The US Federal Trade Commission (FTC or Commission) proposes expanding the Negative Option Rule to all subscription agreements.
The FTC, in a 3-1 vote with Commissioner Christine S. Wilson (R) dissenting, published a notice of proposed rulemaking (NPRM) regarding an amendment to the FTC’s Negative Option Rule concerning subscription services. The NPRM was released March 23, 2023, and comments will be due within 60 days of its forthcoming publication in the Federal Register.
The proposal would amend the current Negative Option Rule by expanding its scope to apply to all subscription agreements and strengthening consumer protections as follows:
- Simple and Easy Cancellation Mechanism – Businesses offering subscription services would be required to make it at least as easy to cancel as it is to sign up. By way of example, if a consumer can sign up online, then the consumer must also be able to cancel online in the same number of steps.
- No Means No – Before pitching additional offers after a consumer asks to cancel, the business must first obtain the consumer’s authorization to make such offers.
- Annual Reminder – The business must provide an annual reminder prior to renewal to consumers enrolled in negative option programs (with the exception of physical goods).
Violations of the proposed rule would be penalized under the Commission’s authority to prohibit unfair or deceptive acts and practices (UDAP), 15 USC § 45. Because this penalty provision establishes statutory penalties of up to $46,517 per violation and the Commission could be expected to argue that each impression or viewing is a violation, the potential penalties for violations could be significant.
Moreover, all 56 states and territories have similar UDAP statutes that they may independently enforce in state courts. Some states argue, although it is far from clear, that a violation of a federal rule is a violation of state law. In addition, some plaintiffs’ class action lawyers may incorrectly argue that there could be a private right of action enforceable on a class basis.
The proposal significantly expands the scope and reach of existing law that dates back to 1973 with the last amendments in 1998. The current rule focuses on outdated marketing techniques and products and applies only to prenotification plans wherein the consumer is sent advance notice that the company will send them something (such as a book or album) and the consumer has a limited time to tell the business they do not want to receive it. Those of us of a certain age will recall getting CDs, cassette tapes, or 8-track cartridges that way. While such programs continue to exist, they are largely online, and the proposal sweeps within “negative option” programs subject to common subscriptions such as internet, cable television, and mobile phones.
KEY TAKEAWAYS
- Businesses have an opportunity to comment on the NPRM. Should they choose to do so, they should consider that even if comments are not considered seriously at the agency level the comments can assist in later litigation challenging a rule. Comments should not focus on broad principles but rather bring out specific facts about a given business’s specific markets and create a consistent pattern that the costs of the proposal exceed its benefits and are not based on facts.
- The proposed rule would significantly increase enforcement risk and require redesign and coding changes with compliance and legal review by skilled technicians and lawyers.
- The financial risks of noncompliance are significant.
- FTC rules are often interpreted by state attorneys general as violations of state law and are enforced in state courts under state law under legally unfavorable circumstances.
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