejected the FTC’s argument that failure to conduct a preliminary regulatory analysis was a “harmless error.” Notably, the court acknowledged that while the Rule did contain a severability provision, vacating the entire Rule was appropriate here because of the prejudice the petitioners suffered due to the FTC’s procedural error. Because the Eighth Circuit struck down the Rule on procedural grounds, it ultimately declined to consider the petitioners’ substantive arguments.
So, what happens next?
The FTC has a few different options it could explore:
- The FTC could petition the Supreme Court for review. Considering the lack of deference to regulators’ rulemaking authority in recent cases, this option is less likely than it might have been in the past.
- The FTC could reopen the rulemaking record. This would require the FTC to issue a Supplementary Notice of Proposed Rulemaking (SNPRM), which would include a detailed preliminary regulatory analysis. The FTC would also request comments from the public on the SNPRM. Following this request for comment, the FTC would likely issue a final Federal Register notice with a revised final regulatory analysis. While this option may seem to be the most straightforward path, it would be time intensive, and the final product may look different than the Rule that was struck down. While FTC Chairman Andrew Ferguson has been supportive of the Rule generally, he and the other Commissioners have been critical of certain provisions, such as the right to pursue any misrepresentation for a subscription under the Rule. This provision likely would not be in any new version of the Rule, and other changes could be made as well.
- The FTC could also take no action on the Rule and continue to aggressively enforce the Restore Online Shoppers’ Confidence Act (ROSCA). There are several cases pending in federal court in which the FTC is enforcing ROSCA and Section 5 of the FTC Act, which do not rely on the FTC’s Click-to-Cancel Rule. The FTC has brought and likely will continue to bring many enforcement actions regarding ROSCA violations.
As we hint above, despite the court’s decision to vacate the Rule, we expect to see significant ROSCA enforcement. During the pendency of this action, the FTC filed a brief in which it fully supported the Rule, which we discussed in our blog. This is particularly notable because Commissioner Melissa Holyoak and then-Commissioner Ferguson voted no on the final Rule, primarily due to the misrepresentation provision referenced above. Reading the tea leaves, the brief supporting the Rule and ongoing ROSCA cases signal that there is continued support from the current Commission for enforcement in this area. It’s unclear whether this will mean that the FTC will attempt to revive the Rule, but either way, we expect to see an active FTC on this issue.
And even without the Rule, subscription sellers continue to face enforcement at the state level, including a “click-to-cancel” requirement. California, New York and several other states have added this requirement to their laws, along with other, more novel requirements not found in the FTC’s Rule. We recently wrote about state auto-renewal updates here. Stay tuned for a Part II to this blog that will have more detail on what this means for compliance at the state and federal level.
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