FTC proposes amending Negative Option Rule to include click-to-cancel and other protections

On March 23, 2023, the Federal Trade Commission (FTC) proposed changes to the cancellation policy for companies selling products or services under a “negative option feature”. This includes subscriptions, memberships, free trials that automatically convert to paid subscriptions, and other recurring payment programs that renew indefinitely unless the consumer takes action to cancel or return the goods or services.

The doorstep economy allows consumers to purchase various items on a recurring basis. However, the existing Negative Option Rule only pertains to the older pre-notification plans, which are becoming less common. According to the FTC, some negative option practices that harm consumers. Some consumers are being charged for items they did not agree to purchase, while others are struggling to cancel subscriptions despite making multiple attempts.

The Commission has proposed a new Rule that will bring about several changes. One of those changes is the expansion of the types of negative option transactions covered by the Rule. Businesses will have to meet additional disclosure, consent, notification, and cancellation requirements. This would require that businesses would need to ensure that opting out is as simple as opting in, using the same method. Companies who offer negative option features may face financial penalties for alleged misrepresentations, even if they are not related to the negative option feature.

The authority of the FTC to address these Rules is under different laws that address specific types of transactions, including cases of subscription-renewal abuses. The FTC is proposing an amendment to its existing “Prenotification Negative Option Rule,” which currently only applies to prenotification plans, to consolidate regulations. This allows sellers to automatically send merchandise, like books, to their subscribers and charge them for it, unless the subscribers say they don’t want it within a certain amount of time. The FTC wants to make a new Rule to include other types of negative option plans, such as automatic renewals, free trials that turn into paid subscriptions, and continuity plans, under its coverage of “negative option features”.  While this rule may not be widely applicable in current markets, the FTC enforces other laws mandating disclosure, consent, and cancellation requirements for various categories like subscription-based goods or services, membership clubs, and automatic renewal programs that are now considered “negative option.”

There are various laws that apply to sales depending on the method used. For instance, the Restore Online Shoppers’ Confidence Act (ROSCA) applies to online sales while the Telemarketing Sales Rule (TSR) applies to sales made through the phone. The Federal Trade Commission Act (“FTC Act”), specifically Section 5, generally prohibits unfair or deceptive practices. Additionally, the Electronic Fund Transfers Act regulates recurring debits from consumer accounts.  The FTC has stated that the current “patchwork of laws and regulations” lacks consistency in providing a legal structure for both industry and consumers, across various media and offers.

The FTC has used its authority under Section 18 of the FTC Act to create a new regulation called the Rule Concerning Recurring Subscriptions and Negative Options. This will replace the previous Prenotification Negative Option Rule and will apply to negative option offers in all forms of media. The new regulation will require more detailed disclosure, consent, and cancellation procedures than current laws and rules enforced by the FTC.

Key provisions to the Negative Option Rule

The proposed new Rule would implement several significant changes besides increasing negative options coverage if it is approved as written. Some of the key provisions include the following:

  • The proposed rule will regulate contracts with automatic renewal provisions that use a negative option. The term “automatic renewal” will not be defined or limited in any way by the FTC.
  • If a consumer asks to cancel an automatic renewal contract, the seller can only cancel it right away if they don’t offer a “save” option. The save option means a chance to get a better deal or different term length, and the seller can only offer it if they ask the consumer’s permission and get a clear “yes” in response.
  • The proposed rule would make it mandatory to disclose all important information regarding the product or service, regardless of its relation to the negative option feature, before obtaining billing information. This information must be clearly visible to the consumer before they make a purchasing decision.
  • The rule states that negative option sellers cannot lie about any significant details regarding the transaction or the product/service being offered. This includes information about the negative option program or anything related to the underlying good or service. This requirement covers a wide range of contractual terms, such as rates, fees, termination conditions, early termination fees, authorization to make payments, personal guarantees, merchant obligations, and any other terms in a merchant agreement that involve automatic renewal.
  • According to the proposed rule, the seller or payment processor would need to get a clear and explicit agreement specifically for the negative option feature. The FTC recommends using a separate signature or consent method exclusively for the automatic renewal aspect. A single signature to agree to all the other terms may not be enough.
  • If a consumer signs up for an automatic renewal contract online using a website or web-based app, the seller must offer a way to cancel the contract through the same website or app. This could be difficult for payment processors who use separate apps for different tasks and may have a link for cancelling contracts in a different app than the one merchants use to access their account information and services.

Businesses can submit their feedback on the proposed rule to the FTC within 60 days after it is published in the Federal Register. This comment period allows businesses to share their opinions on the new rule and highlight any challenges or concerns they may have. Businesses can also provide any relevant information and data to influence the final Rule.

At Global Legal Law Firm, our lawyers are familiar with the rapidly changing nature of electronic payments processing processors, and the ever changing regulations involved, with decades of expertise in ISOs, commercial collections, credit card brands, and other forms of electronic payment processing litigation. Let us guide you through this new and volatile environment, rather than attempting to navigate it on your own.

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