In a March 23 proposed rule, the Federal Trade Commission has pitched requirements for companies that sell goods and services using subscriptions, automatic renewals, and similar programs. The agency’s goal is to encourage companies to make canceling subscriptions or memberships as easy as it is to sign up.
The rule would also require companies to provide more detailed information and notices about subscriptions and memberships—in a crowded online marketplace where subscription start and end dates and cancellation terms aren’t always clear to consumers.
While the final rule won’t be published until after a notice and comment period, businesses should proactively review their subscription and membership practices to be ready to comply with a final rule and avoid any legal ramifications down the road.
The FTC’s new click to cancel rule is an extension of its prenotification negative option rule, first implemented in 1973. That legacy rule is limited and applies only to prenotification plans where a seller sends a product and charges a participating consumer, unless the consumer declines the periodic notice that the product will be sent. It requires prenotification plan sellers to disclose the plan’s material terms clearly and conspicuously.
The FTC’s telemarketing sales rule also touches on negative-option practices for negative-option sales by phone. In addition, in 2010, Congress passed the Restore Online Shoppers’ Confidence Act, which prohibits charging or attempting to charge consumers for goods or services sold online through negative-option features unless the seller discloses material terms about the transaction, obtains express consent, and provides simple mechanisms to stop recurring charges.
Click to Cancel Rule
The FTC’s latest proposed rule poses to expand the current prenotification rule, covering a larger scope of activity and imposing more substantial requirements on companies. It would apply to all forms of negative-option marketing in all media—internet, telephone, print media, and in person. The FTC’s perspective on negative-option marketing covers prenotification plans, continuity plans, automatic renewals, and free trial conversions. The new rule would apply to all four categories.
The new proposed rule also expands substantive requirements placed on sellers. Most notably, and why the rule is informally called click to cancel, the rule would require canceling a negative-option program to be as easy as signing up. The cancellation method must also be available through the same means as signing up. For example, if a company offers one-click membership through its website, it must also offer one-click cancellation through the same website.
Other substantive requirements of the proposed rule include annual reminders for customers of programs that don’t involve the shipment of physical goods, pre-billing disclosure requirements, express consent for subscription terms separate from the rest of the transaction, and limits on the ability to offer special deals to customers attempting to cancel. The FTC is taking comments on the proposed rule until April 19.
How Companies Should Prepare
The new proposed rule may still change before it is finalized, but companies shouldn’t wait to examine their internal practices. Understanding all facets of the changes will help companies comply with the final rule. To accomplish this, companies should catalog their negative-option marketing offerings under the broader definition provided by the FTC under the proposed rule.
They should take a comprehensive approach to ensure that covered practices are not missed. Next, companies should review the processes associated with these offerings from beginning to end. It’s important to consider the representations they make concerning any aspect of a product or service involving negative-option marketing to ensure they are accurate and supported.
Additionally, companies should review pre-billing disclosures to ensure all material terms of a deal are disclosed to consumers before they enter their billing information and that express consent to the subscription is obtained.
Finally, companies should begin discussions with their IT departments and other technical personnel to begin designing a simple cancellation procedure that customers can use to cancel their participation in negative-option programs, and to set up appropriate annual notifications for consumers.
It’s time to understand ahead of the final rule’s incorporation about how a compliant cancellation process can be implemented in accordance with the law. Involving IT and other technical personnel early in the process will lead to greater efficiency when the final rule is published.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Nicci Warr is a partner at Stinson and focuses on complex litigation in antitrust, consumer protection, and intellectual property.
Emily Asp is an associate at Stinson.
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