Beware of the FTC’s Proposed Changes to The Negative Option Rule… There is a Potential Trojan Horse

• In its current form, the Negative Option Rule covers only a narrow category of negative option marketing – prenotification negative option plans. The FTC’s proposed Rule seeks to synthesize all of the legal requirements for negative option marketing within one rule, which would provide much-needed clarity to consumers and businesses with respect to negative option plans.
• However, at the same time, the broadened scope is alarming given that it sweeps in conduct that has nothing to do with the negative option feature. In particular, the proposed rule would capture alleged misrepresentations regarding the underlying product or service that are wholly unrelated to the negative option feature.
• The likely impact of this is that marketers using negative option features in conjunction with the sale of a good or service could be liable for civil penalties or redress under this proposed Rule for product efficacy claims or any other material representation even if the negative option terms are clearly described, informed consent is obtained, and cancellation is simple.

The Federal Trade Commission (FTC) recently issued a notice of proposed rulemaking as part of an ongoing review of its 1973 Negative Option Rule (the “proposed Rule”). In its current form, the Negative Option Rule covers only a narrow category of negative option marketing – prenotification negative option plans (i.e., “free trial” programs that automatically convert to paid subscriptions and “automatic renewals” which allow sellers to unilaterally renew a consumer’s paid subscription when it expires unless the consumer affirmatively cancels by a certain date). The FTC’s proposed Rule seeks to synthesize all of the legal requirements for negative option marketing within one rule[1], which would provide much-needed clarity to consumers and businesses with respect to negative option plans.

While the proposed Rule may achieve the goal of synthesizing the various legal requirements in one rule, the broadened scope of conduct covered by the proposed Rule is alarming given that it sweeps in conduct that has nothing to do with the negative option feature. In particular, the proposed rule would capture alleged misrepresentations regarding the underlying product or service that are wholly unrelated to the negative option feature and give the FTC powers that it otherwise would not have or that were expressly curtailed by the Supreme Court in AMG Capital Mgmt., LLC v. FTC, 141 S. Ct. 1341 (2021).

[1] Other types of negative option features are covered by a patchwork of statutes or rules that are also enforced by the FTC, but the differing requirements in the statutes, rules, and FTC Section 5 enforcement actions have not provided a consistent, cohesive framework for businesses to which to adhere. Restore Online Shoppers’ Confidence Act (ROSCA) 15 U.S.C. §§ 8401-8405; the Telemarketing Sales Rule (TSR) 16 C.F.R. § 310; the Postal Reorganization Act (a.k.a. the Unordered Merchandise Rule) 39 U.S.C. § 3009; and the Electronic Funds Transfer Act), 15 U.S.C. §§ 1693-1693r. In particular, the proposed rule would capture alleged misrepresentations regarding the underlying product or service that are wholly unrelated to the negative option feature and give the FTC powers that it otherwise would not have or that were expressly curtailed by the Supreme Court in AMG Capital Mgmt., LLC v. FTC, 141 S. Ct. 1341 (2021).

As drafted, the proposed Rule would allow the FTC to obtain civil penalties, or consumer redress under Section 19 of the FTC Act, if a marketer using a negative option feature made misrepresentations regarding product efficacy or any other material fact. The proposed text is as follows:

            425.3  Misrepresentations.

In connection with promoting or offering for sale any good or service with a Negative Option Feature, it is a violation of this Rule and an unfair or deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act (“FTC Act”) for any Negative Option Seller to misrepresent, expressly or by implication, any material fact related to the transaction, such as the Negative Option Feature, or any material fact related to the underlying good or service. (Emphasis added).

The express language of the proposed Rule confirms that the scope of this provision is intended to extend beyond the terms of the negative option feature. Specifically, the notice explains that “the proposed Rule prohibits any person from misrepresenting, expressly or by implication, any material fact regarding the entire agreement – not just facts related to a negative option feature” (emphasis added). It further explains that “such deceptive practices may involve misrepresentations related to costs, product efficacy, free trial claims, processing or shipping fees, billing information use, deadlines, consumer authorization, refunds, cancellation, or any other material misrepresentation.”

Consequently, marketers using negative option features in conjunction with the sale of a good or service could be liable for civil penalties or redress under this proposed Rule for product efficacy claims or any other material representation even if the negative option terms are clearly described, informed consent is obtained, and cancellation is simple.

If you recall, the FTC’s ability to seek consumer redress was gravely curtailed by the Supreme Court’s ruling in AMG where the Court found the FTC does not have authority to seek consumer redress under Section 13(b) of the FTC Act.[2] The FTC’s proposed Rule seeks to fill the vacuum left by AMG when marketers use a negative option feature.

The proposed Rule was approved by a 3-1 vote, with Commissioner Christine S. Wilson opposing it. In her Dissenting Statement, Commissioner Wilson disagreed with this decision, stating that the proposed Rule attempts an end-run around the Supreme Court’s decision in AMG to confer de novo redress and civil penalty authority on the FTC for section 5 violations unrelated to deceptive or unfair negative option practices. I agree with Commissioner Wilson and advise businesses to remain vigilant of this potential Trojan Horse.

[2] AMG Capital Mgmt., LLC v. FTC, 141 S. Ct. 1341 (2021).