Last week, the Federal Trade Commission announced that its proposed rule replacing its Prenotification Negative Option Rule would result in new, expansive requirements for all forms of negative option offers, including automatic renewals, continuity plans, and free-to-pay conversations, made in all media, including Internet, telephone, in-person, and printed material.
Still subject to another round of comments, the proposed Rule Concerning Recurring Subscriptions and Other Negative Option Plans also features a federal requirement to provide an online cancellation mechanism to consumers who enroll in the negative option program online. That requirement is already imposed by laws in California, New York, and other states, and may be the least consequential of the proposed changes.
If enacted, the proposed rule would reach far beyond the scope of usual disclosure, consent, and cancellation requirements. Among other things, it would prohibit misrepresentations related to the underlying product or services, impose restrictions on “save” efforts when a consumer attempts to cancel, and require annual reminders for negative option features not involving physical products.
As support for its rule, the FTC estimated that 109,000 entities would need to comply at a total annual cost of about $5.7 million. We believe these numbers underestimate the compliance burdens, and the cumulative compliance obligations of these requirements are likely to be significantly higher for businesses.
While the FTC intends the proposed rule to provide a consistent legal framework across all media offers, the proposed rule has no preemptive effect on the various state automatic renewal laws and offers no help to businesses targeted by excessive class action lawsuits based on subjective and sometimes frivolous interpretations of state law requirements.
Key Provisions to Know about the Proposed Rule
Notwithstanding the FTC’s efforts to provide more clarity to sellers of subscription-based products and services and other negative option features, there remains a tremendous potential for subjective interpretation as to disclosures, placements, and other issues now specifically covered by the proposed rule. The following list outlines some elements of the FTC’s proposed rule:
- “Negative option sellers” subject to the rule are not limited to those who sell to consumers; business-to-business sales would be encompassed in the rule, feasibly including commercial contractual arrangements with automatic renewal clauses.
- The proposed rule prohibits misrepresenting any fact related to the underlying good or service associated with the negative option feature, not just facts relating to the negative option feature. This includes costs, product efficacy, free trial claims, fees, billing information, deadlines, authorization, refunds, cancellation, and any other material representation.
- Disclosure placement requirements specify that specific information about the negative option feature must appear immediately adjacent to the means of recording the consumer’s consent; if not directly related to the negative option feature, disclosures must appear “before consumers make a decision to buy (e.g., before they ‘add to shopping cart’).”
- The proposed rule expands the existing requirement to provide a “simple cancellation mechanism” under the Restore Online Shoppers’ Confidence Act and requires the mechanism to be at least as easy to use as the method the consumer used to enroll in the offer. At a minimum, the cancellation mechanism would need to be made available through the same medium the consumer used to consent to the offer, and, if the consumer enrolled online, the cancellation mechanism must be over the same website or web-based application the consumer used for the initial purchase.
- For subscriptions not involving physical goods, consumers would need to receive reminders, at least annually, identifying the product or service, the frequency and amount of charges, and a means to cancel. Such reminders must be provided through the same medium the consumer used to enroll.
- When consumers contact the seller to cancel, the seller must immediately cancel the negative option feature upon request, unless the seller obtains the consumer’s unambiguous affirmative consent to receive a “save” prior to cancellation.
- New recordkeeping requirements appear in the proposed rule, including a requirement to maintain verification of the consumer’s consent for at least three years, or one year after the contract is otherwise terminated (whichever is longer). A similar recordkeeping requirement would be imposed on recording the consumer’s assent to hearing a save offer.
Comments are due within 60 days once the proposed rule is published in the Federal Register.