The FTC’s Negative View of Negative Options – Are Expanded Regulations Coming?

By Ellen Berge and Len Gordon

The Federal Trade Commission’s “Negative Option Rule” is up for review, and the FTC is steering toward stricter regulations for automatic renewal plans and subscription programs. The FTC completed its last regulatory review of the Negative Option Rule in 2014 and decided then to retain the rule in its current form. But, will this time be different?

The Rule Under Review

The rule under review is the “Rule Concerning the Use of Prenotification Negative Option Plans,” also referred to as the “Negative Option Rule.” However, the scope of the Negative Option Rule only covers prenotification plans, like book-of-the-month clubs, where the seller sends notice of a book to be shipped and charges for the book only if the consumer takes no action to decline the offer, such as sending back a postcard or rejecting the selection through an online account.

In its current form, the Negative Option Rule does not cover negative option programs as typically defined to encompass continuity plans, automatic renewals, and free-to-pay plans or nominal-free-to-pay plans, where a trial period rolls into an automatic renewal program unless the consumer cancels.

According to the FTC, since the last regulatory review of the Negative Option Rule, “evidence strongly suggests that negative option marketing continues to harm consumers.” In its notice announcing the rule review, the FTC referenced more than 20 recent FTC cases involving negative option marketing as well as state cases challenging negative option marketing. Additionally, the FTC said it received thousands of complaints each year related to negative option marketing, suggesting there is “prevalent, unabated consumer harm in the marketplace.”

Existing Legal Framework for Negative Option Marketing

Notwithstanding the limited scope of the Negative Option Rule, there is an existing, comprehensive framework of laws and regulations that the FTC uses against marketers of membership clubs, automatic renewal plans, subscriptions, and other such arrangements that the FTC deems to be unfair or deceptive. For telephone sales, the Telemarketing Sales Rule (TSR) has long specified disclosures for free trials and automatic renewal offers made by phone. The Restore Online Shoppers’ Confidence Act (ROSCA) notably covers online sales. The Electronic Fund Transfer Act (EFTA) applies when consumers use debit cards for recurring charges and requires the consumer’s written authorization for such charges. Section 5 of the Federal Trade Commission Act, which generally prohibits unfair or deceptive acts and practices, provides an extra, all-encompassing layer that can easily be applied to any aspect of negative option marketing. And, the plentiful collection of stipulated FTC orders in this space provide a roadmap of the FTC’s evolving views about compliance.

The FTC characterizes these various existing components as a “patchwork of regulations” that does not provide consistent guidance to industry or consumers across different media and different offers. Some might differ with the FTC’s view on this point, as the regulations seem quite consistent in providing a solid structure for negative option marketers based on three core principles: making clear and conspicuous disclosures about the material terms of the offer; obtaining explicit, informed consent to the automatic renewal offer; and, providing a simple and easy method for the consumer to cancel out of the negative option offer.

It may be that the FTC is seeking a more prescriptive instruction to marketers on making disclosures, dictating specific words or disclosure placement that would likely remove at least some business judgment, creativity, and differentiation from marketing practices. The FTC specifically raised ROSCA’s requirement of a “simple mechanism” to cancel as problematic because it does not specify which methods would suffice. In enacting ROSCA, Congress concluded that it need not further specify how cancellation should be effected, but the FTC clearly views this rule review proceeding as a way to make such a pronouncement.

Would an Expanded Negative Option Rule Address the FTC’s Concerns?

In our view, no. Many of the companies sued by the FTC for ROSCA and other violations allegedly engaged in practices that no additional laws or regulations would have stopped. For example, as described by the FTC in many recent complaints, those practices included using fake web sites with ROSCA-compliant disclosures and consent mechanisms to obtain payment processing from banks, yet making actual sales through other web pages that had no disclosures at all.

In other words, companies that want to dupe consumers into buying their products and services do not need further instruction on what not to do. Meanwhile, those striving to create long-standing customer relationships and sell useful products and services through the convenience of automatic renewal programs would likely be hindered by more regulations, at significant additional compliance costs and expense with no material benefit to consumers.

An expanded Negative Option Rule also would not serve to preempt the various, often disparate state laws that have cropped up since 2014, including those in California, Virginia, Vermont, the District of Columbia, and others. To the extent there is a “patchwork of regulations,” it is happening at the state level, where things like different font-face requirements and renewal notice timeframes are cropping up. Moreover, there are new MasterCard “regulations” and forthcoming Visa rules that impose additional, new compliance requirements. Failure to comply with those rules runs the risk of losing processing relationships.

There may be other reasons the FTC wants to expand the Negative Option Rule, such as to require pre-billing notices for recurring payments or order confirmation notices like those required by some states. Or, the FTC may be considering whether it could use an expanded rule to obtain enhanced civil penalties for violations. All possibilities should be considered.

The general public, including companies and industry groups, have until December 2, 2019 to comment on the FTC’s proposal to expand the Negative Option Rule. Please let us know if you are interested in this topic or participating in the proceeding.