If your business includes any sort of subscription-based or membership model, a new federal regulation may change how your customers cancel their subscription or membership. On October 16, 2024, the Federal Trade Commission announced its final “Click-to-Cancel” rule. The new rule applies to “negative option programs,” such as subscription or membership services. “Too often, businesses make people jump through endless hoops just to cancel a subscription,” said FTC Chair Lina M. Khan. Chair Khan went on to say, “nobody should be stuck paying for a service they no longer want.”
The rule is part of the FTC’s efforts to modernize its 1973 Negative Option Rule, which purports to combat deceptive practices related to subscriptions, memberships, and other recurring payment programs. The new rule aims to require businesses to make it as easy for consumers to cancel their subscriptions as it was to sign up.[1] The rule applies across all industries and media, including but not limited to gym memberships, water delivery services, and video streaming services. The rule will cover both business-to-business transactions and business-to-consumer transactions.[2]
What is a negative option program?
A negative option program allows a seller to interpret a customer’s silence or failure to act as an acceptance of an offer. Negative options generally fall into one of four categories:
- Prenotification plans – such as a book-of-the-month club, a plan where the seller provides notices offering goods to participating consumers and then sends and charges for those goods if the consumers take no action to decline the offer.
- Continuity plans – such as bottled water delivery, a plan where consumers agree in advance to receive periodic shipments of goods or services which they continue to receive until they cancel the agreement.
- Automatic renewals – such as a magazine subscription, where the seller automatically renews consumers’ subscriptions when they expire unless the consumers cancel their subscriptions.
- Free-to-pay plans – plans where the consumer receives goods or services for free for a trial period. After the free trial period, sellers begin to automatically charge for the goods or services unless consumers affirmatively cancel. A common example is video streaming services that offer the first month free, then automatically charge consumers thereafter.
What conduct does the rule prohibit?
The rule will prohibit:
- Misrepresenting any material fact while marketing a negative option program;
- Failing to openly disclose material terms of the negative option program prior to obtaining a consumer’s billing information;
- Failing to obtain a consumer’s express informed consent to the negative option program before charging the consumer; and
- Failing to provide a simple mechanism to cancel the negative option program and immediately stop charges.
Impact on Businesses
The rule will impact any business that relies on subscription models or other recurring payment programs with either consumers or other businesses. The FTC has announced the final rule, and they are expected to publish it in the Federal Register in the near future. The rule becomes effective 180 days after its date of publication[3], however the provisions relating to misrepresentations become effective 60 days after its publication. Once it becomes effective, those who violate the rule will be subject to consumer redress or civil penalties up to $51,744 per violation.[4]
Conclusion
The “Click-to-Cancel” rule will require businesses that utilize a subscription model or membership model to ensure that the process by which their customers (both consumers and businesses) cancel their subscription or membership are as easy as the process to sign up. Several groups have already challenged the rule in the Fifth Circuit Court of Appeals, claiming that the rule is “arbitrary, capricious, and an abuse of discretion” and in excess of the FTC’s statutory authority, among other things.[5] For the time being, all businesses that have a subscription or membership model should review their termination practices to ensure that their process comports with the rule’s requirements. If you have any questions about the “Click-to-Cancel” rule, please contact Ian Stanford or Steve Lawrence.
[1] https://www.ftc.gov/news-events/news/press-releases/2024/10/federal-trade-commission-announces-final-click-cancel-rule-making-it-easier-consumers-end-recurring
[2] https://www.ftc.gov/system/files/ftc_gov/pdf/p064202_negative_option_rule.pdf (p. 2, 32)
[3] https://www.ftc.gov/system/files/ftc_gov/pdf/NegOptions-1page-Oct2024-v2.pdf
[4] https://www.ftc.gov/system/files/ftc_gov/pdf/p064202_negative_option_rule.pdf (p. 4, 201); https://www.ftc.gov/news-events/news/press-releases/2024/01/ftc-publishes-inflation-adjusted-civil-penalty-amounts-2024
[5] https://www.iab.com/wp-content/uploads/2024/10/ESA-NCTA-IAB-v-FTC.pdf
