“Too often, businesses make people jump through endless hoops just to cancel a subscription,” said Commission Chair Lina M. Khan. “The FTC’s rule will end these tricks and traps, saving Americans time and money. Nobody should be stuck paying for a service they no longer want.”
The Commission first published the “Rule Concerning Use of Prenotification Negative Option Plans” in 1973 to eliminate unfair and deceptive marketing practices that violated Section 5 of FTC Act, 15 U.S.C. 45. The approval of the amended rule retitled “The Rule Concerning Recurring Subscriptions and Other Negative Option Programs” marks the end of a multi-year process that began in 2019 to keep pace with an increasingly digital economy.
Most of the provisions go into effect 180 days after publication in the Federal Register, and violations may result in hefty civil penalties.
Updating the rule
Commission approval and publication follow a March 2023 notice of proposed rulemaking which received more than 16,000 comments from consumers and federal and state government agencies, consumer groups and trade associations.
As updated, the rule will apply to almost all negative option programs in any media, including, but not limited to interactive electronic media, telephone, print and in-person transactions.
It will prohibit sellers from misrepresenting any material facts—ranging from cost to efficacy to health safety—while marketing goods or services with a negative option feature.
Requirements include clear and conspicuous disclosure of material terms prior to obtaining consumer billing information, acquiring express informed consent to the negative option features before charging the consumer and providing a simple mechanism to opt out of the negative option.
A section on the relation to state laws establishes that the FTC rule does not supersede, alter or affect any state statute even if the local law offers greater consumer protection.
“Practically speaking, if companies are already complying with California’s auto-ship rule, the review and any changes shouldn’t be that burdensome,” said Katie Bond, partner at Keller and Heckman LLP. “One watch out: if a company is offering subscriptions for a year or more, be sure to also check out the New York auto-ship law.”
Although those types of subscriptions are generally more commonplace on news sites, Bond added that it is worth noting given that plaintiff’s firms can enforce those state laws and have brought many cases based on the New York law in the last few years.
Her general advice to companies: “Get with your lawyers, get with your marketing team, and review your auto-ship or other ‘negative option’ features to ensure compliance.”
Rule as ‘incredibly expansive’
As one of two dissenting votes in the 3-2 decision, Commissioner Melissa Holyoak stated that the Commission had exceeded its boundaries and used “its limited resources to promulgate a broader regulation that may not survive legal challenge.”
She said that not only is the rule not specific enough in its definition of unfair acts or deceptive practices but encourages businesses to avoid negative option features that honest companies and consumers find valuable and represents a missed opportunity to make useful amendments.
“Today, I believe we are seeing another low in our abuse and misuse of the tools Congress has given us,” she added. “Rather than engage in blatant electioneering to advance political ends, the Commission should have instead focused on stewarding its resources effectively and in ways that restore our institutional legitimacy, not further undermine it.”
Section 18 of the FTC Act—the statutory authority underlying the rulemaking process—authorizes the FTC to create “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce.”
Highlighting the word “specificity” in the language of the statute, Bond called the rule “incredibly expansive” in that it stretches the underlying statutory authority to make an array of business practices subject to civil penalties. The language used establishes as violation to misrepresent, expressly or by implication, any material fact, including facts related to health or safety.
“Given the myriad ways the presentation, or substantiation, of a ‘health or safety’ claim might render the claim deceptive, the rule doesn’t seem to ‘define with’ any ‘specificity’ what practices might be violative on that point,” she said.
According to Bond, the FTC can currently seek $51,744 in civil penalties per violation of a rule like the Negative Option Rule and normally considers each violation (e.g., each misrepresentation or failure to provide a certain disclosure) to be a separate violation.
Courts and common law apply a multi-factorial test, however, that considers factors like defendant’s good or bad faith, the injury to the public and even ability to pay.
“If a company is a fraud outfit, then the gush of civil penalties may well be allowed, but the outcome should be far different for a responsible company that makes a mistake (or is, at least, accused of making a mistake) along the way,” Bond said.
She added that companies should be aware that, just like the state auto-ship laws, class actions can be based on the FTC’s new rule and that competitors can also enforce the rule through cease-and-desist letters or self-regulatory challenges.
Rule as ‘fair and reasonable’
Vous Vitamins, which has been offering personalized vitamin subscription plans since 2014, said the rule was justified, fair and reasonable and should be embraced by the dietary supplement industry as an important consumer protection.
“It is really aimed at bad actors in the industry,” said Arielle Levitan, MD, co-founder of Vous Vitamins. “Top performing CPG subscription companies have always provided ample notice about their subscription plans and easy methods for consumers to cancel their plan.”
As examples of bad practices observed in the marketplace over the years, Vous Vitamins cited difficulties in cancelling subscriptions, phantom charges on credit bills past cancellation dates and consumer inability to reach customer service.
To ensure compliance with the update, the company shared that although it does not view the requirements as challenging giving its current approaches, it will make sure the new rule is conspicuous in its existing messaging, train its customer service team on elements of the regulation and evaluate where additional ‘click-and-cancel’ communication might be needed.
“We hope this rule prompts more consumer-centric thinking in our industry, and all companies benefit when the industry overall starts treating consumers with basic respect and financial protections,” Dr. Levitan added.
The Vitamin Shoppe, which rolled out its “Spark Auto Delivery” subscription service in 2017, echoed that the new FTC rule aligns with the retailer’s existing practices. The company’s auto-delivery page features a clearly marked prompt for consumers to manage their subscriptions at any time.
“We have always prioritized a user-friendly experience by allowing our customers to manage their auto-deliveries online, including the ability to skip or cancel without hurdles,” said Andy Laudato, chief operating officer at The Vitamin Shoppe. “So, for us, this rule does not present any significant changes or challenges."