On Tuesday July 8, the United States Court of Appeals for the Eighth Circuit vacated the Federal Trade Commission’s (“FTC”) “Negative Option” Rule, also called the “Click-to-Cancel” Rule, which expanded regulations on recurring subscription plans. The Court ruled that the FTC did not follow proper procedures in promulgating the Rule.
The FTC announced the final version of the Rule on October 16, 2024, and it was scheduled to go into effect on July 14, 2025. The Rule would have made several important changes to how businesses are required to handle subscription services and auto-renewals. Specifically, the Rule introduced stringent requirements on providers of negative options programs across industries, including prohibitions on misrepresentations, clear and conspicuous disclosures, proof of unambiguous affirmative consent, and simple and straightforward cancellation options.
Last fall, industry groups representing companies with subscription options, including cable providers, advertising companies, and home security firms, filed in federal court to block the Rule. In petitions consolidated for review by the Judicial Panel on Multidistrict Litigation before the Eighth Circuit, they argued that the FTC had exceeded its statutory authority, failed to follow required rulemaking procedures, and acted arbitrarily and capriciously.
The Court of Appeals focused on the parties’ procedural challenge and found that the FTC violated 15 U.S.C. § 57b-3(b)(1) by failing to issue a preliminary regulatory analysis after an Administrative Law Judge determined the rule’s economic impact would exceed $100 million. The Court held that the statute unambiguously required a preliminary analysis whenever the economic threshold was met regardless of timing. However, the FTC only issued a final regulatory analysis with the final rule. The Court found that this procedural error deprived petitioners of a meaningful opportunity to comment on alternatives and the cost-benefit analysis at a critical stage. Accordingly, the Court vacated the Rule in its entirety.
The Court emphasized that the statutory framework—specifically Section 18 of the FTC Act and the Administrative Procedure Act—requires courts to set aside agency rules adopted in violation of required procedures. While the Rule contained a severability provision, the Court determined that vacating only part of the Rule was not feasible due to its broad coverage and the nature of the procedural error. The Court made clear that its decision did not endorse unfair or deceptive negative option marketing practices, but that the procedural deficiencies in the FTC’s rulemaking process were fatal and could not be excused. The Court did not address the substantive challenges to the rule.
The Court’s decision requires the FTC to restart its rulemaking process. Such a process will take several months, if not longer. Significantly, the commissioners who championed the Rule under the Biden administration, including then Chair Lina Khan, are no longer active. The two legacy commissioners, including Chairman Andrew Ferguson, both dissented from the original Rule. As such, it is possible that the current FTC may not take steps to reissue the Rule.
More broadly, the Eighth Circuit’s decision may influence how the agency approaches future consumer protection regulations. In the future, the FTC will likely apply greater caution in completing economic studies and analysis before finalizing any proposed rule. It also may be more inclined to slow down rulemaking to ensure rules are appropriately tailored to the industries or practices that have been the subject of complaints.
