On October 16, 2024, the U.S. Federal Trade Commission (FTC) announced that it has finalized its new Negative Option Rule (Rule), which represents a significant expansion of its 1973 Negative Option Rule and is guaranteed to have a far-reaching impact on many businesses in today’s subscription economy. The final Rule imposes new requirements for companies that sell products via negative options—in other words on a subscription or recurring basis. These recurring subscriptions are increasingly the subject of regulatory scrutiny as demonstrated by recent heightened interest from regulators around the globe, including Australia, Canada, and the United Kingdom.
The FTC approved the Rule 3–2, with Chair Lina Khan, Commissioner Alvaro Bedoya, and Commissioner Rebecca Slaughter voting yes and Commissioner Andrew Ferguson and Commissioner Melissa Holyoak voting no (with Holyoak issuing a strong dissent and Ferguson signaling that his dissent is forthcoming).
What does the final Rule require of companies?
Some of the key new requirements under the Rule include more stringent requirements related to enrollment disclosures, obtaining consumers’ consent, and “immediate” cancellation.
- Misrepresentation of material facts (§ 425.3). Companies must not misrepresent any material fact in connection with marketing a negative option–based product, regardless of whether that fact relates to the negative option itself. § 425.3. “Material” facts are those “likely to affect a person’s choice [or] conduct.”
- Placement of disclosures (§ 425.4). Material terms must be clearly and conspicuously disclosed prior to obtaining billing information, and certain disclosures must be “immediately adjacent” to where consumers’ consent to the negative option feature (which must be obtained separately from consent to the overall transaction).
- Express informed consent (§ 425.5). Companies must obtain customers’ express informed consent to the negative option feature, separate from consent to the overall transaction, before the customer is charged. The final Rule also imposes a recordkeeping requirement of customers’ consent (for three years in most cases).
- Simple cancellation “Click to Cancel” (§ 425.6). Companies must provide “simple mechanisms” by which customers can cancel their subscriptions “immediately” and via the “same medium” as the customer signed up. For example, if a customer signs up online, they must be able to cancel online. In all cases, cancellation must be “at least as easy to use” as the means by which the consumer provided consent to the negative option feature.
The FTC can seek both damages and monetary civil penalties, for violations of the Rule (up to $51,744 per violation).
Commissioner Holyoak’s Dissent
In a separate dissenting statement, Commissioner Holyoak condemned the Rule’s approval as rushed due to Chair Khan’s political motivations, in addition to criticizing the rulemaking process and the Rule’s substantive requirements. Specifically, Commissioner Holyoak wrote that the rulemaking violated Section 18 of the FTC Act because the final Rule exceeds the “area of inquiry” provided in the 2019 advanced notice of proposed rulemaking; fails to specifically define practices that are unfair or deceptive while generalizing localized complaints from particular industries to the entire negative option economy; and does not demonstrate the prevalence of unfair or deceptive negative option marketing practices.
Commissioner Holyoak further lamented the “missed opportunity to make useful amendments” to preexisting negative option regulations and guidance “rather than conducting an overbroad rulemaking that cost years of staff time to propose and finalize, but will likely not survive legal challenge.”
The Rule is almost certain to face legal challenges, as Commissioner Holyoak predicted.
The Rule will become effective 60 days after its publication in the Federal Register, with the exception that Sections 425.4 through 425.6 will become effective 180 days following publication in the Federal Register.
With only months to ensure compliance, businesses should act swiftly to assess current practices and close any gaps in their existing practices.
This post comes to us from Sidley Austin LLP. It is based on the firm’s memorandum, “FTC Finalizes “Click-to-Cancel” Rule Regulating Free Trial- and Subscription-Based Services,” dated October 24, 2024, and available here.