By: Natalie Benayoun, Esq.

The Federal Trade Commission (FTC) has announced its final “Click-to-Cancel” rule in response to the overwhelming number of consumer complaints about negative option and recurring subscription practices. The Click-to-Cancel mechanism ensures that sellers make it as easy to cancel a subscription as it is to sign up.

“Too often, businesses make people jump through endless hoops just to cancel a subscription,” said Commission Chair Lina M. Khan in the FTC’s press release announcing the final rule. “The FTC’s rule will end these tricks and traps, saving Americans time and money. Nobody should be stuck paying for a service they no longer want.”

All negative option programs rely on one thing to generate revenue: consumer inaction. In other words, the programs allow sellers to interpret a customer’s silence, or failure to take affirmative action, as acceptance of an offer.

These programs generally fall into four categories: (1) prenotification plans, where sellers offer goods to consumers regularly, charging them unless consumers actively decline (e.g., book of the month clubs), (2) continuity plans, where consumers agree to receive regular shipments of goods or services, which continue until they cancel (e.g., bottled water delivery), (3) automatic renewals, where sellers automatically renew consumers’ subscriptions when they expire, unless consumers affirmatively cancel the subscriptions (e.g., magazine publisher), and (4) free trial conversion offers, where goods or services are offered for a trial period, and after the trial consumers are automatically charged unless consumers affirmatively cancel or return the goods or services. All sellers of negative option plans, whether they are selling to consumers (B2C) or businesses (B2B), must comply with the new rule.

This new rule requires sellers to provide a “simple cancellation mechanism” that is as easy to use as the sign-up process. The rule imposes medium-specific cancellation requirements. For example, if a consumer signs up online, they must be able to easily cancel online without navigating complex menus or interacting with customer service. Similarly, if a consumer signs up over the phone, they must be able to cancel by phone during regular business hours. For in-person sign-ups, a simple online or phone cancellation option must be provided.

The new rule also prohibits sellers from:

• Misrepresenting any material fact made while marketing goods or services with a negative option feature.
• Failing to clearly and conspicuously disclose material terms prior to obtaining a consumer’s billing information in connection with a negative option feature.
• Failing to obtain a consumer’s express informed consent to the negative option feature before charging the consumer.
• Failing to provide a simple mechanism to cancel the negative option feature and immediately halt charges.

When enrolling a customer, the rule requires that the seller disclose all material terms upfront, including potential costs and frequency of charges, before billing consumers. The rule also requires sellers to receive “express informed consent.” In obtaining such consent, the negative option seller must:

• Obtain the consumers unambiguously affirmative consent to the negative option feature, separate from any other part of the transaction.
• Not include any information that interferes with, detracts from, contradicts, or otherwise undermines the ability of consumers to provide their express informed consent to the negative option offer.
• Keep records of the consumer’s consent for at least three years.

The Rule passed by a 3-2 vote. FTC Commissioner Melissa Holyoak issued a dissenting statement, arguing that the Rule does “not follow the FTC Act’s Section 18 requirements for rules,” “fails to define with specificity acts or practices that are unfair or deceptive” and “fails to demonstrate that the unfair or deceptive acts or practices related to negative option billing are ‘prevalent.”

Three industry groups – the NCTA (formerly known as the National Cable & Telecommunications Association), the Electronic Security Association (ESA), and the Interactive Advertising Bureau – have filed a Petition for Review to prevent the FTC from enforcing the rule. The groups’ lawyers argue that the new rule is an “attempt to regulate consumer contracts for all companies in all industries and across all sectors of the economy.” But the new rule will have a significant impact on how sellers manage their subscription models. Therefore, businesses should review their negative option offers and ensure compliance with the rule to avoid potential legal pitfalls.

Most of the final rule’s provisions will go into effect 180 days after it is published in the Federal Register.

The post Click to Cancel: How the FTC’s New Rule Makes Cancelling Subscriptions Simple appeared first on Greenspoon Marder LLP.