Companies that automatically renew customers’ subscriptions or memberships, take note. On October 16, 2024, the Federal Trade Commission (FTC) announced sweeping amendments to the Negative Option Rule, which would apply to a host of subscription-based products and services that have an auto-renewal feature (i.e., a negative option offering), including those directed to businesses. The Rule includes specific and prescriptive requirements, such as requirements to 1) obtain consumers’ affirmative consent to an auto renewal feature “separate from any other portion of the transaction,” 2) present all material terms of the transaction “immediately adjacent to” the means of recording consumer consent, and 3) allow for simple cancellation in the same medium the consumer used to consent, noting that a chatbot cancellation method would not be acceptable unless the initial transaction was made through a chatbot. Violations of the Rule would be subject to $51,744 in civil penalties per violation.

FTC Chair Lina Khan has made the Rule a centerpiece of her consumer protection agenda, noting that it is a “pocketbook” issue. However, many commenters expressed reservations about the Rule. The FTC voted to approve the Rule 3-2 along party lines, with Republican FTC Commissioner Melissa Holyoak issuing a scathing dissent that sets forth her view that the Rule exceeds the FTC’s authority, takes issue with the political nature of the rulemaking, and echoes many commenters’ concerns.

The Negative Option Rule’s provisions and key takeaways are summarized below.

Scope of the Rule

The Rule applies to all negative option programs in any media (including phone, internet, print, and in-person transactions), whereby a consumer’s silence will result in continued acceptance of the offer. This includes automatic renewal subscriptions, continuity plans, free or reduced-price trials that convert into subscriptions, and prenotification negative option plans.

Sellers are covered by the Rule if they sell, offer, charge for, or otherwise market goods or services that have negative option features.

While the Rule has many similar requirements to the Restore Online Shoppers’ Confidence Act (ROSCA), that law only applies to internet sales practices. As such, this new Rule significantly broadens the number of negative option offerings subject to the FTC’s requirements. The Rule also goes beyond ROSCA by specifying methods of disclosures, consents, and cancellation methods.

Requirements

No Misrepresentations

The Rule prohibits express or implicit misrepresentations of any material fact, in connection with offering a negative option. A term or representation is “material” if it is likely to affect a person’s choice or conduct regarding goods or services. This includes terms such as deadlines to prevent a charge or the cost. Sellers also cannot misrepresent the cancellation process, health or safety, or the purpose or efficacy of the product or service.

This provision is significant: Not only does it prevent misrepresentations with respect to the negative option aspect of a transaction, but it would allow the FTC to obtain civil penalties for any material misrepresentation regarding the product or service.

Clear Disclosures

In addition to not misrepresenting any material terms, sellers must clearly and conspicuously disclose all material terms prior to obtaining a consumer’s billing information. The terms must include, at a minimum, the fact that consumers will incur recurring charges unless they cancel, the deadlines by which consumers must act to cancel, the amount and frequency of charges, and information necessary for consumers to find the cancellation mechanism.

The Rule goes beyond ROSCA by providing guidance on where these disclosures must be placed. They must appear immediately adjacent to the consent mechanism and prior to obtaining such consent. Other information that the seller communicates cannot interfere with, detract from, contradict, or otherwise undermine the ability of consumers to read, hear, see, or understand the disclosures.

Separate Express Informed Consent

Sellers must obtain “unambiguously affirmative consent” to the negative option feature; not include information that interferes with, detracts from, contradicts, or otherwise undermines consumers’ ability to provide consent; and must maintain a record of that consent for at least three years unless the seller can demonstrate by a preponderance of the evidence that it is technologically impossible to complete the transaction without consent. Notably, such consent must be separate from any other portion of the transaction.

For written offers (including internet offers and phone applications), sellers can obtain consent through a check box, signature, or substantially similar method if the consumer affirmatively selects or signs to accept (e.g., no pre-filled check boxes or signatures) and consent must be separate from every other portion of the transaction. The request must also be free from information not related to acceptance of the negative option and be clear, unambiguous, and non-deceptive.

Easy Cancellation (“Click to Cancel”)

Sellers must provide a simple cancellation method that stops the consumer from being charged or being charged a higher amount and immediately stops any recurring charges. Such a cancellation mechanism must be at least as simple as the consent mechanism and must be provided through the same medium used to obtain consent.

The Rule has specific requirements based on the method of cancellation. For online cancellation, the cancellation mechanism must be easy to find and cannot require consumers to interact with a live or virtual representative (e.g., chatbot) if the consumer did not have to interact with one to consent to the offering. This requirement is not in ROSCA, so sellers should pay close attention. For phone-based cancellation, the seller must promptly effectuate the request during normal business hours and cannot make the cancellation phone call more costly than the consent phone call. Finally, for in-person consent processes, the seller should offer similar in-person cancellation where practical but must also offer an alternative cancellation method either by phone or online that meets the standard requirements for those mediums. If the alternative is by phone, then the seller cannot impose unnecessary or unreasonable costs for that call.

Exemption Process

The Rule allows sellers to petition for a partial or full exemption if they can demonstrate application of the Rule’s requirements to a particular product or service, or class of product or service, is not necessary to prevent the acts or practices to which the Rule relates.

Takeaways

The Rule will have a significant impact on current business practices. Here are some key additional points:

• The Rule applies broadly to both B2B and B2C subscription memberships. It also applies not just to online transactions, but also to in-person and telephone transactions.
• Building on ongoing enforcement efforts, the FTC is likely to focus on simple cancellation. The FTC has focused on cancellation in recent ROSCA actions and likely will continue to focus on this issue once the Rule goes into effect, especially given the Rule’s detailed provisions regarding acceptable cancellation procedures.
• The requirement to obtain separate consent for the negative option feature is particularly notable given that almost all state-law equivalents do not have this requirement, with Vermont being the exception for subscriptions lasting a year or longer.
• The Rule does not preempt consistent state laws or regulations that provide greater protection than the Rule. Therefore, entities subject to such state laws must still comply with those laws’ unique requirements. This would include, for example, the California Auto-Renewal Law, which was recently amended to include several provisions similar to the Rule.
• The Rule has a staggered effective date. Most provisions of the Rule, such as the disclosure, consent, and cancellation requirements, will go into effect 180 days after publication in the Federal Register. Certain provisions, such as the section prohibiting material marketing misrepresentations, will go into effect 60 days after publication.
• A challenge to the Rule is likely. Given Loper Bright, a legal challenge to the Rule is likely, as noted in Commissioner Holyoak’s dissent, which criticized the rushed process to finalize the Rule and suggested that Chair Lina Khan “hurr[ied] to finish a rule that follows through on a campaign pledge made by the Chair’s favored presidential candidate.”

Wilson Sonsini Goodrich & Rosati routinely helps companies navigate a complicated compliance landscape and has helped companies comply with negative option offering requirements and respond to related regulatory investigations. For more information, please contact Maneesha Mithal, Aaron Hendelman, Libby Weingarten, Eddie Holman, Brett Weinstein, Kelly Singleton, Rebecca Weitzel Garcia, Doo Lee, or another member of the firm’s data, privacy, and cybersecurity or trademark and advertising practices.