Just days before it was scheduled to take effect, the Federal Trade Commission’s (FTC) amended Negative Option Rule, commonly known as the “Click-to-Cancel” Rule (Rule), was vacated by the US Court of Appeals for the Eighth Circuit. The FTC had designed the Rule to make it easier for consumers to understand the details of subscription-based services and, in particular, to simplify cancellation processes.
The Eighth Circuit’s significant July 8, 2025, ruling in Custom Communications, Inc. d/b/a Custom Alarm v. FTC, No. 24-3388, is a major procedural setback for the FTC and underscores the importance for federal agencies in this post-Loper Bright era to adhere to the Administrative Procedures Act (APA), as well as any of their own unique statutory rulemaking requirements.
Background
In October 2024, the FTC attempted to modernize its Click-to-Cancel Rule to keep pace with changes in the online marketplace by requiring businesses to:
- clearly disclose material terms;
- obtain express informed consent; and
- provide a cancellation mechanism as simple as the method used to enroll.
Petitioners, including Custom Communications and several industry associations, challenged the rule on multiple grounds, including statutory overreach and procedural violations under the Magnuson-Moss Warranty Act and the Administrative Procedure Act (APA).
Court’s Rationale
The Eighth Circuit granted the petition for review and vacated the rule, citing the FTC’s failure to comply with procedural requirements under 15 U.S.C. § 57b-3(b)(1).1 Among the Court’s key findings are the following:
- Economic Impact Threshold Breach: The Court was critical of the FTC’s failure to issue a preliminary regulatory analysis despite an administrative law judge’s finding that the rule’s economic impact would exceed the $100 million threshold. Per the Court, this oversight deprived the public of a meaningful opportunity to comment on the rule’s economic implications.
- Statutory Interpretation: Although the FTC argued that its Notice of Proposed Rulemaking (NPRM) sufficed, the Court disagreed. It held that the statute’s use of “shall issue” mandates a separate preliminary analysis when the economic impact threshold is met.
- APA Violation: The court concluded that the FTC’s failure to follow required procedures rendered the rule unlawful under Section 706(2) of the APA.
Practical Implications for Businesses
- The FTC’s Click-to-Cancel Rule is no longer enforceable.
- The prior version of the Negative Option Rule remains in effect, covering only prenotification plans.
- The FTC may attempt to reissue the rule through a process that adheres to APA standards but at this time that seems unlikely.
- States may venture into lawmaking in this area as a result of less federal oversight on how businesses, in particular in online marketplaces, disclose to consumers all the terms and conditions associated with their subscriptions or how to cancel them or more generally how to prevent unfair or deceptive acts or practices (UDAP).
- Businesses remain subject to Section 5 of the FTC Act, which prohibits unfair or deceptive practices, as well as similar state laws designed to prevent unfair or deceptive acts or practices.
Points to consider
1. Continue Voluntary Compliance with Core Principles
Even though the Eighth Circuit vacated the Rule, businesses can continue to:
- transparently disclose all material terms of negative option offers;
- obtain consumers’ express informed consent; and
- make it as easy for customers to cancel as it was for them to enroll.
2. Audit and Document Cancellation Workflows
Ensure that disclosure and cancellation processes are neither deceptive nor unduly burdensome by conducting consumer testing and complaint monitoring.
3. Monitor Regulatory Developments
Stay alert for any state-level legislative action in this area or further FTC efforts to reissue the Rule.
4. Train Compliance and Customer Service Teams
Train all customer-facing teams on your company’s practices for handling cancellations and disclosures.
5. Engage Legal Counsel for Risk Assessment
Continually review your company’s practices to prevent unfair or deceptive acts or practices under Section 5 of the FTC Act and state UDAP laws.
For the court’s opinion, see 8th Circuit Decision Vacating Click to Cancel Rule 7.8.25 here.
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1 The FTC is required by law to issue a preliminary regulatory analysis when it publishes a notice of proposed rulemaking. Among other things, the analysis must include the following: 1) a concise explanation of why the proposed rule is necessary and what it aims to achieve; 2) a discussion of any reasonable alternatives to the proposed rule that could accomplish the same objectives consistent with existing applicable law; and 3) a preliminary assessment of the projected benefits, adverse economic or other effects, and the effectiveness of any option in meeting stated objectives. In this case, the Court found the FTC had failed to meet its preliminary regulatory analysis burden.
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