On October 16, the Federal Trade Commission (FTC or Commission) released its long-anticipated “Negative Option Rule” (the Rule). Most prominently, the Final Rule would require businesses utilizing negative options to market goods or services to provide consumers with a simple cancellation method. Perhaps less noticeably, the Rule would allow the Commission to obtain significant monetary damages from any “negative option” service for any practice the Commission determines to be false or misleading.
An overview of the Rule’s new requirements, followed by a more detailed summary and analysis of the Rule, follows.
Overview of the Rule’s Requirements
The Rule requires all applicable businesses to:
- Provide a “simple cancellation” mechanism allowing consumers to immediately cancel the negative option offering and halt all recurring charges.
- Disclose all material terms of the subscription in a “clear and conspicuous” manner (defined below) prior to receipt of the consumer’s billing information.
- Obtain “express informed consent” to the negative option (defined below) prior to charging the consumer.
- In most cases, retain verification of such consent for at least three years.
In addition to these requirements, the Rule prohibits any utilizer of “Negative Options” (as broadly defined by the Commission) from misrepresenting, either “expressly or by implication, any [m]aterial fact” regarding not just the negative option plan but any aspect of the underlying good or service. The Rule thereby creates a substantial loophole through which the FTC can obtain statutory damages upwards of $51,000 for any perceived misrepresentation regarding any aspect of the product or service being sold.
The Rule expressly does not preempt any state laws except to the extent the state law is inconsistent with the Rule’s provisions—even then, preemption is only applicable to the extent of the inconsistency. As such, robust auto-renewal laws in states like California should remain largely, if not wholly, in effect.
“Negative Options”
“Negative Options” are defined by the Commission as contract provisions “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.”
This definition is sweeping. Disparate businesses in scores of industries will be implicated by its broad reach. Indeed, the FTC notes that “entities in potentially any industry could incorporate a negative option feature into a sales transaction.” The FTC estimates that at least 106,000 companies currently utilize negative options.
Simple Cancellation (“Click-to-Cancel”)
The Rule’s “click-to-cancel” provision requires that consumers be able to cancel any recurring feature procured through a negative option in as simple a manner as they signed up for it. Cancellation must be provided by the same means the consumer signed up to purchase the good or service.
- For electronic signups (i.e. internet, app-based), the cancellation method must be easy to find. The consumer must be able to fully cancel by electronic means and should not need to speak to a live or electronic representative, such as a chatbot, to do so.
- For phone signups, the phone number to cancel must be available to be answered or take recordings during normal business hours, and the call should cost the same or less than the call the consumer made to sign up for the negative option.
- For in-person signups, the business must offer electronic or phone cancellation options. Where practical, the business should also offer in-person cancellation options. Any phone cancellation options must not involve the imposition of additional unnecessary fees.
“Clear and Conspicuous” Disclosures
The Rule defines a “Clear and Conspicuous” disclosure as one that is easily noticeable and understandable by ordinary consumers. This definition is consistent with the Commission’s definition of the term in other recently released rules and guidance (for example, the FTC’s recently revised Endorsement Guides).
The Rule further defines “easily noticeable and understandable” as follows:
- The disclosure must be made through the same means through which the negative option offer was presented. For example, if the offer is made audibly, the disclosure must be audible as well. If the offer is made both audibly and visually, the disclosure must also be made by both means.
- Visual disclosures must stand out from any accompanying text or other visual elements so it can be easily noticed, read and understood.
- Audible disclosures must be delivered in a volume, speed and cadence sufficient for ordinary consumers to easily hear and understand.
- When the negative option is presented electronically (i.e., via the web or an app), the disclosure must be “unavoidable.”
- The language and syntax of the disclosure must be understandable to ordinary consumers.
- The language of the disclosure (i.e., English, Spanish) must be the same as the language in which the negative option offering appears.
- Nothing in the offering can contradict or otherwise be inconsistent with the disclosure.
“Ordinary Consumers”
While courts generally look to a “Reasonable Consumer” standard, the Rule forgoes this term in favor of the phrase “Ordinary Consumers.” Regardless of whether the FTC meant to create a new standard with this language, courts have generally equated the terms. See, e.g., Davis v. HSBC Bank Nevada, 691 F.3d 1152, 1162 (9th Cir. 2012) (a “reasonable consumer is the ordinary consumer acting reasonably under the circumstances.”). In any event, the Rule explains that, where a negative option offering is targeted to a specific group (i.e., children, the elderly) “ordinary consumers” are considered ordinary members of that group.
“Express Informed Consent”
As noted above, the Rule requires businesses to obtain “express informed consent” when utilizing the negative option offering prior to obtaining a consumer’s billing information. To receive “express informed consent,” a business must obtain a consumer’s unambiguously affirmative consent to the negative option offering separate and apart from any other portion of the transaction. The business must not include any information that interferes with, detracts from, contradicts or otherwise undermines the ability of consumers to provide the express informed consent.
Businesses must maintain verification of each consumer’s express informed consent for at least three years, unless the business can demonstrate “by a preponderance of the evidence” that it is impossible to complete a transaction without such consent.
Backdoor Expansion of FTC Authority to Obtain Civil Penalties
The Rule’s expansion of the FTC’s discretionary authority to obtain monetary penalties based on a “you know it when you see it” standard of deceptive practices likely stems from the Commission’s loss of its ability to do so in 2021. At that time, a unanimous Supreme Court explained that the FTC’s longstanding practice of obtaining monetary restitution using Section 13(b) of the FTC Act had no basis in the statutory language.
Since then, the FTC has engaged in a flurry of rulemaking. The new rules allow the Commission to obtain monetary penalties for specifically defined activities. Whatever the merits of those new and amended rules, it is uncontestable that they at least provide businesses with guidance as to how to comply with them. The new Negative Option Rule turns this targeted approach to rulemaking on its head.
In a blistering 13-page dissent, Commissioner Holyoak highlights the Rule’s understated aggregation of power, explaining that “the Final Rule effectively transforms Section 5’s broad prohibition on unfair or deceptive practices into a Section 18 rule, allowing the Commission to expand its ability to seek money. Indeed, because negative option features are widely used in a variety of industries, the Rule greatly expands that ability.” The Supreme Court in AMG clarified that Congress had never given the Commission unbridled power to obtain monetary remedies for non-delineated deceptive practices. With its Negative Option Rule, the FTC gives this power to itself.
Commissioner Holyoak’s dissent can effectively be read as an outline for a legal challenge of the Rule. Given the wide breadth and significant depth of the Rule, such a challenge is sure to come. Whether or not the near-inevitable challenge is ultimately successful, companies who sell goods or services through the use negative options should be prepared for increased FTC scrutiny of both their negative option program and their underlying business.
Effective Date
Barring an injunction, most of the Rule’s provisions will become effective 180 days after their Federal Register publication date. The one exception is the Commission’s broad prohibition regarding misrepresenting any material facts regarding the underlying product or service offered by way of a negative option. That provision becomes effective 60 days after publication.