On Oct. 16, the Federal Trade Commission (FTC) voted 3-2 to finalize its “click-to-cancel” rule that will introduce new requirements to simplify the cancellation process for consumers wishing to terminate their subscriptions or memberships. The rule applies to almost all products and services offered with a “negative option feature,” including business-to-business transactions. Accordingly, the rule encompasses a wide range of subscription services and membership programs, such as gym memberships, streaming platforms and cable TV, among others.
Under the new rule, canceling a subscription must involve the same number of clicks as the initial sign-up. Additionally, individuals who registered in person will now be required to have the option to cancel their subscriptions online or over the phone. The rule primarily targets companies that engage in practices such as: (1) misrepresenting their products or services, (2) creating obstacles to cancellation or (3) billing consumers without their consent—such as when a free trial automatically transitions to a paid plan. While the rule focuses on the cancellation process, it also includes provisions that address the entire lifecycle of the subscription relationship.
FTC Chair Lina Khan emphasized the new rule aims to eliminate the “endless hoops” consumers face when trying to cancel a subscription. She noted the FTC receives approximately 70 complaints from consumers daily regarding cancellation issues, which she said has increased “dramatically” in recent years, up from 42 in 2021.
Before the “click-to-cancel” rule, there lacked a consistent regulatory framework governing subscription and membership programs. As a result, the FTC resorted to addressing these issues through legal action against individual companies and a collection of regulations that applied unevenly across different types of subscription plans. The new rule aims to address these inconsistencies by providing the FTC with a comprehensive enforcement mechanism that applies uniformly to most subscription plans.
Background
The “click-to-cancel” rule is one of the FTC’s most recent efforts to review its 1973 Negative Option Rule that implemented baseline requirements to protect consumers from negative option marketing. The FTC has defined negative option marketing as taking “a customer’s silence, or failure to take an affirmative action,” as an agreement to be charged for a product or service—such as the automatic renewal of a gym membership. The Negative Option Rule was originally adopted following rising complaints from consumers in the 1960s and 1970s over being charged for products and services without consent. Since the initial adoption of the rule, the subscription and membership landscape has evolved significantly, prompting the FTC to revisit certain provisions of the Negative Option Rule to address modern-day concerns.
The FTC first solicited comments on the “click-to-cancel” rule in 2019 through an advanced notice of proposed rulemaking (ANPR), followed by a notice of proposed rulemaking (NPRM) in March 2023. After publishing the NPRM last year, the FTC received over 16,000 comments from the public that informed of changes implemented in the final rule.
What Does “Click-to-Cancel” Really Mean?
The final rule implements numerous requirements to make it easier for consumers to cancel their enrollment in subscriptions or membership programs:
- Misrepresenting Material Facts – The rule prohibits companies from “misrepresenting any material fact while marketing goods or services with a negative option feature.” The rule indicates “material fact” is defined as a fact “likely to affect a person’s choice, or conduct regarding, goods or services” including information on health and safety, cost and the existence of the negative option plan, for example. This provision of the rule is relatively broad and ambiguous, leaving room for interpretation of what is defined as a “material fact.” The FTC did, however, indicate that misrepresentations in privacy policies could violate this provision of the “click-to-cancel” rule.
- Disclosure Requirements – The rule prohibits companies from “failing to clearly and conspicuously disclose material terms before obtaining a consumer’s billing information in connection with a negative option feature.” The rule includes a list of some items that must be disclosed, including things such as charges to the consumer, increases in charges, deadlines to stop recurring charges, frequency of charges and how to cancel the recurring charges, among other things. Importantly, the rule includes requirements for providing consumers with required disclosures, including when they occur and where they must appear.
- Express Informed Consent – The rule prohibits companies from “failing to obtain a consumer’s express informed consent to the negative option feature before charging the consumer.” The rule includes requirements for obtaining the consumer’s consent, including around when it must occur, what information can be included and its distinction from other sections of the transaction. The rule also requires companies to keep a record of such consent for three years unless certain conditions are met. Notably, the rule indicates that companies receiving consumer consent through a “check box, signature or other substantially similar method” are in compliance with the rule if that consent is solely related to the negative option rule.
- Simple Cancellations – The rule prohibits companies from “failing to provide a simple mechanism to cancel the negative option feature and immediately halt charges.” This provision of the rule includes the requirement that it must be as easy for a consumer to cancel their subscription as it was for them to sign up. For electronic cancellations, consumers must be easily able to find the cancellation method and must not be required to interact with a chatbot or other customer service representative if that was not required to sign up. For cancellations occurring over the phone, the company must have a phone number that can be used during business hours and isn’t more costly to the consumer than it would be to sign up via telephone. Finally, for in-person cancellations, it must be similar to the in-person sign-up processes and the consumer must have alternative methods to cancel such as online or over the phone.
Final Rule vs. NPRM
Notable differences exist between the original NPRM and the final “click-to-cancel” rule, including: (1) the final rule does not require companies to remind consumers of the negative option feature on an annual basis and (2) the final rule does not prohibit companies from providing customers with modifications to the agreement or reasons to keep their subscription when canceling. The record will remain open on these two provisions through a supplemental NPRM, providing stakeholders with the opportunity to offer additional input on the final version of the “click-to-cancel” rule. The final rule also includes two additional definitions, a provision allowing for exemptions from the final rule and a severability provision.
There do remain some ambiguities in the final rule around its applicability as it relates to a consumer who was presented with the negative option plan but elected to not enroll in a recurring subscription.
Opposition to the Rule
The FTC’s two Republican commissioners remain opposed to the rule, aligned with several members of the business community who have argued the new rule implements onerous requirements on businesses and disincentivizes companies from using a negative option plan. Additional stakeholders have further expressed concerns the rule will increase costs for consumers, with the U.S. Chamber of Commerce stating, “Businesses succeed by being responsive to customers and have a far better track record of customer service, streamlined paperwork and prompt response times than the federal government.”
Brownstein’s Outlook
Future implementation of the rule remains uncertain depending on the outcome of the 2024 election and anticipated legal challenges to the rule. The rule is set to go into effect on two separate dates, with provisions relating to misrepresentations taking effect in two months and the remainder of the rule taking effect in six months. Delayed implementation of the rule has the goal of providing companies with time to adapt their current subscription and membership practices to comply with the rule. However, it remains unclear whether the rule will be implemented on time as it can be expected several businesses will look to challenge requirements under the rule, potentially delaying implementation.
The upcoming election further has the potential to influence the implementation of the rule. Should Vice President Kamala Harris win the presidency this fall, she would be expected to push forward with the rule, especially considering “click-to-cancel” provisions are included in her economic platform. The rule also aligns with the Biden administration’s broader efforts to combat “junk fees,” garnering support from the White House. In contrast, if former President Donald Trump were to return to the White House, he would likely support suspending the rule’s implementation, responding to opposition from the Republican commissioners and concerns with overregulating businesses.
Industry stakeholders still have the chance to provide feedback on two of the more contentious provisions of the rule through a supplementary NPRM. Consequently, the future of the “click-to-cancel” rule remains uncertain, providing stakeholders a distinct opportunity to provide additional input on the rule’s impact.
This document is intended to provide you with general information regarding the FTC's "click-to-cancel" ruling. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.