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In brief

If you sell goods and services to consumers through automatically renewing payment plans, free or discounted trials that convert into full plans, or other “negative option features” that interpret a consumer’s silence as permission to keep charging them (collectively, “recurring subscriptions“), you should monitor and consider submitting comments on the Federal Trade Commission’s (“FTC’s“) proposed Negative Option Rule. The proposed rule would impose detailed transparency, consent, simple cancellation and annual reminder requirements on companies that use any medium to offer recurring subscriptions for products or services, and allow the FTC to seek civil penalties of over USD 50,000 per violation and consumer redress for violations.


Contents

  1. In Depth
  2. Commentary
  3. What’s Next

Background

The FTC published the proposed rule in March 2023 and it would amend the FTC’s existing “Prenotification Negative Option Rule,” dating to 1973, which currently only regulates prenotification plans. A prenotification plan is where a seller provides periodic notices offering goods to consumers and then sends (and charges for) goods if the consumer neglects to affirmatively decline the offer. The FTC indicated that the newly proposed rule is intended to cover more modern forms of recurring subscriptions, such as:

  • Continuity plans, in which a consumer agrees in advance to receive goods periodically until the consumer cancels the agreement.
  • Automatic renewals, where a seller automatically renews a consumer’s subscription upon its expiration, unless the consumer affirmatively cancels.
  • Free trial conversion offers, where a consumer receives goods or services without charge or at a discount for an initial period, but is then charged for goods and services in full following the expiration of the free trial period.

The common thread among these plans is that they include a term that allows a seller to interpret a customer’s silence as acceptance of an offer. Although the existing Negative Option Rule only applies to prenotification plans, other laws and rules—including section 5 of the FTC Act, the Restore Online Shoppers’ Confidence Act (ROSCA), the Telemarketing Sales Rule (TSR), the Postal Reorganization Act, the Electronic Funds Transfer Act, and a patchwork of state laws—govern subscriptions in various other forms and contexts.

In Depth

Against this background, the proposed Negative Option Rule aims to set “clear, enforceable performance-based requirements for all negative option features in all media.” Some key changes include the following:

  • Expanded Scope: As noted above, the existing Negative Option Rule applies only to prenotification plans, with other recurring subscription models being governed by a patchwork of legislation and regulation. The proposed new rule would expand the scope of the Negative Option Rule to apply to all negative option features, regardless of the form of the offer or the medium in which it’s made. Under the proposed rule a “negative option feature” would be defined as “a contract provision under which the consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement is interpreted by the negative option seller as acceptance or continuing acceptance of the offer.”
  • Prohibitions against certain Misrepresentations: The rule would make it unlawful for any negative option seller to misrepresent any material fact related to the transaction or the underlying good or service. The FTC stated that this could include 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. The inclusion of “product efficacy” in this list is controversial because it could lead to the FTC using the rule to seek civil monetary penalties and consumer redress for misrepresentations that are only tangentially related to negative option features, which is arguably outside of the FTC’s enforcement powers as a general proposition. As the sole FTC commissioner dissenting, Commissioner Christine Wilson withheld her support from the proposed rule for this and other reasons. 
  • Prescriptive disclosure requirements: Under the proposed rule, sellers would at least need to disclose: (1) that consumers’ payments will be recurring, (2) the deadline by which consumers must act to stop charges, (3) the amount or ranges of costs consumers may incur, (4) the date the charge will be submitted for payment, and (5) information about the mechanism consumers may use to cancel the recurring payments. Importantly, such disclosures must be made prior to obtaining billing information from the consumer. 
  • New consent requirements: The proposed rule would require the seller to obtain unambiguous affirmative consent to the negative option feature separately from any other portion of the transaction. The FTC has suggested that a separate signature or other method of consent solely for the automatic renewal component would be necessary, and one signature to agree to various other, comprehensive terms may not be sufficient. Additionally, the rule would (1) prohibit marketers from including information that interferes with, detracts from, contradicts, or otherwise undermines the consumers ability to give express informed consent and (2) require the marketer to obtain and maintain verification of such consent for the later of three years or a year after cancellation. 
  • A simple cancellation mechanism: The proposed rule would also include a click-to-cancel provision, requiring businesses to make it at least as easy to cancel a subscription as it was to start it. For example, if you can sign up online, you must be able to cancel on the same website, in the same number of steps. The rule deliberately eschews prescribing specific standards or mechanisms for cancellation, and provides merely that they must be equivalent in difficulty to the process used to enroll. The rule would however require the offer the cancellation mechanism in the same medium it used to enroll the customer. For example, if a customer can sign up via a mobile app, the seller must also allow customers to cancel their enrollment via the app.
  • New requirements before making additional offers: The proposed rule would allow sellers to pitch additional offers or modifications (e.g., lower pricing, different term length) when a consumer tries to cancel their enrollment only if they first ask consumers whether they want to hear them and receive an unambiguous affirmative consent. Upon receiving a negative response to this question the seller must desist from presenting any such “save” offers and cancel the negative option arrangement immediately. In other words, a seller must take “no” for an answer and upon hearing “no” must immediately implement the cancellation process. 
  • New requirements regarding reminders: The proposed rule would require sellers to provide an annual reminder to consumers enrolled in negative option programs involving anything other than the automatic delivery of physical goods, before they are automatically renewed. This distinction between arrangements for physical and non-physical products reflects the fact that, for negative option arrangements that have no tangible presence, a consumer may forget that they are enrolled and incur indefinite charges for a service they don’t use.  

Commentary

The proposed Negative Option Rule on negative option arrangements comes amid renewed legislative, regulatory and enforcement attention being paid to certain commercial practices, such as automatic renewal and so-called “dark patterns“, which have become increasingly prevalent in today’s digital marketplace. 

  • Automatic renewal laws: Many states have enacted laws governing automatic renewal and other negative option features. The disparate requirements imposed by these state laws—for example they mandate different renewal terms and different notification requirements—create a challenging compliance environment for businesses offering products on a subscription basis. Of particular note is California’s Automatic Renewal Law, which was strengthened by a set of 2022 amendments and which has fueled a wave of private enforcement. Although the FTC’s proposed new rule aims to engender consistency, it doesn’t expressly preempt state laws and may simply add a further layer of complexity for businesses.
  • Dark patterns: The proposed Negative Option Rule is also consistent with recent regulatory trends policing dark patterns, both at the state and federal levels. The term “dark patterns” refers to a nebulous array of commercial practices involving interface design strategies that manipulate users into making choices they likely wouldn’t have otherwise made and that may cause harm. For example, making it difficult for a website user to adjust their privacy settings or designing a retail transaction interface that makes it possible for a consumer to accidentally complete an unwanted purchase are both examples of common dark patterns conduct.   

What’s Next

If the rule is passed in its current form, companies should, in summary: (1) review their renewing subscription sign-up processes to ensure that they include all required information and the information is factually complete and accurate; (2) ensure that they only charge consumers for subscription fees with their demonstrable, express and informed consent; (3) review their cancellation processes to ensure that they are easy-to-use and don’t try to “save” the customer relationship unless the customer affirmatively consented to receive these types of communications; and (4) send reminders, at least annually, of the recurring subscription, except where it is for the automatic delivery of physical goods. The rule, if passed, would also sit on top of existing statutes and regulations at the state and federal level governing recurring subscriptions, adding to the onerous requirements that already apply to sellers of subscription plans. 

Once the notice has been published in the Federal Register (pending), the public can submit comments electronically or in writing within 60 days from the publication date. The FTC will take these public comments into account in deciding whether and how to implement the proposed rule.

Author

Pamela leads our New York IP & Technology Practice. She is consistently ranked by Chambers USA and World Trademark Review, and was recognized as one of the "Top 250 Women in IP" by Managing IP in 2023. Clients describe Pamela as "a legal whizz. What sets her apart is her business expertise and ability to craft viable, actionable solutions. She responds quickly and is a pleasure to work with" (Chambers USA Client Interview - 2023).
Pamela has extensive experience in structuring, negotiating and implementing transactions involving the acquisition, development, exploitation and sale of IP rights, including mergers and acquisitions, licenses, joint ventures, strategic alliances, research and development collaborations, digital publishing, e-commerce, outsourcing and corporate finance transactions.

Author

Jonathan Tam is a licensed attorney in California and Ontario. He focuses on privacy, advertising, intellectual property, content moderation and consumer protection laws. He is passionate about helping clients achieve their commercial objectives while managing legal risks associated with activities involving data, information technology and media. Jonathan regularly writes about information technology and privacy, and is the Vice Chair of the Cybersecurity and Privacy Law Section of the Bar Association of San Francisco. He has completed secondments at a global payment services provider based in London, England and a world-leading tech company based in Silicon Valley. He joined Baker McKenzie as a summer associate in 2012 and has also worked in the Firm's Toronto office.

Author

Rebecca helps clients register, protect and enforce their intellectual property in the US and abroad. Prior to joining Baker McKenzie, Rebecca was a partner at an international law firm and more recently was in-house counsel at a large retailer where she handled brand strategy, brand managing and re-branding initiatives.

Author

Emily Mola is a Staff Attorney in Baker McKenzie, Tampa office.

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