No marketing method has incurred the wrath of the Federal Trade Commission, with more dire consequences (asset freezes, receiverships, ruinous monetary judgments) to the targets of its wrath, than continuity, subscription or auto-renewal plans containing a “negative option” feature (under which the consumer agrees in advance to recurring charges for a product or service until he cancels). The FTC has shut down dozens if not hundreds of businesses, seizing and forcing the disgorgement of their (and their owners’) assets, for failing to disclose a negative option, or failing to do so effectively in its judgment, thus harming consumers who did not realize they were enrolling in an auto-renewal plan and did not knowingly authorize the recurring charges. The FTC puts deceptive negative options in the “fraud” category in its hierarchy of enforcement priorities, and policing them lies at the heart of its fraud enforcement program.
The FTC’s authority to prevent deceptive negative option marketing online rests on Section 5 of the FTC Act, which prohibits unfair and deceptive business conduct, and on the “Restore Online Shoppers’ Confidence Act” (“ROSCA”). (For negative option offers made over the telephone, the FTC’s Telemarketing Sales Rule (“TSR”) applies.) ROSCA codifies the principle – articulated in FTC orders, guidance documents and court decisions – that for a negative option offer to be lawful, all material terms, including recurring charges, must be “clearly and conspicuously” disclosed before the consumer submits his billing information; the consumer must give his express informed consent to the offer; and it must be easy to cancel. ROSCA applies to third party “post-transaction” negative option offers facilitated by an initial merchant as well as to the initial transaction.
Given the prevalence of negative option marketing and the legal patchwork governing the practice, in 2019 the FTC announced a new rulemaking to consider whether to expand its existing “Rule on the Use of Prenotification Negative Option Plans” (applicable only to such offerings as “book of the month clubs”) to cover more modern and various forms of negative option offers. While the Commission has received public comment on the proposed regulation, the rulemaking is still in its fairly early stages with no final rule, if any, foreseen for a while.
Since then, of course, there has been a presidential election and a significant change in leadership at the FTC with the appointment of a new FTC Chair, progressive Democrat Lina Khan, who has already forcefully grabbed the reins by announcing a host of policy and procedural changes to demonstrate to the business community that the FTC intends to aggressively enforce the law and use all its tools to deter and punish bad behavior. At the same time, as she took office, she had to confront the reality of the recent loss of the FTC’s most potent enforcement tool, which is the power to obtain monetary relief in federal court, an authority the Supreme Court took away (in all but order and rule violation cases) last April. (See “Supreme Court Guts FTC’s Enforcement Powers and Clout,” April 2021).
This fall, under Chair Khan’s leadership, the FTC has revealed that one of the ways in which it plans to confront that loss of power is a broad-based public communications campaign to inform and provide compliance guidance – and the consequences of non-compliance – to a diverse array of advertisers and marketers, in the hope that the uncertainty and cost of incurring the FTC’s wrath will have the same deterrent effect that its erstwhile unbridled authority to obtain money judgments had. As discussed here last month (See “FTC Unveils Sweeping New Enforcement Strategy Following AMG,” Oct. 2021), we have seen this strategy unveiled through the issuance of so-called Penalty Offense Notices to over two thousand companies, notifying and educating them on FTC legal principles and cease and desist orders governing testimonials, endorsements, product reviews, and moneymaking claims, and warning them of the risk of ruinous civil penalties, to be levied under a heretofore long dormant statutory authority, for knowing violations of those principles and orders.
Now, in a different form of communication, but with the same “educate, guide, create uncertainty and warn” goal in mind, the FTC, even as it proceeds with its negative option rulemaking, has just issued a formal “Enforcement Policy Statement Regarding Negative Option Marketing.” Such a maneuver, in the midst of an ongoing formal rulemaking, is highly unusual (prompting a dissent from one of the two Republican commissioners), and serves to underscore the impatience of the new FTC regime with bureaucratic process and the urgency it feels to make its presence felt in the marketplace.
Because the FTC can still get monetary relief, including civil penalties, for negative option marketing violations of ROSCA and the TSR, there would not seem to have been the same urgency from the new FTC leadership’s perspective to issue the Enforcement Policy Statement (“EPS”) as there presumably was with the Penalty Offense Notices. Still, as with those notices, the EPS serves the same purpose of reminding negative option sellers that the practice remains a top FTC enforcement priority and that especially with the financial risk of becoming an FTC target, it would be best to err on the conservative side of uncertainty by taking the guidance offered to heart and reviewing one’s offers for compliance with the EPS.
The EPS itself does not really break new ground in the FTC’s legal approach to negative option marketing. Essentially consolidating in one document the key elements of its past decisions and orders and the provisions of ROSCA, it is organized around the three pillars of disclosure, consent, and ease of cancellation. Here is a summary of those requirements.
Disclosure: The FTC and ROSCA require disclosure of all material terms that are necessary to prevent deception, including: (1) any initial charges and all recurring charges after any applicable trial period ends, and that the recurring charges will continue unless the consumer cancels; (2) the frequency of charges and date by which the consumer must act to stop them; the date each charge will be submitted for payment; and (4) all information necessary to cancel and stop the charges. The disclosures must be “clear and conspicuous,” meaning easily noticeable or unavoidable and easily understandable by ordinary consumers. If in writing, including on the internet, they must appear immediately next to the spot where the consumer gives his consent to the negative option.
Consent: The FTC and ROSCA require “express informed consent” to a negative option offer. To attain it, the negative option seller must: (1) obtain the consumer’s acceptance of the negative option offer separately from any other portion of the entire transaction; (2) do nothing that could undermine the ability of consumers to provide their express informed consent to the negative option; (3) obtain the consumer’s unambiguously affirmative consent to the negative option and the entire transaction; and (6) be able to verify the consumer’s consent.
Cancellation: ROSCA requires negative option sellers to provide a simple, reasonable means for consumers to cancel a negative option plan. To meet this standard, the cancellation mechanism must be at least as easy to use as the method the consumer used to accept the negative option, and should be at least through the same medium (such as website or mobile application) the consumer used to consent to it. If telephone cancellation is an additional method, at a minimum, a telephone number must be provided and all calls to it must be answered timely during normal business hours. All properly requested cancellations must be honored.
For additional important information on negative option marketing requirements set forth in the EPS, see https://www.federalregister.gov/documents/2021/11/04/2021-24094/enforcement-policy-statement-regarding-negative-option-marketing.