On July 8, the U.S. Court of Appeals for the Eighth Circuit vacated a rule issued by the FTC that sought to expand the negative option rule to cover modern forms of negative option marketing in media, following challenges from various industry associations and individual businesses. Although the petitioners alleged multiple violations, including that the FTC exceeded its statutory authority, that the Commission failed to conduct the required preliminary analysis, and that it acted arbitrarily and capriciously under the APA, the court ultimately held that the FTC failed to comply with its procedural requirements under §22 of the FTC Act, which mandates the FTC issue a “preliminary regulatory analysis” when a proposed rule is published that has an economic impact exceeding $100 million.
The court noted that although the FTC issued a final regulatory analysis alongside the final rule, the failure to issue a preliminary regulatory analysis was “fatal” because it would then be impossible for the FTC to consider any public comments with respect to such analysis prior to issuing a final regulatory analysis as required by § 22. The court also agreed with the challengers that the FTC’s error was not harmless because the challengers had “lost a notable opportunity to dissuade the FTC from adopting the Rule as proposed[.]”
As previously covered by InfoBytes, the FTC announced its final Negative Option Rule in October 2024, also known as the “click-to-cancel” rule, requiring sellers to make it as easy for consumers to cancel their enrollment as it was to sign up for a good or service in the first place.
Given the need to regulate online subscription plans, the FTC set out to modernize its original negative option rule, promulgated in 1973, which covered only one form of negative option plan. In 2023, the commission proposed extending the scope of the 1973 rule to cover all forms of negative option marketing in all media, prompting legal challenges from affected businesses and associations who claimed the rule’s breadth and lack of procedural safeguards would harm their interests.
The court also held that excusing the FTC’s noncompliance with §22 could open the door to future manipulation of the rulemaking process and that vacatur of the entire rule was appropriate due to the prejudice suffered by the petitioners.
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