Two days before Halloween, the Federal Trade Commission issued a new 15-page enforcement policy statement putting subscription companies on notice that the agency would not tolerate subscription practices that attempt to deceive consumers. Subscription companies that use illegal “dark patterns,” or subscription tricks and traps, will face legal action if the companies do not provide clear, transparent information to consumers up front; fail to obtain informed consent from customers; or that make cancellation difficult or impossible.

“Today’s enforcement policy statement makes clear that tricking consumers into signing up for subscription programs or trapping them when they try to cancel is against the law,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, in an October 29, 2021 news release. “Firms that deploy dark patterns and other dirty tricks should take notice.”

Negative option marketing

In the enforcement policy statement, the FTC specifically refers to negative option marketing, a term that can take multiple forms but that essentially interprets a consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement as acceptance, or continuing acceptance, of an offer. This includes, but is not limited to, automatic renewals, continuity plans, free-to-pay or fee-to-pay conversions, and prenotification plans.

“Negative option programs are widespread in the marketplace and can provide substantial benefits for sellers and consumers. At the same time, consumers suffer costs when marketers fail to make adequate disclosures, bill consumers without their consent, or make cancellation difficult or impossible,” said the FTC on page 2 of its enforcement policy statement. “Over the years, unfair or deceptive negative option practices have remained a persistent source of consumer harm, often saddling shoppers with recurring payments for products and services they did not intend to purchase or did not want to continue to purchase.”

The FTC wrote the policy statement to address deceptive negative option marketing practices, as well as the thousands of consumer complaints they receive each year. Such practices and the FTC’s enforcement is based on Section 5 of the FTC Act, the Restore Online Shoppers’ Confidence Act (ROSCA) and the Telemarketing Sales Rule, as well as the Rule on the Use of Prenotification Negative Option Plans, the Electronic Fund Transfer Act and the Postal Reorganization Act.

Definitions

The FTC explained the terms addressed in the statement as follows:

Automatic renewals allow sellers to unilaterally renew consumers’ subscriptions when they expire, unless consumers affirmatively cancel their subscriptions by a certain date (e.g., magazine or newspaper subscriptions, streaming services).

Continuity plans allow consumers to agree in advance to receive periodic shipments of goods or provision of services until the agreement is canceled (e.g., razon subscription, box of the month, meal kits).

Free trial marketing (e.g., free-to-pay conversions) give consumers the opportunity to receive goods of services for free, or at a nominal fee) for a trial period. After the trial period, sellers can automatically begin charging a fee, or a higher fee, unless consumers affirmatively cancel or return the goods or services.

Prenotification plans (e.g., book of the month and wine clubs) are when a seller provides periodic notices offering goods to participating consumers and then send and charge for those goods if the consumers take no action to decline the offer. The periodic announcements and shipments can continue indefinitely unless the subscriber cancels the service.

Three key requirements

There are three key requirements that subscription companies must follow to avoid criminal and/or civil penalties.

1. Subscription companies must clearly and conspicuously disclose all material terms of the subscription product or service, including the cost, deadlines to avoid future charges, the amount and frequency of the charges, how to cancel, and information about the product or service that is needed to stop consumers from being deceived about the characteristics of the product or service. The information must be provided up front when a consumer first sees an offer and generally as prominent as the offer itself.
2. Subscription companies must obtain the consumer’s express informed consent before they can be charged for products or services. This includes obtaining the consumer’s acceptance of the negative option feature separately from other portions of the entire transaction, not including information that interferes with, detracts from, contradicts, or otherwise undermines the consumer’s ability to provide their express informed consent.
3. Subscription companies must provide easy and simple cancellation procedures for the consumer. Marketers should provide cancellation mechanisms that are at least as easy to use as the method the consumer used to buy the product or service in the first place. For example, if a consumer can subscriber to a digital newspaper online, they should also be able to cancel using the same method, not requiring a phone call or mail-in cancellation form as the only options for cancellation.

A cautionary tale – ABC Mouse

What happens when subscription companies fail to comply? The FTC investigates. In the case of ABCMouse, the online learning subscription service was fined $10 million for its deceptive negative option marketing and billing practices. The FTC used the settlement to provide refunds to more than 200,000 consumers.

“ABCmouse didn’t clearly tell parents that their subscriptions would renew automatically, and then the company made it very difficult for them to cancel,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, in a September 2, 2020 news release. “People are relying more than ever on remote learning and other online services, and companies need to be up-front about automatic renewals and get permission before charging customers.”

Insider Take

The FTC’s enforcement policy statement indicates a serious shift in the agency’s willingness to tolerate deceptive subscription practices. With the growth of the subscription economy, consumer complaints have grown and less-than-scrupulous or unknowing subscription companies have taken advantage of consumers. The FTC says “no more.”

This statement provides clear guidance on avoiding subscription tricks and traps and on what subscription companies need to do to stay on the right side of the law, and ignorance of the law will no longer be tolerated. Subscription companies should consult with or hire compliance officers to review their processes and procedures to ensure their adherence to the law or be prepared to face the consequences if they fail to comply.

[For more on this topic and dos and don’ts, Subscription Show attendees can view view Attorney Lisa B. Dubrow’s and Attorney Marc Roth’s session on the State of Subscription Regulation and Recurring Revenue Regulation!]