Several states have recently passed new automatic renewal laws (ARLs) that regulate continuing or renewing contracts for goods and services. Other states have likewise amended existing ARLs to add various restrictions and requirements.
The FTC has proposed an amended Negative Option Rule to create a sweeping regulatory regime for prenotification plans, 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 federal rule 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 apply to consumer and business-to-business contracts.
The public comment period closed on June 23, 2023.
Although the proposed rule may be modified to address public comments, the current requirements and restrictions include new disclosures, consent, renewal reminders, cancellations, misrepresentations, and enforcement rules.
The 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 than state laws, which typically require only “proximity” between disclosures and the request for consent.
The rule would require affirmative consent to required disclosures before charging for a negative option or recurring contract. The 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. This requirement is analogous to the separate consent required under Vermont’s ARL, which no other state statute currently requires.
Annual reminders would be required for subscriptions involving anything other than physical goods. The 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 as consent was provided.
The proposed rule would require 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). The rule would also require consumer consent for a business to pitch any additional offers or modifications to a subscription at the time of cancellation.
The rule would prohibit any misrepresentation of a material fact related to any part of the transaction, product, or service, regardless of whether the misrepresentation is explicitly related to the negative option feature.
The rule would expand the FTC’s enforcement power, such as its ability to seek restitution, injunctive relief, and civil penalties for any alleged violations, including violations of the new rule concerning factual misrepresentations. Individuals in states with broad consumer protection statutes that permit claims for violations of other laws may be able to sue for alleged violations of the new rule in either individual or class action suits.
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 impossible.
Accordingly, the new rule could directly impact businesses in several ways. It would build upon the current patchwork of state ARLs. Because many state ARLs do not regulate business-to-business contracts with automatic renewal provisions, the new rule would increase their scope and bring many contracts under new scrutiny.
Businesses that have avoided state regulation (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.
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 considered necessary given strengthened federal requirements. It may also generate even more private enforcement through individual and class litigation. Individuals in states with broad consumer protection statutes may use a violation of the new federal rule as the predicate act for a claim under state law.
Given the likelihood that a new rule will take effect, it would be prudent for businesses to refresh their disclosures, contract terms, consent processes, and cancellation procedures.