A federal appeals court has nullified the Federal Trade Commission’s amendments to its Negative Option Rule intended to make it easier for people to cancel subscriptions.
Custom Communications, the U.S. Chamber of Commerce, and other groups filed suit challenging the amendments to the rule, contending that the FTC did not follow proper procedures in enacting them.
A three-judge panel from the U.S. Court of Appeals for the Eighth Circuit agreed and found that the “Commission’s rulemaking process was procedurally insufficient and Petitioners demonstrated prejudicial error.
On October 16, 2024, the FTC issued its final amendments to the Negative Option Rule, which applied to all negative option programs and included a “click to cancel” provision intended to make it easier for consumers to cancel their enrollment in order to halt continued charges.
“Negative option” is a term used to describe commercial transactions in which an underlying condition or term will continue unless the consumer takes an affirmative action to either cancel the agreement or reject the goods or services. These plans typically take the form of agreements or subscriptions that automatically renew, continuity plans (where a consumer agrees in advance to receive goods or services periodically), or free trial marketing (where a consumer receives goods or services for free or for a nominal price for a limited time period). The amendments issued by the FTC expanded the coverage of the rule beyond pre-notification plans – in which sellers send periodic notice offering goods or services to consumers and then charge them for the goods or services if they fail to affirmatively decline – to all other forms of negative option marketing.
The FTC said the final rule was intended to provide a consistent legal framework.
Under federal law, the FTC must issue a preliminary regulatory analysis when a proposed rule would have an annual effect on the national economy surpassing $100 million.
The FTC said that the rule would not have an annual $100 million impact on the economy.
However, an Administrative Law Judge found that the proposed rule would have an annual effect surpassing the $100 million threshold.
The FTC was not excused from having to prepare the analysis if its initial economic analysis was deemed inaccurate, the judges wrote. They said that after the Administrative Law Judge’s decision, the FTC could have reissued its Notice of Proposed Rulemaking with the required preliminary analysis.
The petitioners made additional arguments about why the rule should be nullified, but the appeals court said those arguments were not needed.
“We hold the FTC’s rulemaking process was procedurally insufficient and Petitioners demonstrated prejudicial error, we need not address Petitioners’ other substantive challenges to the Rule,” the judges wrote. “While we certainly do not endorse the use of unfair and deceptive practices in negative option marketing, the procedural deficiencies of the [FTC’s] rulemaking process are fatal here.”
Excusing the FTC’s noncompliance with the requirement for a preliminary analysis could open the door to future manipulation of the rulemaking process, according to the judges.
“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,” the court concluded.
The CFPB’s Circular 2023-01 on negative option marketing was also rescinded earlier this year.
While the amendments to the Negative Option Rule are no longer effective, state regulators could use their UDAP authority under state laws modeled on Section 5 of the FTC Act or their UDAAP authority under Section 1042 of the Consumer Financial Protection Act to attack any subscription practices that they deem to be unfair, deceptive, or abusive to consumers.
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