As promised in last week’s blog that covered the Eighth Circuit’s decision to vacate the Federal Trade Commission’s (FTC) Negative Option Rule (Click-to-Cancel Rule or Rule), we are back with some practical insights on and considerations of how businesses should think about compliance in the wake of this decision. At the outset, we want to flag that although this has been lauded as a big win for business, companies selling subscriptions still need to comply with most of the requirements that the Rule set forth. For example, even if there is no FTC rule explicitly requiring “click to cancel,” several state laws similarly require online cancellation for subscriptions purchased online. And the FTC may even seek to enforce this requirement under its other authority.
The biggest change as a result of the Eighth Circuit’s decision is likely the removal of the Rule’s requirements for consent to the negative option provision at enrollment. The Final Rule would have required that a business obtain consent to the negative option feature separately from the rest of the transaction. While it did not dictate how companies should satisfy that requirement, the Rule provided a safe harbor if the seller used a check box to gain consent to the negative option terms. This was a substantial change from existing law, which many sellers interpret to only require a clear and conspicuous disclosure. The disclosure must state the automatic renewal terms and that the customer consents to them by completing the transaction. Some state laws do have language similar to the Rule expressly requiring separate consent, but only for free trials longer than a month or subscriptions with an initial term of at least one year. And while the original legislation for the new California amendments included a nearly identical requirement, the final version removed the “separately from any other portion of the contract” language and instead requires “express affirmative consent to the automatic renewal or continuous service offer terms.” This arguably requires something similar to a check box, but the removal of the “separately” language has introduced ambiguity. The Rule clearly required a check box, or something substantially similar, and required it for all subscriptions. The California law may ultimately include the same requirement – class action plaintiffs and state district attorneys will likely take that position – but its language is less clear than the Rule, and this distinction will likely need to be resolved in court.
It’s also worth keeping in mind that the Rule would have broadly prohibited misrepresentation of “any” material fact, not just those pertaining to the negative option feature. This is significant because it would have allowed the FTC to circumvent the Supreme Court’s decision in AMG Capital, which restricted the FTC’s ability to obtain monetary relief for false and misleading advertising claims by going directly to federal court. Many FTC watchers dubbed this the MoviePass provision because that was the case where the FTC debuted its novel theory that the Restore Online Shoppers’ Confidence Act (ROSCA) prohibited any material misrepresentation as opposed to material misrepresentations about the negative option feature itself. The Rule would have codified this novel interpretation.
So, What Must Businesses Do To Comply with the Current Landscape?
At a federal level, the FTC can still seek enforcement under its Section 5 authority and ROSCA. As a reminder, ROSCA requires that businesses must 1) clearly and conspicuously disclose all material terms of a transaction prior to obtaining a consumer’s billing information, 2) obtain a consumer’s express informed consent prior to charging the consumer and 3) provide a “simple mechanism[s]” for consumers to cancel.In the past several years, the FTC has used ROSCA and Section 5 to take significant enforcement actions in this space and has indicated that subscription practices are a priority. Even though the Rule will no longer go into effect, many of the consent decree/settlement provisions in ROSCA enforcement actions look very similar to the Rule. For example, several of the consent orders required the business to obtain consent through a “check box, signature, or other substantially similar method.” Other consent decrees have imposed requirements that the business provide a “reminder” to consumers on when they need to cancel. While these settlements are not binding on other companies, they are instructive of how the FTC interprets ROSCA and what is required to comply with the law. The FTC will likely scrutinize cancellation practices in particular, and we recommend ensuring that customers can easily cancel in the same manner they enrolled.
At the state level, automatic renewal legislation continues to increase and the requirements mirror many of the requirements imposed in these settlement orders and the Click-to-Cancel Rule. In addition to the consent requirement discussed above, the states generally require at a high level:
- Post-Sale Acknowledgment: Many states require that sellers provide a “post-sale acknowledgment” of the contract, generally in an email format.
- Reminder Notifications: Many states require businesses to provide reminder notifications to consumers prior to renewal. These laws generally impose specific timing requirements based on the type of subscription – e.g., month-to-month, annual.
- Notice of Material Changes: Many states provide restrictions around changing material terms of the automatic renewal contract. The laws generally require adequate notice and that an opportunity to cancel is provided to the consumer.
- Easy Cancellation: Generally, most states require that there be a simple cancellation method, and increasingly states require that customers who enroll online are able to cancel online. Some states have also imposed more specific requirements. For example, Minnesota requires the seller to receive the customer’s permission prior to showing them retention offers in the cancellation flow, while California does not preclude offers or require permission, but it does require that a click-to-cancel button is always clearly and conspicuously disclosed in close proximity to any such offers.
Finally, we would be remiss not to flag that after the Eighth Circuit’s decision, U.S. Senators Brian Schatz (D-HI) and John Kennedy (R-LA.) introduced the Unsubscribe Act, a bipartisan bill that would:
- “Require sellers to clearly explain the terms of a contract to customers and obtain their express and informed consent.
- Require sellers to provide a simple way to cancel the subscription, which the customer can complete in the same way in which they entered the original contract.
- Require sellers to clearly notify consumers when their free or reduced-cost trial is complete and before charging for the full-cost subscription.
- Disallow automatic transfer to a contract beyond the preliminary period.
- Require sellers to periodically notify the customer of the terms of the contract and the cancellation mechanism.”
A legislative solution would be the fastest way to make these requirements part of federal law. The FTC would likely take at least 12 months to finalize a new Negative Option Rule based on the Eighth Circuit’s decision, should it choose to do so. But even without the Rule, this area is ripe for enforcement and poses challenges given the patchwork requirements imposed by state laws. Considering new state laws and the FTC’s ongoing interest in this area, now would be a good time to make sure your automatic renewal compliance is up to date.
[View source.]
