Unpacking the FTC’s Negative Option Rule Informal Hearing

The Federal Trade Commission (FTC) recently held its informal hearing on the proposed amendments to the Negative Option Rule. Clearly on display was not only industries’ concern about the impact of the proposed rule, but also concern about the FTC’s haste toward implementing the rule changes.

As a refresher, the FTC generally must promulgate rules under the Magnuson-Moss Warranty Federal Trade Commission Improvements Act (Mag-Moss) instead of the less-stringent Administrative Procedures Act. Under Mag-Moss, the FTC must first issue an advanced notice of proposed rulemaking (ANPR) seeking public comment, issue a notice of proposed rulemaking (NPRM), have reason to believe that the conduct at issue is “prevalent,” conduct informal hearings allowing parties to present their views and finally publish the final rule with a “statement of basis and purpose” accompanying the rule.

Particularly relevant to the Negative Option Rule informal hearing is fact-finding during the rulemaking process. If there are disputed issues of fact (such as, for example, whether conduct is “prevalent”), the FTC must allow participants to rebut and cross-examine those making oral presentations at the informal hearing. Most notably, each party testifying at the hearing opposed either the rule itself or at least the scope of the rule as written.

Thus, as one trade group pointed out in seeking to compel the FTC to present a testifying witness, interested parties were not given the opportunity to cross examine proponents—specifically the FTC—of the proposed rule. Further, several parties also objected to the abbreviated nature of the rulemaking proceedings. As Tech Freedom argued, scheduling of the hearing was rushed, and the parties were limited to 10-minute presentations where Mag-Moss requires more thorough deliberation of the proposed rule. Thus, as Performance Marketing Institute testified, given the abbreviated fact-finding process, the FTC’s assertion that there are no disputed issues of fact is disingenuous at best.

As a result of the hearing’s limitations, a recurring theme emerged from the parties that testified—that the FTC has not demonstrated the substantial harm to consumers required to promulgate the rule. Hearing participants made several noteworthy points:

• The Restore Online Shoppers’ Confidence Act (ROSCA) and state laws already address deceptive billing practices within the proposed rule
• The proposed rule goes beyond imposing requirements on negative option features themselves. Rather, the proposed rule addresses claims for the underlying products or services that use a negative option feature
• Consumers who purchase products or services in bundles, such as in the television and internet context, may face significant difficulties in choosing the services they want, mistaken cancellation, or price increases because of the proposed rule’s click-to-cancel requirements
• As at least one hearing participant noted, the FTC provided no evidence that the “save-the-sale” provision harms consumers or interferes with their ability to cancel

Overall, hearing participants expressed concern that the FTC has not conducted an adequate cost-benefit analysis for many aspects of the proposed rule.

Before concluding, the presiding administrative law judge noted that her authority to extend the hearing is limited to 30 days, set a one-week deadline for the parties to brief the material facts that they believe are at issue, and suggested that there will be an additional hearing in two weeks. Accordingly, we will continue to monitor updates in the rulemaking process in the coming weeks.

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