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What You Need to Know About the FTC’s Proposed Changes to Negative Option Rule, Part 2

Observations and insights shared by Marc Roth of Cobalt Law

Last week, we shared some of Marc Roth’s extensive observations and insights into the FTC’s proposal to change the Negative Option Rule, adopted 50 years ago in 1973. In this week’s article, we continue with additional observations and insights.

Sellers must obtain a consumer’s express informed consent to the Negative Option Feature before charging the consumer, which includes:

·      Obtaining the consumer’s unambiguously affirmative consent to the Negative Option Feature offer separately from any other portion of the transaction,

·      Not including any information that interferes with, detracts from, contradicts, or otherwise undermines the ability of consumers to provide their express informed consent to the Negative Option Feature,

·      Obtaining the consumer’s unambiguously affirmative consent to the rest of the transaction, and

·      Keeping or maintaining verification of the consumer’s consent for at least three years, or one year after the contract is otherwise terminated, whichever period is longer.

Requirements one and four warrant comment.

Regarding the first bullet point, we saw this exact language in the FTC’s 2021 Policy Statement (at p.13), and at that time were concerned it meant the FTC expected sellers to obtain a consumer’s consent to the Negative Option Feature separate from the overall transaction through, for example, a check box, even if not expressly stated. But we also noted then that this requirement was not codified in any law (save Vermont and DC in certain circumstances) and took some comfort in knowing that the Policy Statement was merely guidance and did not have the force of law. But now, if this proposal is adopted as is, the FTC may possibly expect sellers to obtain a separate opt-in for the Negative Option Feature, which could include, for online offers, a check box in addition to a submit button, and for phone sales, a second verbal acceptance for the Negative Option Feature.

And here is where it gets confusing.  The new proposed Section 425.5 does not expressly require a separate check box to obtain consent for online offers, but certain language in the NPR suggests otherwise. The NPR (at p.49) indicates that in response to the ANPR, certain commenters (i.e., state AGs and TINA) suggested requiring “consumers to take a separate, affirmative action” to consent to negative option features, such as “clicking an ‘I Agree’ button to accept the trial product” accompanied by disclosures about the “terms of the offer, including the amount and frequency of payments.” These commenters, the NPR notes, expressed concern with “sellers offering negative option features through in-person transactions [that] frequently use consumers’ signatures on the entire purchase as consent for the negative option…” and “….use retail sales receipts or check endorsements, in which the customer’s signature serves a dual purpose (e.g., negative option enrollment and promotional check cashing).”

In light of these comments, the NPR states that “for all written offers (including over the internet), sellers may obtain express informed consent through a check box, signature, or other substantially similar method, which the consumer must affirmatively select or sign to accept the negative option feature, and no other portion of the offer.”

Check box? First, the language in the NPR above says “may” and not “must,” which suggests a checkbox is not mandatory, but may satisfy the “separate consent” requirement. 

Second, when discussing the check box, the NPR does not cite any actual cases or laws that support a separate opt-in, just a statement that baldly references statutory and judicial support for it, “In addition, consistent with ROSCA, judicial decisions applying Section 5, and cases brought by the Commission, the seller should obtain the consumer’s acceptance of the negative option feature offer separately from any other portion of the entire transaction.” (NPR at 14).  Also note the use of “should” here and not “must.”

Red voting tick in a checkbox
Source: Envato Elements

Third, the exact wording of the New Rule requires sellers to “[o]btain the consumer’s unambiguously affirmative consent to the Negative Option Feature offer separately from any other portion of the transaction.”  If the entire offer is a Negative Option Feature, there is no “other portion of the transaction” warranting a separate consent, and thus the concern with obtaining a separate consent for these types of offers may be moot. On the other hand, if the offer includes a free or low-cost trial prior to automatically renewing, the FTC might interpret the recurring charge following the trial as “another portion” of the transaction, thus warranting the separate opt in.

But here we found language in the NPR that suggests no additional action is necessary in these cases. In the context of discussing whether to adopt suggestions by several AGs and TINA to require sellers to obtain an additional (or alternative) consent after completion of a trial, the FTC rejects this proposal (more on this below), noting “…if sellers follow the proposed Rule’s disclosure and consent requirements, consumers should understand they are enrolled in, and will be charged for, the negative option feature once the free trial ends.” (NPR at 50).

On the issue of whether a seller must obtain a consumer’s consent to be charged following a trial, the FTC rejects this proposal in the NPR, but we are not out of the woods yet, as the NPR invites comment on whether such “additional (or alternative) measures are necessary to prevent unfairness or deception and ensure consumers have adequate notice concerning the initiation of recurring purchases or payments following the completion of a free trial. For example, the Commission seeks comment on whether sellers offering free trials should be required to obtain an additional round of consent before charging a consumer at the completion of the free trial.”  Obviously, this needs to be addressed in comments to the NPR.

Bullet point #4 addresses recordkeeping. The New Rule would require sellers to keep or maintain verification of consumers’ consent to a Negative Option Feature for (i) three years, or (ii) one year after the contract is terminated, whichever is longer. So if a consumer agrees to try your service for a 3-month trial that rolls to a paid subscription and cancels before being charged, you still have to keep that record for three years, even if you never charged them? That seems harsh. Assuming the consumer doesn’t cancel and remains a subscriber for 10 years, you have to keep the original consent, in some form,  effectively for 11 years. That’s also pretty harsh. That said, many sellers in their ordinary course of business retain either exact copies or records of consumer enrollments in some form in anticipation of possible challenge or litigation, so this issue may be moot for many. But mandating companies to maintain these records seems a bit overreaching, regardless.

In May 2022, the FTC proposed similar requirements in a Notice of Proposed Rulemaking for the Telemarketing Sales Rule, where it sought to expand the amount and types of information companies must maintain in connection with calling campaigns. We noted at that time that the FTC had introduced the idea of expanded recordkeeping in an earlier rulemaking process, seeking comments on the costs and burdens these requirements would impose, and in response reported receiving no specific data from industry representatives, other than they generally oppose it.

Industry comments generally opposed any mandatory requirement to maintain call detail records, arguing that imposing such a requirement would be overly burdensome, particularly for small businesses. None of the industry comments, however, provided concrete information or data on the costs associated with requiring telemarketers to maintain call detail records, nor did they suggest any alternative solutions that address the Commission’s law enforcement challenges while minimizing the burden on industry.

We noted then that companies would need to submit specific data to the FTC to show how the proposal would result in added costs and burdens to their business, and we reiterate that suggestion here. To the extent you are able to quantify the additional costs and burdens this requirement would impose, we suggest gathering that information and submitting such data to the FTC to challenge this proposal.

Caucasian businessman pulling files from a traditional file cabinet.
Source: Envato Elements

425.6 Simple Cancellation.

Proposed new section (a) would require sellers to provide consumers with a simple mechanism to cancel a Negative Option Feature to avoid being charged for a good or service and immediately stop any recurring charges. That’s currently required by ROSCA, so it is simple enough.

Proposed new section (b) would require the “simple mechanism” to be as easy to use as the method the consumer used to initiate the Negative Option Feature. That also seems fair enough.

Now we get into the weeds. Proposed new section (c) would require the “simple mechanism” to be through the same medium the consumer used to consent to the Negative Option Feature (e.g., internet, telephone, mail, or in-person). For internet cancellation, the “simple mechanism” must be over the same website or web-based application the consumer used to purchase the Negative Option Feature, which the NPR refers to as “Click to Cancel.”  The NPR offers little guidance around how the “click to cancel” method must work, such as dictating the location of the cancel button or whether sellers may require a consumer to be logged into their account, and instead provides flexibility for sellers to meet this requirement in lieu of prescribing specific requirements, “[t]he lack of detailed requirements affords businesses flexibility in meeting the proposed Rule’s simple cancellation standard.” (NPR at 51).

For telephone cancellation, the “simple mechanism” must include, at a minimum, a telephone number to call where calls are “answered promptly during normal business hours and are not more costly than the telephone call the consumer used to consent to the Negative Option Feature.”  Unclear exactly what “promptly” means here, but the NPR notes that comments submitted by several AGs to the ANPR reported that “many businesses have created unnecessary and burdensome obstacles in the cancellation process, including forcing uninterested consumers to listen to multiple upsells before allowing cancellation, that are not outweighed by countervailing benefits to consumers or competition.” (NPR at 53). So, at a minimum, multiple save attempts may not pass muster.

For in-person sales, the “simple mechanism” to cancel must include an online or telephone method, and, where practical, an in-person method similar to that which the consumer used to enroll. If a telephone number is used, as above, calls must be answered during normal business hours and, if applicable, must not be more costly than the telephone call the consumer used to consent to the Negative Option Feature.

Consumer clicking a red Cancel key on their keyboard.
Source: Adobe Stock Photo

And now we come to another controversial topic…saves! If a consumer requests to cancel a Negative Option Feature using one of the methods described above, under the New Rule, sellers…

…must immediately cancel the Negative Option Feature upon request from a consumer, unless the seller obtains the consumer’s unambiguously affirmative consent to receive a Save prior to cancellation. Such consent must apply only to the cancellation attempt in question and not to subsequent attempts. The Negative Option Seller must keep or maintain verification of the consumer’s consent to receiving a Save prior to cancellation for at least three years, or one year after the contract is otherwise terminated, whichever period is longer.

Let’s unpack this. First, the obvious…before making a save attempt, a seller would need to obtain the consumer’s consent. At first blush, this requirement seemed somewhat overreaching and potentially violative of free speech rights, but as we thought through this and considered our experience in working with clients and their customer retention efforts, we realized that many save attempts do actually start with a question, such as “What if I can lower the price on your subscription, would that interest you,” or “Before you cancel, would you like to try the program for another 30 days at no cost?” 

These questions are not so dissimilar to sample language the FTC offers in the NPR as being acceptable for obtaining the required consent, “Would you like to consider a different price or plan that could save you money?” But we also recognize that some save attempts may be offered without first asking for permission, so if this proposal goes into effect as is, sellers will need to review their retention processes to ensure the New Rules are followed. In the meantime, we have spoken with several clients who intend to challenge this requirement on free speech grounds, which raises larger and more thorny constitutional issues, but may nevertheless be successful.

We also note that the NPR limits a save consent to only the cancellation attempt in question, and not to subsequent attempts. And, consistent with the recordkeeping requirements discussed above for enrolling in a Negative Option Feature, sellers must keep or maintain verification of a consumer’s consent to receive a save attempt for at least three years, or one year after the agreement is otherwise terminated, whichever period is longer.

425.7 Annual Reminders for Negative Option Plans Not Involving Physical Goods.

The New Rule would require sellers of non-physical products/services to send consumers enrolled in their auto billed programs reminders of their enrollment, at least annually, identifying the purchased product or service, the frequency and amount of charges, and the methods to cancel. At a minimum, the reminders must be provided through the same medium (such as internet, telephone, or mail) through which the consumer enrolled in the program/subscription. For in-person sales, sellers must provide the reminder through the internet or by telephone in addition to, where practical, an in-person method similar to that the consumer used to enroll.

This proposal, while on its face seemingly consistent with many state laws requiring annual renewal notices for auto billed subscriptions, is actually quite different in that it is not necessarily a renewal notice, but a reminder that the consumer is enrolled in a recurring billing program. The rationale for this requirement is found at p. 54 of the NPR, where the FTC notes that

[s]ubscriptions and other negative option arrangements that do not involve physical goods, however, present a different issue. As some commenters explained, because these services may have no regular, tangible presence for consumers (e.g., data security monitoring or subscriptions for online services), many consumers may reasonably forget they enrolled in such plans and, as a result, incur perpetual charges for services they do not want or use. Thus, the failure to provide reminders for such contracts meets all three elements of unfairness.

The concerning aspect of this requirement is that there is no triggering time period for the notice, such as a year or six-month term, but rather applies to any billing frequency, such as monthly. As such, any seller of a non-physical good/service that auto bills customers, regardless of billing frequency, must send a notice to those customers no less than every 12 months with information about the subscription and instructions on how to cancel.

This requirement is similar to recently enacted legislation in Colorado and Delaware that require sellers to send consumers enrolled in auto billed programs with renewal terms of less than 12 months, a reminder notice upon reaching 12 consecutive billing intervals. While efforts to stop this legislation failed in these states, similar bills in other states met with significant (and successful) industry opposition based on simple policy and practical grounds…that charges for subscriptions billed on a regular and frequent (e.g., monthly) basis, along with information on how to cancel to avoid future charges, are seen (or should be seen) by consumers on their monthly billing statements, or even more frequently if they access their credit card statements online.

While the FTC’s rationale for proposing this notice requirement is rooted in the fact that consumers may not receive or “see” an intangible product or service for which they are charged, the agency conveniently ignores consumers taking responsibility for checking their monthly credit card or bank statement where they will see these charges. This fact needs to be made clear to the FTC in comments to the NPR.

425.8 Relation to State Laws.

The New Rule would not pre-empt, supersede, or affect any state law, regulation, order, or interpretation relating to negative option requirements, except to the extent same is inconsistent with the provisions of the New Rule, and then only to the extent of the inconsistency. Further, any greater protections afforded consumers by state law would not be considered to be inconsistent with the New Rule.

Made in the USA wood sign of US wood map with stars on weathered whitewash wood
Source: Envato Elements

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