On July 8, a panel for the U.S. Court of Appeals for the Eighth Circuit issued a significant decision in the case of Custom Communications, Inc. v. Federal Trade Commission (FTC). The panel vacated the FTC’s amended Negative Option Rule aka the “click-to cancel” rule, citing procedural deficiencies in the rulemaking process. Specifically, the panel found that the FTC failed to conduct a required preliminary regulatory analysis, which deprived stakeholders of the opportunity to comment on alternatives and engage with the FTC’s cost-benefit analysis.
Background
So-called negative option marketing is where consumers enroll in subscription plans that automatically renew unless consumers actively opt out before a given renewal. Given the growth in these products, the FTC sought to modernize its 1973 negative option rule, and, in 2023, proposed amendments to extend the rule’s scope to encompass all forms of negative option marketing across all media.
The FTC’s amendments involved significant changes to the existing framework, including a requirement for sellers to disclose material facts, obtain unambiguous consumer consent, and provide easy cancellation mechanisms. However, industry associations and businesses challenged the rule in multiple courts (discussed here), arguing that the FTC exceeded its statutory authority and failed to conduct a necessary preliminary regulatory analysis.
FTC Act Requirements
The FTC Act mandates specific procedural requirements for rulemaking, particularly when a rule is expected to have a significant economic impact. Under 15 U.S.C. § 57b-3, the FTC must issue both a preliminary and final regulatory analysis for rules with an estimated annual economic effect of $100 million or more. The preliminary analysis should include a description of reasonable alternatives, projected benefits, and adverse effects. The final analysis must provide an explanation of the reasons for the rule, a summary of significant issues raised by comments, and an assessment of the rule’s effectiveness. Initially, the FTC estimated that the amendments would not meet the $100 million threshold, thus bypassing the preliminary analysis requirement. However, an administrative law judge (ALJ) later found that the rule’s compliance costs would exceed this threshold.
Decision
The panel’s decision to vacate the FTC’s rule was based on these procedural deficiencies. Despite the ALJ’s finding that the rule’s economic impact would exceed $100 million annually, the FTC did not issue a preliminary regulatory analysis. The FTC argued that the timing of the ALJ’s decision, one year after the Notice of Proposed Rulemaking (NPRM), did not necessitate a preliminary analysis at that late stage. However, the panel emphasized that the statutory language “shall issue” mandates a separate preliminary analysis for public review and comment “in any case” where the $100 million threshold is surpassed. The panel noted that the FTC could have reissued the NPRM with the required preliminary analysis, as is common practice among administrative agencies when the scope of a proposed rule changes.
The FTC contended that any procedural error was harmless, citing the Administrative Procedure Act’s provision for prejudicial error. However, the panel found that the petitioners had met their burden of demonstrating harm. The lack of a preliminary regulatory analysis deprived them of the opportunity to engage with the FTC’s cost-benefit analysis and propose less burdensome alternatives.
Moreover, the panel was concerned that excusing the FTC’s noncompliance in this instance would lead to “future manipulation of the rulemaking process.” Specifically, the panel posited that “furnishing an initially unrealistically low estimate of the economic impacts of a proposed rule would avail the [FTC] of a procedural shortcut that limits the need for additional public engagement and more substantive analysis of the potential effects of the rule on the front end.”
Remedy
Section 18 of the FTC Act directs that a reviewing court “shall hold unlawful and set aside the rule” if it finds agency action to be “without observance of procedure required by law.” The panel determined that vacatur of the entire rule was appropriate due to the procedural deficiencies and the prejudice suffered by petitioners. While the rule contained a severability provision, the breadth of its coverage made party-specific vacatur infeasible. Consequently, the panel granted the petitions for review and vacated the rule.
Our Take
This decision comes days before the rule’s July 14 compliance deadline and, for now, alleviates the burdensome requirements of the rule for those offering subscription products. Given that the rule originally was promulgated under the Biden administration, it is not clear what, if any, steps the current FTC might take to reinstate the rule. Providers of subscription services should continue to be aware of state laws governing subscriptions/negative option products and state regulatory enforcement with respect to same given the increased scrutiny of these products. For example, on July 8 New York’s attorney general issued a press release urging consumers to take advantage of the FTC’s rule and to file complaints online with her office.
