The Federal Trade Commission (FTC) introduced its updated Negative Option Rule on October 16, 2024 (the “New Rule”). The New Rule targets deceptive practices associated with subscription-based services through which companies continue charging consumers for products or services unless the consumer actively cancels. The New Rule is designed to make it easier for consumers to opt out of such services and aims to improve transparency regarding the terms of such arrangements. The New Rule was announced after the FTC issued a notice of proposed rulemaking (the “Proposed Rule”) on April 23, 2023, setting out its initial proposed revisions to its existing Negative Option Rule, which was first created in 1973 and which applied to a narrower set of specific subscription plans.
The New Rule is described as a “modernization” of the FTC’s existing Negative Option Rule. The changes set out in the New Rule significantly expand the scope of the old rule. The New Rule applies broadly across all media and applies to a much larger variety of negative option plans, including prenotification and continuity plans, free trial offers and automatic renewals.
The New Rule places several key requirements on businesses utilizing negative option arrangements, including:
- Clear Disclosure of Payment Terms and Material Facts Regarding the Goods or Services Being Ordered: Businesses must clearly present all relevant details about the payment arrangement and the products and services being sold before enrolling consumers in subscription plans. These details include information about costs, renewal terms, and cancellation procedures, and must be easy to understand and prominently displayed prior to collecting the consumer’s payment information and prior to asking the consumer to consent to the payment arrangement.
However, the New Rule also prohibits sellers from misrepresenting in their marketing any material fact about the goods or services being sold even if that material fact has nothing to do with the payment plan. As a result, even if a business follows the New Rule’s requirements regarding disclosure of the payment terms, and the cancellation process, if the business’ marketing makes a misrepresentation about the underlying product, the business will be in violation of the New Rule.
- Affirmative Consent: Companies are required to secure explicit consent from consumers before charging them for any recurring service. This means that the business must be able to demonstrate that the consumer specifically accepted the terms of the subscription plan. Signing consumers up through passive actions like pre-checked boxes, or through acceptance of terms included in lengthy “terms & conditions language” will no longer be acceptable. The New Rule places the burden on the seller to show that the consumer knew what they were signing up for when they agreed to it.
- Simplified Cancellation (“Click to Cancel”): The New Rule requires businesses to provide a straightforward cancellation process for any negative option payment plan, such as a “click-to-cancel” option. The cancellation process must be as easy as signing up, and use the same method as was used for enrollment (e.g., online if the subscription was made online). The New Rule sets out specific alternative processes for cancellation when the consumer signs up in person.
There were two provisions included in the Proposed Rule that received considerable input from businesses and were subsequently omitted from the New Rule. Contrary to the Proposed Rule, the New Rule does not: 1) require businesses to provide annual reminders to consumers about their subscription or negative option payment plan; or 2) prohibit businesses from presenting consumers with additional offers, proposed modifications to the existing offer, or reasons to retain the existing offer, when they attempt to cancel a negative option feature.
The New Rule takes effect in stages, with certain provisions going into effect in 60 days and others becoming mandatory within 180 days of publication in the Federal Register.
- Misrepresentation Prohibition: The part of the New Rule that prohibits businesses from misleading consumers regarding any aspect of their negative option offerings, or the underlying products and services, is set to take effect on December 15, 2024, 60 days after the New Rule’s publication in the Federal Register. The FTC argues that these prohibitions align with existing legal requirements and therefore should not be difficult for businesses to conform to.
- Other Requirements (Including “Click-to-Cancel”): Most of the New Rule’s other provisions, including the requirements for a simple cancellation process (including “click-to-cancel”), clear and conspicuous disclosures, and obtaining informed consent before charging consumers, become effective 180 days after the New Rule’s publication, April 14, 2025. This longer window is intended to give businesses time to adjust their practices to meet the new standards.
