FTC Guidance on Negative Option Programs and Increased Enforcement

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On October 22, the Federal Trade Commission (“FTC”) issued a policy statement providing further guidance on its enforcement of federal law with regard to negative option marketing. The FTC noted in an associated press release that they are “ramping up” enforcement efforts against companies that “trap consumers into subscriptions.”  The policy statement is intended to “put companies on notice that they will face legal action if their sign-up process fails to provide clear, up-front information, obtain consumers’ informed consent, and make cancellation easy.”

The FTC uses the phrase “negative option marketing” broadly to refer to a category of commercial transactions in which an underlying condition or term will continue unless the consumer takes an affirmative action to either cancel the agreement or reject the good or service.  Negative option offers can take the form of agreements or subscriptions that automatically renew, continuity plans (where a consumer agrees in advance to receive goods or services periodically), or free trial marketing (where a consumer receives goods or services for free or for a nominal price for a limited time period).

The FTC acknowledged that negative option offers are increasing in popularity and can prove convenient for consumers.  However, the FTC cautioned that others could be harmful if disclosures are inadequate, consumers are billed without their consent, and cancellation is difficult.  The FTC concludes that its own enforcement cases and the high volume of consumer complaints justify a continuing need for its enforcement efforts.

The FTC relies predominantly on Section 5 of the FTC Act (15 U.S.C. § 45(a)), the Restore Online Shoppers’ Confidence Act (“ROSCA”) (15 U.S.C. §§ 8401-8405), the Telemarketing Sales Rule (16 C.F.R. § 310), the Use of Prenotification of Negative Plans Rule (16 C.F.R. § 425), the Postal Reorganization Act (also known as the Unordered Merchandise Rule) (39 U.S.C. § 3009), and the Electronic Funds Transfer Act (15 U.S.C. §§ 1693-1693r) to bring enforcement actions against negative option marketing.

To avoid enforcement, the FTC highlights four basic guidelines for companies to engage in negative option marketing in a compliant manner (more specific requirements for each guideline are available in the policy statement):

  • Clear and conspicuous disclosure of material terms of the offer;
  • Disclosure of all material terms of the offer before the consumer agrees to buy;
  • Express informed consent must be obtained; and
  • Cancellation must be simple, reasonable, and easily accessible.

According to the FTC, these requirements apply to both written offers (including the Internet) and verbal offers.  If offers are written, any disclosures are to appear immediately adjacent to the means of recording the consumer’s consent.  If offers are by telephone, or otherwise oral, disclosures may not contain other information that interferes or undermines the consumer’s ability to understand the terms of the offer.

In developing cancellation procedures, in addition to requirements already set forth under federal law, the FTC instructs sellers not to impede consumers’ efforts to cancel, and to promptly honor cancellation requests that comply with specified procedures.  Sellers should not hang up on consumers who call to cancel, delay processing cancellation requests, or place consumers on hold for unreasonable amounts of time.

In addition to federal law and the new FTC policy statement, there are a number of states that have additional requirements for negative option marketing, including new autorenewal laws in California, Colorado, Delaware and Illinois enacted so far in 2021.  California has been particularly active with its enforcement of negative options over the past several years, including the creation of its California Autorenewal Task Force.

Given the persistent focus on both the federal and state levels, companies should carefully set up any negative option marketing for subscription services and expect heightened scrutiny and potential enforcement for any compliance issues, especially as the FTC implements its new policy statement and new state laws become effective.

On October 19, 2021, Ballard conducted a webinar titled “Pitfalls of Using Subscription Services in the Consumer Financial Services Industry,” which focused on the various ways autorenewals are used in financial services, federal and state autorenewal requirements, and recent litigation activity.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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