On October 16, 2024, and by a 3-2 vote of its commissioners, the Federal Trade Commission (FTC) issued a broad-reaching final “click to cancel” rule (Rule), updating its Negative Option Rule, that could subject companies to civil penalties when they make it difficult for consumers to cancel their subscriptions. The Rule, which will apply the FTC Act’s unfair and deceptive acts and practices (UDAP) principles, comes on the heels of thousands of consumer complaints and nearly three dozen FTC enforcement actions. Although there may be legal challenges to the Rule, companies trying to navigate regulatory uncertainty should consider adapting their processes according to the Rule’s requirements.
Overview of the Rule
The FTC has made clear that companies cannot make it harder for consumers to cancel recurring arrangements than it was for consumers to enter into them in the first place, without running afoul of Section 5 of the FTC Act. The Rule focuses on a broad range of “negative option” strategies companies use, including, but not limited to, subscriptions that automatically renew, free-trial-to-pay arrangements, and other memberships that continue without further action by consumers.
Intending to provide a “consistent legal framework,” the FTC seeks to obligate sellers to take the following steps:
- Disclose all material facts to consumers when marketing goods or services with a negative option feature.
- Clearly and conspicuously disclose every material term before obtaining consumers’ payment and billing information for goods or services with a negative option feature.
- Obtain consumers’ express informed consent to the negative option before charging the consumer for it.
- Provide a simple mechanism consumers can use to cancel the negative option feature and halt charges.
A company’s failure to fulfill all or any of these requirements may subject it to civil penalties as a UDAP. Examples in the Rule of actionable material misrepresentations are failures to accurately disclose deadlines for preventing charges, features of goods or services subject to negative option features, costs or any health and safety issues.
Significantly, the Rule does not preempt state laws that may apply to negative option features in consumer arrangements.
The Rule will go into effect 180 days after publication in the Federal Register.
Compliance Details – Negative Option Features
The Rule contains many implementation details that can assist negative option sellers with compliance, including the following:
Clear and Conspicuous Presentation of Information. The Rule provides details about how negative option sellers need to “clearly and conspicuously” present the required information to consumers. For example:
- All key disclosures required by the Rule “must appear immediately adjacent to the means of recording the consumer’s consent” for the negative option feature.
- All key disclosures must appear “before obtaining the consent.”
- Any communications, regardless of method or media, cannot contain any other information “that interferes with, detracts from, contradicts, or otherwise undermines the ability of consumers to read, hear, see, or otherwise understand” the disclosures the Rule requires.
Express Informed Consent. Companies must obtain “express informed consent.” In instances in which companies can demonstrate that their technology would prevent signing up without consent and it would be impossible to acquire a good or service without clicking through the full disclosure, there is no need to retain consent documentation. Otherwise, records of consent must be maintained for three years.
Harmonization with the Telemarketing Sales Rule, the Electronic Fund Transfer Act and Regulation E. Under the Rule, negative option sellers must ensure compliance with the Telemarketing Sales Rule (e.g., obtaining from customer the last four digits of account numbers to be charged and maintaining audio records of the entire telemarketing transaction). In addition, the Rule provides that a negative option seller will be in compliance if it obtains consents for payment transactions through check boxes, signatures, or “other substantially similar methods” that the consumer has to affirmatively select or sign related to the negative option feature of the transaction “and no other portion of the transaction.” The Rule specifically states that consent requests “must be presented in a manner and format that is clear, unambiguous, non-deceptive, and free of any information not directly related to the consumer’s acceptance of the Negative Option Feature.”
Click to Cancel. Consumers must be provided with a “simple mechanism” to avoid being charged, or to avoid being charged increases, and to stop any recurring charges per the Rule. This feature must be as easy for consumers to use as was the feature consumers used to originally consent to the negative option. This feature of the Rule enumerates detailed examples of methods to cancel and how they must match the way in which consumers entered into the transaction in the first place, such as interacting with live or virtual representatives, telephoning and ensuring consumers’ calls are answered and consumers are not subjected to additional charges, in-person methods, and alternative simple methods like “Interactive Electronic Medium” provided there are no cost barriers for consumer cancellations.
Conclusion
The reach of the Rule is broad and applies to free trials for subscriptions or other goods or services that auto-renew into paying arrangements after the trial period ends, membership arrangements that auto-renew or have increasing costs or billing, collaborative arrangements between a seller and other cooperating sellers in which one or more of the sellers has negative option features, and other commonplace arrangements, whether entered into online, in person, or even by telephone. Companies should review the ways in which consumers have entered into arrangements to ensure that consumers can cancel or exit those arrangements with ease similar to that with which they entered into those arrangements. Consents, permissions, and disclosures need to be “clear and conspicuous” and cannot be obscured or overshadowed by other information related to specific transactions. Note, strategies to comply with the Rule should harmonize with state laws that offer consumers more protections than the Rule, as the Rule does not categorically preempt state law.
Finally, companies should be aware that there is a measure of uncertainty here because businesses and the Chamber of Commerce have brought, with some success, legal challenges to FTC rulemaking using its UDAP powers in the post-Loper Bright Enterprises1 that have stalled the effectiveness of the FTC’s recent rule banning non-compete agreements.2
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1 See Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al., 22-451 Loper Bright Enterprises v. Raimondo (06/28/2024) (supremecourt.gov)
2 See Non-Compete Clause Final Rule (ftc.gov); see also ruling of US District Court for the Northern District of Texas in Ryan LLC et al. v. Federal Trade Commission, Civil 3:24-cv-00986E, in which Judge Ada Brown ruled on August 20, 2024, stating that “the Court sets aside the Non-Compete Rule, 16 C.F.R. § 910.1.6, and the Rule shall not be enforced or otherwise take effect on September 4, 2024, or thereafter. This is a final and appealable judgment.” The FTC noted an appeal to the Fifth Circuit on October 18, 2024. For analysis of this decision and cases challenging the enforceability of this FTC rule, please see https://corpgov.law.harvard.edu/2024/09/05/ftc-noncompete-rule-is-set-aside-but-appeal-is-expected-and-states-may-act/
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