Last week, we reported on the Federal Trade Commission’s proposed changes to the Negative Option Rule to make canceling subscriptions easier, impose new requirements for making additional offers, and impose new requirements for reminders and cancelations. With these changes, the FTC hopes to stave off the “dark patterns” used by marketers, including subscription companies, to make cancellations difficult and to charge and retain customers without their express consent.

The Negative Option Rule was adopted 50 years ago in 1973, and the FTC said that changes are needed to reflect how we do business today. The FTC seeks public comments on the proposal, which are due 60 days from when the notice is posted in the Federal Register. It is not known when the notice will be posted.

Marc Roth of Cobalt Law shares his extensive observations and insights into the proposal. This week we’ll share part 1, and we’ll publish Part 2 next Friday.

In Roth’s summary, he said the proposed changes would require sellers to (i) provide a cancel option that is at least as easy as it was to enroll, including a “click to cancel” option for online sales, (ii) obtain a consumer’s consent to hear a new offer or save attempt when they seek to cancel a subscription, and (iii) send an annual reminder notice for these programs.

While the FTC mentioned only these changes in its press release, other, more subtle changes loom in the NPR that are much more dangerous and troubling, including (i) prohibiting any misrepresentation in a negative option offer, even if unrelated to the auto renewal, (ii) requiring sellers to obtain a consumer’s agreement to the negative option feature separate from the overall transaction, possibly via a separate check box, and (iii) insane record keeping requirements. Roth points out that the FTC highlights certain changes in its press release and conveniently omits the more subtle and troubling aspects of its proposals.

Background

The FTC is finally getting around to updating the current “Rule Concerning Prenotification Negative Option Plans” (16 C.F.R 425) (the “Rule”) which was originally promulgated in 1973 to combat abuses by marketers offering free or low price products (“Get 10 books for just a penny!”) to enroll consumers in auto ship programs with a commitment to buy additional products at higher prices. Since then, the FTC has reviewed the Rule for continued relevance and has made some technical changes to it, but in a 2009 rulemaking review, declined to “expand or enhance the Rule, concluding that amendments were not warranted … because the enforcement tools provided by the TSR and, especially, (the newly enacted) ROSCA … might prove adequate to address the problems generated by deceptive or unfair negative option marketing.” However, at that time, the FTC noted that “if ROSCA and its other enforcement tools failed to adequately protect consumers, [it] would consider whether and how to amend the Rule.”

In October 2019, the FTC initiated an Advanced Notice of Proposed Rulemaking (“ANPR”) to explore expanding the scope of the Rule to cover a broader array of negative option, subscription, and continuity offers, as well as free trials. In addition, the FTC sought to harmonize differences in how these offers are treated under the Restore Online Shoppers Confidence Act (“ROSCA”) which only governs online negative option offers, and the Telemarketing Sales Rule (16 C.F.R. 310) (“TSR”).  Comments to this proposal were due in December 2019, and we heard nothing further on that initiative until now.

A little more than two years following the ANPR, the FTC issued an Enforcement Policy Statement Regarding Negative Option Marketing (“Policy Statement”) on November 4, 2021, identifying how the agency expects companies making these offers to conduct themselves, and warning that it will be ramping up its enforcement in this area (which it did).  Key to the Policy Statement was the FTC’s expectation that enrollment terms be provided clearly and conspicuously, sellers obtain consumers’ informed consent to enroll, and make cancellation easy.

Fast forward to today…where the FTC just announced its intention to update the Rule through a Notice of Proposed Rulemaking (“NPR”), based on responses received to the ANPR and various cases it has brought against companies since then with the goal of combating “unfair or deceptive practices that include recurring charges for products or services consumers do not want and cannot cancel without undue difficulty.”

A good portion of the 83-page NPR discusses cases the FTC and other law enforcement agencies have brought in the negative option space as well as the concerns these practices present. In a nutshell, the NPR addresses concerns with confusing and deceptive free trial offers that roll to a paid subscription, failing to disclose offer terms clearly and conspicuously, and making it difficult for consumers to cancel. These concerns underlie the proposed changes to the Rule in the NPR.

The New Rule

The NPR proposes renaming the Rule to the “Rule Concerning Recurring Subscriptions and Other Negative Option Plans” (the “New Rule”). The New Rule would replace the current Rule in its entirety, address “the most important issues related to negative option marketing, including misrepresentations, disclosures, consent, and cancellation,” and apply to all forms of negative option marketing, including prenotification and continuity plans, automatic renewals, and free trial offers, thus “establishing a common set of requirements applicable to all types of negative option marketing.”

Specific Proposals

Section 425.1.   Scope. 

The New Rule would apply to any form of Negative Option Offer, such as an automatic renewal, continuity plan, free-to-pay conversion or fee-to-pay conversion, or pre-notification negative option plan, in any media, including, but not limited to, the Internet, telephone, in-print, and in-person transactions.

Section 425.2.  Definitions (only addressing clear and conspicuous here).

(c). Clear and Conspicuous.  Generally, the New Rule would require that “disclosures be easily noticeable (i.e., difficult to miss) and easily understandable by ordinary consumers.”  Unlike many state auto renewal laws, the FTC does not adopt the California definition (Cal. Bus. Prof. & Code 17601(c)), which defines with particularity how disclosures must be made, but makes up for it in other ways, such as:

·      For a visual disclosure, the disclosure must stand out from any accompanying text or other visual elements so that it is easily noticed, read, and understood.  This can be achieved by its size, contrast, location, and length of time it appears.  Note:  While not specifically adopting the California standard, the “must stand out” requirement comes awfully close to California’s “or set off from the surrounding text of the same size by symbols or other marks” mandate.

·      For an offer made online, via a phone, or software, the disclosure must be unavoidable, which means it cannot be accessible by clicking on a hyperlink or hovering over a term.

Section 425.3.   Misrepresentations.

Of all the proposed changes, one of the most concerning is new Section 425.3 (p.42 of the NPR), which would prohibit a seller from “misrepresenting, expressly or by implication, any material fact regarding the entire agreement” – not just facts related to a negative option feature. The NPR notes that “FTC enforcement experience demonstrates misrepresentations in negative option marketing cases continue to be prevalent and often involve deceptive representations not only related to the negative option feature but to the underlying product (or service) or other aspects of the transaction as well.” Further, “Such deceptive practices may involve misrepresentations related to costs, product efficacy, free trial claims, processing or shipping fees, billing information use, deadlines, consumer authorization, refunds, cancellation, or any other material representation.”

This proposal is extremely concerning because it would empower the FTC to seek and obtain civil penalties under the New Rule for any aspect of a negative option offer that may be misleading or deceptive, such as a product performance claim or other attribute, whereas the FTC would not otherwise have such ability under its general Section 5 authority for first time violators (aka “de novo” actions). 

The FTC has in recent years lost a number of cases, some at SCOTUS, that have curtailed its ability to obtain consumer redress for first time general deception offenses (See AMG Capital Mgmt., LLC v. FTC, 141 S. Ct. 1341 (2021)). As a result, it has sought other ways to obtain financial relief in its cases, such as relying on the obscure (and recently unearthed) Notice of Penalty Offense authority (15 U.S.C. §45(m)(1)(B)) to obtain civil penalties against companies that receive actual notice of particular conduct the agency has deemed by written decision as being unfair or deceptive under the FTC Act.  

FTC Commissioner Christine Wilson also expressed these concerns in her dissent to the NPR.

“The broadened scope of the Rule would extend far beyond the negative option abuses cited in the ANPR, and far beyond practices for which the rulemaking record supports a prevalence of unfair or deceptive practices. In fact, the Rule would capture misrepresentations regarding the underlying product or service wholly unrelated to the negative option feature,” Wilson says.

Wilson further notes, “Importantly, we did not seek comment in the ANPR about whether an expanded negative option rule should address general misrepresentations; no comments are cited in the NPRM to support the inclusion of these provisions. Absent the above quoted brief explanation with the accompanying case cites, the Notice does not offer evidence that negative option marketing writ large is permeated by deception. If that were the case, it might be appropriate to fold in representations about any material fact.”

Ultimately, Wilson encourages “the public to address these issues in their comments in response to this Notice.”

If this proposal is adopted as is, subscription marketers will need to review and ensure that all aspects of their offers with a negative option feature are truthful and not misleading in any sense, or possibly violate any other FTC guidance, so as to avoid an enforcement action that can include civil penalties.

425.4 Important Information.

The New Rule would require sellers to disclose all material terms of the offer clearly and conspicuously prior to obtaining the consumer’s billing information, such as

·      that payments will be recurring, if applicable,

·      the deadline by which to cancel to avoid future charges,

·      the amount or ranges of costs consumers may incur,

·      the date charges will be submitted for payment, and

·      information about the mechanism consumers may use to cancel the recurring payments.

These disclosures align with various state laws in this area, but bullet #4 may be problematic if particular billing dates are unknown at the time of enrollment and whether a generic “you will be charged after your trial,” or “you will be charged monthly/annually” will suffice.

As for placement, if the above disclosures directly relate to the Negative Option Feature, they must appear immediately adjacent to the means of recording the consumer’s consent for the Negative Option Feature (See Consent discussion below), or if not, before a consumer decides to buy (e.g., before they “add to shopping cart”).

Next week, we’ll share additional insights on the proposed New Rule.