June 09, 2023

Summer 2023 Automatic Renewal Law Update: FTC Proposes Sweeping Amendments to Negative Option Rule

At a Glance

  • The proposed rule would subject many contracts to new regulatory requirements because many of the existing state ARLs do not regulate business-to-business contracts with autorenewal provisions.
  • Businesses that have avoided state regulation may need to make significant changes in light of the new federal regime, which would be a dramatic expansion from current federal requirements under the Negative Option Rule, TSR and ROSCA.
  • Certain specific requirements, such as the requirement that disclosures be “immediately adjacent” to the request for consent, would expand on existing ARLs that require only “visual proximity.”

Over the last few years, perhaps prompted by the proliferation of subscriptions for consumer goods and services during the pandemic, several states have passed new automatic renewal laws (ARLs) that regulate continuing or renewing contracts. Other states have likewise amended existing ARLs to add detailed restrictions and requirements. Our most recent coverage of those efforts can be found in our Fall 2021 and Summer 2022 alerts.

With such activity at the state level, it was only a matter of time before federal regulators joined the fray. The Federal Trade Commission (FTC) recently did so by issuing a statement regarding its nearly 50-year-old Negative Option Rule. As announced by the FTC, the existing federal regulatory regime has “major gaps”: the Negative Option Rule regulates only “prenotification plans” (where sellers send products and charge for them unless consumers decline); the Telemarketing Sales Rule (TSR) regulates only telemarketing; and the Restore Online Shoppers’ Confidence Act (ROSCA) regulates only online purchases. 

Against this backdrop, the FTC has now proposed, through an amended Negative Option Rule, a sweeping regulatory regime for not only prenotification plans but also continuous contracts, automatically renewing agreements and free (or discounted) trials. Like the most stringent state ARLs (e.g., in California and New York), the proposed rules would require clear and conspicuous disclosures of automatic renewal terms, affirmative consent and easy cancellation procedures, among many other requirements. Unlike those ARLs, however, this proposed rule would expressly apply both to consumer contracts and business-to-business contracts.

The proposed rule is currently available for public comment until June 23, 2023. Although it may be modified through that process, we briefly discuss below its core requirements to provide a preview of the potential changes, including new rules for disclosures, consent, renewal reminders, cancellation, misrepresentations and enforcement. 

Disclosures

The proposed rule would require the initial disclosure of certain information, including: whether any payments will be recurring until canceled; the deadline to act before incurring additional charges; the amount, dates and frequency of charges; and instructions on how to cancel. This information must be provided for online, print, telephone and in-person offers — and it must be provided “clearly and conspicuously” and “immediately adjacent” to the request for consent. Although these rules are generally consistent with state ARLs, the “immediately adjacent” requirement is arguably stricter; by contrast, state laws typically require only “proximity” between disclosures and the request for consent. 

Consent

The new rule would require affirmative consent to the required disclosures before charging for a negative-option or recurring contract. Such consent to the renewal terms would need to be separate from any consent to the transaction or contract more generally; in other words, the request for consent would need to take the form of a “check box, signature, or other substantially similar method, which the consumer must affirmatively select or sign to accept the Negative Option Feature and no other portion of the transaction.” Notably, this requirement is analogous to the separate consent required under Vermont’s ARL, which no other state statute currently requires.

Renewal Reminders

Under the proposed rule, annual reminders would be required for subscriptions involving “anything other than physical goods.” Such reminders would need to “identify the product or service, the frequency and amount of charges, and the means to cancel” and be delivered in the same manner through which consent was provided.

Cancellation

The proposed rule requires simple and easy cancellation methods, which the FTC calls “click to cancel.” The cancellation option must be as simple as the method used to sign up, and it also must be offered through the same medium used to sell the negative option (e.g., a consumer who purchases a subscription online must be allowed to cancel online). Further, the rule would require consumer consent for a business to pitch any additional offers or modifications to a subscription at the time of cancellation. 

Misrepresentations

The proposed rule would prohibit any misrepresentation of a material fact related to any part of the transaction, good or service, regardless of whether the misrepresentation is related specifically to the negative-option feature. 

Enforcement

The new rule would expand the FTC’s current enforcement power, including the ability to seek restitution, injunctive relief and civil penalties for any alleged violations — including the above new rule concerning factual misrepresentations. Although the rule does not expressly provide a private right of action, individuals in states with broad consumer protection statutes that permit claims based on violations of other laws may effectively be able to sue for alleged violations of the new rule, in either individual or class action suits.

Looking Ahead

Once the comment period closes, the FTC will issue the rule as currently drafted, make further revisions and seek additional comments, or decline to issue the rule together. Assuming the rule as drafted (or substantially similar) is adopted, the FTC has made clear that the rule would not preempt state ARLs, except in cases where compliance with both laws is not possible. 

Accordingly, the new rule could directly impact businesses in several ways. It would build upon the current patchwork of state ARLs, and because many of those laws do not regulate business-to-business contracts with autorenewal provisions, the new rule would effectively increase their scope and bring many contracts under new scrutiny. Relatedly, businesses that have avoided state regulation to date (because they only do business in states without an ARL) may need to make significant changes — or face the prospect of FTC enforcement and steep civil penalties — in light of the proposed federal regime, which would be a dramatic expansion from current federal requirements under the Negative Option Rule, TSR and ROSCA. Finally, as noted, certain specific requirements, such as the requirement that disclosures be “immediately adjacent” to the request for consent, would expand on existing ARLs that require only “visual proximity.”

Other, indirect consequences may flow from the new rule. It may deter state ARL legislation, which may no longer be viewed as necessary given strengthened federal requirements. It may also generate even more private enforcement through individual and class litigation; as discussed, individuals in states with broad consumer protection statutes (such as California’s Unfair Competition Law) may attempt to use a violation of the new federal rule as the predicate act for a claim under state law.

Given the likelihood that the new rule (or at least a modified version of it) will take effect, it would be prudent for any business to use this opportunity to conduct a “refresh” of their disclosures, contract terms, consent processes, cancellation procedures and the like, as private lawsuits and government activity show no signs of stopping.

For More Information

Faegre Drinker’s consumer contracts team actively monitors developments relating to ARLs and advises clients on compliance strategies. Questions can be directed to the authors or to your usual Faegre Drinker contacts.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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