Rule2024-25534
Negative Option Rule
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 15, 2024
Effective
January 14, 2025
Issuing agencies
Federal Trade Commission
Abstract
The Federal Trade Commission ("FTC" or "Commission") issues final amendments to the Commission's trade regulation "Rule Concerning Use of Prenotification Negative Option Plans," retitled the "Rule Concerning Recurring Subscriptions and Other Negative Option Programs" ("Rule," "final Rule" or "Negative Option Rule"). The final Rule now applies to all negative option programs in any media. This document also contains the text of the final Rule, the Rule's Statement of Basis and Purpose ("SBP"), and a final regulatory analysis.
Full Text
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<title>Federal Register, Volume 89 Issue 221 (Friday, November 15, 2024)</title>
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[Federal Register Volume 89, Number 221 (Friday, November 15, 2024)]
[Rules and Regulations]
[Pages 90476-90545]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-25534]
[[Page 90475]]
Vol. 89
Friday,
No. 221
November 15, 2024
Part III
Federal Trade Commission
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16 CFR Part 425
Negative Option Rule; Final Rule
Federal Register / Vol. 89 , No. 221 / Friday, November 15, 2024 /
Rules and Regulations
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FEDERAL TRADE COMMISSION
16 CFR Part 425
RIN 3084-AB60
Negative Option Rule
AGENCY: Federal Trade Commission.
ACTION: Final rule.
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SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission'')
issues final amendments to the Commission's trade regulation ``Rule
Concerning Use of Prenotification Negative Option Plans,'' retitled the
``Rule Concerning Recurring Subscriptions and Other Negative Option
Programs'' (``Rule,'' ``final Rule'' or ``Negative Option Rule''). The
final Rule now applies to all negative option programs in any media.
This document also contains the text of the final Rule, the Rule's
Statement of Basis and Purpose (``SBP''), and a final regulatory
analysis.
DATES:
Effective date: This rule is effective January 14, 2025.
Compliance date: Regulated entities have until May 14, 2025 to
comply with Sec. Sec. 425.4 through 425.6.
ADDRESSES: Relevant portions of the record of this proceeding,
including this document, are available at <a href="https://www.ftc.gov">https://www.ftc.gov</a>.
FOR FURTHER INFORMATION CONTACT: Katherine Johnson, Attorney, (202)
326-2185, <a href="/cdn-cgi/l/email-protection#cda6a7a2a5a3bea2a3fe8dabb9aee3aaa2bb"><span class="__cf_email__" data-cfemail="553e3f3a3d3b263a3b66153321367b323a23">[email protected]</span></a>, Division of Enforcement, Bureau of
Consumer Protection, Federal Trade Commission, 600 Pennsylvania Ave.
NW, Washington, DC 20580.
SUPPLEMENTARY INFORMATION:
I. Overview
The Commission commenced this proceeding because it had reason to
believe unfair and deceptive negative option practices are widespread
in the marketplace. Negative option programs can provide substantial
benefits for sellers and consumers. However, consumers cannot realize
these benefits when sellers make material misrepresentations to induce
consumers to enroll in such programs, fail to provide important
information, bill consumers without their consent, or make cancellation
difficult or impossible. Unfair and deceptive negative option practices
have been a persistent source of consumer harm for decades, saddling
shoppers with recurring payments for products and services they never
intended to purchase nor wanted to continue buying. In the past, the
Commission sought to address these practices through individual law
enforcement actions and a patchwork of laws and regulations.
Nevertheless, problems persist, as demonstrated by both a steady stream
of State and Federal law enforcement actions and thousands of consumer
complaints each year. To address these practices, the Commission
proposed amending the current Negative Option Rule to establish clear,
enforceable performance-based requirements for all negative option
features in all media. The Commission solicited comments first in an
advance notice of proposed rulemaking (``ANPR'') and then on proposed
amendments in a notice of proposed rulemaking (``NPRM''). The
Commission designed these amendments to ensure consumers understand
what they are purchasing and allow them to cancel their participation
without undue burden.
Among other things, this final Rule (1) prohibits
misrepresentations of any material fact made while marketing using
negative option features; (2) requires sellers to provide important
information prior to obtaining consumers' billing information and
charging consumers; (3) requires sellers to obtain consumers'
unambiguously affirmative consent to the negative option feature prior
to charging them; and (4) requires sellers to provide consumers with
simple cancellation mechanisms to immediately halt all recurring
charges.
The Commission now promulgates a final Rule. Pursuant to 15 U.S.C.
57a(a)(1)(B), the Rule, inter alia, defines the following acts and
practices as unfair or deceptive within the meaning of section 5 of the
FTC Act:
<bullet> to misrepresent any material fact made while marketing
using a negative option feature (Sec. 425.3);
<bullet> to fail to clearly and conspicuously disclose material
terms prior to obtaining a consumer's billing information in connection
with a negative option feature (Sec. 425.4);
<bullet> to fail to obtain a consumer's express informed consent to
the negative option feature before charging the consumer (Sec. 425.5);
and
<bullet> to fail to provide a simple mechanism to cancel the
negative option feature and immediately halt charges (Sec. 425.6).
Further, the Rule, consistent with the final sentence of 15 U.S.C.
57a(a)(1)(B) includes requirements prescribed for the purpose of
preventing such acts or practices.
The final Rule differs from the proposed Rule in two significant
ways. First, the proposed Rule would have required sellers to provide
annual reminders to consumers of the negative option feature. Second,
the proposed Rule would have prohibited sellers from forcing consumers
to receive saves \1\ without first obtaining consumers' unambiguously
affirmative consent. The Commission has considered comments both
supporting and opposing these proposed provisions. As explained in the
section-by-section analysis, the Commission declines to adopt these
provisions of the proposed Rule at this time. Instead, the Commission
plans to seek further comment through a supplemental NPRM (``SNPRM''),
and therefore, keeps the record open on these issues.\2\
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\1\ Save was defined in the proposed Rule to mean an attempt by
a seller to present any additional offers, modifications to the
existing agreement, reasons to retain the existing offer, or similar
information when a consumer attempts to cancel a negative option
feature. Proposed Rule Sec. 425.2(f).
\2\ See 16 CFR 1.11 (``Commission's Rules of Practice'' or
``Commission Rules''); cf. Impersonation Rule, 89 FR 15072 (Feb. 29,
2024).
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Finally, in response to the comments, the Commission adds two
definitions and two provisions to the final Rule for clarity. The final
Rule explicitly defines the terms ``material'' and ``interactive
electronic medium'' consistent with how they were defined and discussed
in the NPRM. Additionally, the final Rule includes a severability
provision and a provision allowing requests for exemptions from the
final Rule consistent with the Commission's Rules of Practice.\3\
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\3\ See 16 CFR 1.16.
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II. Background
A. Statutory Authority
The Commission promulgates the final Negative Option Rule, 16 CFR
part 425 pursuant to section 18 of the FTC Act, 15 U.S.C. 57a, the
Administrative Procedure Act (``APA''), 5 U.S.C. 533; and part 1,
subpart B of the Commission's Rules of Practice, 16 CFR 1.7-1.20.
Section 18 permits the Commission to promulgate, amend, and repeal
trade regulation rules that define with specificity acts or practices
that are unfair or deceptive within the meaning of section 5(a)(1) of
the FTC Act, 15 U.S.C. 45(a)(1); and allows the Commission to prescribe
requirements for the purpose of preventing these unfair or deceptive
acts and practices.
B. Negative Option Marketing
1. Negative Option Programs
Negative option programs come in a variety of forms, but all share
a central feature: each contain a term or condition that allows a
seller to interpret a customer's silence, or failure to take an
[[Page 90477]]
affirmative action, as acceptance of an offer.\4\ Negative option
programs generally fall into four categories: prenotification plans,
continuity plans, automatic renewals, and free trial (i.e., free-to-pay
or nominal-fee-to-pay) conversion offers.
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\4\ The Commission's Telemarking Sales Rule defines a negative
option feature as a provision in an offer or agreement to sell or
provide any goods or services ``under which the customer's silence
or failure to take an affirmative action to reject goods or services
or to cancel the agreement is interpreted by the seller as
acceptance of the offer.'' 16 CFR 310.2(w).
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Prenotification plans are the only negative option practice
currently covered by the Commission's current Negative Option Rule,
originally promulgated in 1973. Under such plans (e.g., book-of-the-
month clubs), sellers provide periodic notices offering goods to
participating consumers and then send--and charge for--those goods only
if the consumers take no action to decline the offer. The periodic
announcements and shipments can continue indefinitely. In continuity
plans, consumers agree in advance to receive periodic shipments of
goods or provision of services (e.g., bottled water delivery), which
they continue to receive until they cancel the agreement. In automatic
renewals, sellers (e.g., a magazine publisher, credit monitoring
service provider, etc.) automatically renew consumers' subscriptions
when they expire, unless consumers affirmatively cancel the
subscriptions. Finally, in free-to-pay plans, consumers receive goods
or services for free (or at a nominal fee) for a trial period. After
the trial period, sellers automatically begin charging a fee (or higher
fee) unless consumers affirmatively cancel or return the goods or
services.
Some negative option offers include upsell or bundled offers, where
sellers use consumers' billing data to sell additional products from
the same seller or pass consumers' billing data to a third party for
their sales. An upsell occurs, e.g., when a consumer completes a first
transaction and then receives a second solicitation for an additional
product or service. A bundled offer occurs, e.g., when a seller
packages two or more products or services together.
Importantly, negative option programs are distinct from other
continuing agreements such as installment contracts. In an installment
contract, consumers are obligated for the entire contractual period for
the entire contract. A prime example of this type of transaction is a
contract for purchasing a vehicle, which outlines terms, such as price,
interest rate, and payment schedule. The contract thus allows the
consumer to pay the purchase price of the vehicle over time. Consumers'
failure to pay amounts due under an installment agreement may bring the
total balance due, and may trigger halting performance, or provide the
seller with other contractual rights.
A negative option, in contrast, merely determines whether a seller
may continue to send, and charge for, goods or provide services without
the consumer's further action. Notably, a contract could have both
installment and negative option features. Take, for instance, a
software license agreement. A consumer may purchase a software license
for a year, in which the consumer is obligated for the entire year,
payable monthly, to renew automatically at the conclusion of the year
unless the consumer cancels the agreement.\5\ Canceling the agreement
during the first year does not void a consumer's obligation to pay for
the whole first year, but it does terminate the consumer's
responsibility for the next year.
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\5\ See, e.g., United States v. Adobe, Inc., No. 5:24-cv-03630
(N.D. Cal. 2024).
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2. Prevalence of Deceptive or Unfair Negative Option Acts and Practices
Negative option programs are widespread in the marketplace and can
provide substantial benefits for sellers and consumers. For businesses,
the benefits of negative option marketing include ``greater revenue
predictability, customer base continuity, and the ability to better
plan in advance.'' \6\ For consumers, such benefits may include
opportunities to explore new products prior to purchase (e.g., free
trials),\7\ broader selections at lower prices and transaction
costs,\8\ and the convenience of uninterrupted products or services.\9\
However, consumers cannot reap these benefits when marketers
misrepresent material facts, fail to make adequate disclosures, bill
consumers without their consent, or make cancellation difficult or
impossible. Over the years, such problematic practices have remained a
persistent source of consumer harm, saddling consumers with recurring
payments for products and services they never intended to purchase nor
wanted to continue buying.
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\6\ News/Media Alliance (``N/MA''), FTC-2023-0033-0873; see also
Association of National Advertisers (``ANA''), FTC-2023-0033-1001;
National Retail Federation (``NRF''), FTC-2023-0033-1005. Citations
herein to comments are cited as the name of commenter and unique
identifier (e.g., FTC-2023-0033-__). Comments are available online
at <a href="http://regulations.gov">regulations.gov</a>, Negative Option Rule (NPRM), FTC-2023-0033-0001,
<a href="https://www.regulations.gov/document/FTC-2023-0033-0001">https://www.regulations.gov/document/FTC-2023-0033-0001</a>.
\7\ N/MA, FTC-2023-0033-0873; Sirius XM Radio Inc. (``Sirius
XM''), FTC-2023-0033-0857; NCTA--The Internet & Television
Association (``NCTA''), FTC-2023-0033-0858; Interactive Advertising
Bureau (``IAB''), FTC-2023-0033-1000.
\8\ See IAB, FTC-2023-0033-1000; Sirius XM, FTC-2023-0033-0857;
Joint Comment from Entertainment Software Association, Digital Media
Association, and Motion Picture Association (``ESA''), FTC-2023-
0033-0867.
\9\ N/MA, FTC 2023-0033-0873; NRF, FTC-2023-0033-1005; ANA, FTC-
2023-0033-1001.
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The Commission tried to address these practices through individual
law enforcement cases and a patchwork of regulations (see discussion at
sections III-IV). Nevertheless, problems persist, as demonstrated in
part by the tens of thousands of complaints consumers submit about
these practices to the FTC each year. Moreover, the Commission and
States continue to regularly bring cases challenging harmful negative
option practices, including more than 35 recent FTC cases.\10\ These
matters involved a range of deceptive or unfair practices, including
inadequate disclosures for ``free'' offers and other products or
services, enrollment without consumer consent, and inadequate or overly
burdensome cancellation and refund procedures.\11\ As discussed further
below, the continuing stream of cases; the high volume of ongoing
complaints; and comments on the record all demonstrate prevalent unfair
and deceptive practices and unabated consumer harm.
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\10\ See, e.g., FTC v. FloatMe Corp., No. 5:24-cv-00001 (W.D.
Tex. 2024); United States v. Adobe, Inc., No. 5:24-cv-03630 (N.D.
Cal. 2024); FTC v. WealthPress, Inc., No. 3:23-cv-00046 (M.D. Fla.
2023); FTC v. Bridge It, Inc., No. 1:23-cv-09651 (S.D.N.Y. 2023);
FTC v. <a href="http://Amazon.com">Amazon.com</a>, Inc., No. 2:23-cv-0932 (W.D. Wash. 2023); see
also n.60.
\11\ E.g., FTC v. Triangle Media Corp., No. 3:18-cv-01388 (S.D.
Cal. 2018); FTC v. Credit Bureau Ctr., LLC, No. 1:17-cv-00194 (N.D.
Ill. 2017); FTC v. JDI Dating, Ltd., No. 1:14-cv-08400 (N.D. Ill.
2014); FTC v. One Techs., LP, No. 3:14-cv-05066 (N.D. Cal. 2014);
FTC v. Health Formulas, LLC, No. 2:14-cv-01649 (D. Nev. 2014); FTC
v. NutraClick, LLC, No. 2:16-cv-06819 (C.D. Cal. 2016); FTC v. XXL
Impressions, LLC, No. 1:17-cv-00067 (D. Me. 2017); FTC v. AAFE
Prods. Corp., No. 3:17-cv-00575 (S.D. Cal. 2017); FTC v. Pact, Inc.,
No. 2:17-cv-1429 (W.D. Wash. 2017); FTC v. Tarr, No. 3:17-cv-02024
(S.D. Cal. 2017); FTC v. AdoreMe, Inc., No. 1:17-cv-09083 (S.D.N.Y.
2017); FTC v. <a href="http://DOTAuthority.com">DOTAuthority.com</a>, Inc., No. 0:16-cv-62186 (S.D. Fla.
2016); FTC v. BunZai Media Grp., Inc., No. 2:15-cv-04527 (C.D. Cal.
2015); FTC v. RevMountain, LLC, No. 2:17-cv-02000 (D. Nev. 2017).
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III. The FTC'S Existing Regulatory Scheme
A. The FTC's Current Negative Option Rule
The Commission first promulgated the Rule in 1973 pursuant to the
FTC Act, 15 U.S.C. 41 et seq., finding some negative option marketers
committed
[[Page 90478]]
unfair and deceptive practices that violated section 5 of the Act, 15
U.S.C. 45. Based on practices at the time, however, the Rule only
applied to prenotification plans for the sale of goods, and therefore,
does not reach the vast majority of modern negative option
programs.\12\
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\12\ The Rule defines ``negative option plan'' narrowly to apply
only to prenotification plans. 16 CFR 425.1(c)(1). In 1998, the
Commission clarified the Rule's application to such plans in all
media, stating that it ``covers all promotional materials that
contain a means for consumers to subscribe to prenotification
negative option plans, including those that are disseminated through
newer technologies.'' 63 FR 44555, 44561 (Aug. 20, 1998).
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Specifically, the Rule required prenotification plan sellers to
disclose their plans' material terms clearly and conspicuously before
consumers subscribe. To do so, it required sellers to disclose seven
material terms: (1) how subscribers must notify the seller if they do
not wish to purchase the selection; (2) any minimum purchase
obligations; (3) the subscribers' right to cancel; (4) whether billing
charges include postage and handling; (5) that subscribers have at
least ten days to reject a selection; (6) that if any subscriber is not
given ten days to reject a selection, the seller will credit the return
of the selection and postage to return the selection, along with
shipping and handling; and (7) the frequency with which announcements
and forms will be sent.\13\ In addition, sellers had to disclose the
specific periods during which they would send introductory merchandise,
give consumers a specified period to respond to announcements, provide
instructions for rejecting merchandise in announcements, and promptly
honor written cancellation requests.\14\
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\13\ 16 CFR 425.1(a)(1)(i)-(vii).
\14\ 16 CFR 425.1(a)(2) and (3); id. 425.1(b).
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B. Other Current Regulatory Requirements
Several other statutes and regulations also address harmful
negative option practices. First, section 5 of the FTC Act has served
as the Commission's primary mechanism for addressing deceptive negative
option claims. Additionally, the Restore Online Shoppers' Confidence
Act (``ROSCA''), 15 U.S.C. 8401-8405, the Telemarketing Sales Rule
(``TSR''), 16 CFR part 310, the Postal Reorganization Act (i.e., the
Unordered Merchandise Statute), 39 U.S.C. 3009, and the Electronic Fund
Transfer Act (``EFTA''), 15 U.S.C. 1693-1693r, all address various
aspects of negative option marketing. ROSCA, however, is the only law
primarily designed to do so, but only for online transactions.
1. Section 5 of the FTC Act
Section 5(a) of the FTC Act, 15 U.S.C. 45(a), is the core consumer
protection statute enforced by the Commission. That statute broadly
prohibits ``unfair or deceptive acts or practices'' but does not
specifically address negative option marketing.\15\ Therefore, in
guidance and cases, the FTC has highlighted six basic requirements
negative option marketing must follow to avoid deceptive and unfair
practices.\16\ First, marketers must disclose the material terms of a
negative option offer including, at a minimum: the existence of the
negative option offer; the offer's total cost; the transfer of a
consumer's billing information to a third party, if applicable; and how
to cancel the offer. Second, section 5 requires these disclosures to be
clear and conspicuous. Third, sellers must disclose the material terms
of the negative option offer before consumers agree to the purchase.
Fourth, marketers must obtain consumers' consent to such offers. Fifth,
marketers must not impede the effective operation of promised
cancellation procedures and must honor cancellation requests that
comply with those procedures. Finally, marketers cannot make any
material misrepresentation regarding any portion of the transaction.
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\15\ Under the FTC Act, ``unfair or deceptive acts or
practices'' include acts or practices involving foreign commerce
that cause or are likely to cause reasonably foreseeable injury
within the United States or involve material conduct occurring
within the United States. 15 U.S.C. 45(a)(4)(A). Section 5(n) of the
FTC Act provides that ``unfair'' practices are those that cause or
are likely to cause substantial injury to consumers which is not
reasonably avoidable by consumers themselves and not outweighed by
countervailing benefits to consumers or to competition. 15 U.S.C.
45(n).
\16\ See Negative Options: A Report by the Staff of the FTC's
Division of Enforcement, 26-29 (Jan. 2009) (``Staff Report''),
<a href="https://www.ftc.gov/reports/negative-options-federal-trade-commission-workshop-analyzing-negative-option-marketing-report-staff">https://www.ftc.gov/reports/negative-options-federal-trade-commission-workshop-analyzing-negative-option-marketing-report-staff</a>. In discussing the principal Section 5 requirements related to
negative options, the report cites the following pre-ROSCA cases,
FTC v. JAB Ventures, LLC, No. 2:08-cv-04648 (C.D. Cal. 2008); FTC v.
Complete Weightloss Ctr., No. 1:08-cv-00053 (D.N.D. 2008); FTC v.
Berkeley Premium Nutraceuticals, No. 1:06-cv-00051 (S.D. Ohio 2006);
FTC v. Think All Publ'g, LLC, No. 4:07-cv-00011 (E.D. Tex. 2006);
FTC v. HispaNexo, Inc., No. 1:06-cv-424 (E.D. Va. 2006); FTC v.
<a href="http://Consumerinfo.com">Consumerinfo.com</a>, No. 8:05-cv-00801 (C.D. Cal. 2005); FTC v.
Conversion Mktg., No. 8:04-cv-01264 (C.D. Cal. 2004); United States
v. Mantra Films, Inc., No. 2:03-cv-9184 (C.D. Cal. 2003); FTC v.
Preferred Alliance, Inc., No. 1:03-cv-0405 (N.D. Ga. 2003); United
States v. Prochnow, No. 1:02-cv-917 (N.D. Ga. 2002); FTC v.
Ultralife Fitness, Inc., No. 2:08-cv-07655 (C.D. Cal. 2008); In re
America Isuzu Motors, FTC Docket No. C-3712 (1996); FTC v. Universal
Premium Servs., No. 2:06-cv-00849 (C.D. Cal. 2006); FTC v. Remote
Response Corp., No. 1:06-cv-20168 (S.D. Fla. 2006). The report also
cited the FTC's previously issued guidance, Dot Com Disclosures
(2002), archived at <a href="https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc-staff-issues-guidelines-internet-advertising/0005dotcomstaffreport.pdf">https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc-staff-issues-guidelines-internet-advertising/0005dotcomstaffreport.pdf</a>. See also nn.245-252.
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In addition to these deception-based requirements, the Commission
has repeatedly stated billing consumers without consumers' express
informed consent is an unfair act under the FTC Act.\17\
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\17\ Courts have found unauthorized billing to be unfair under
the FTC Act. See, e.g., FTC. v. Neovi, Inc., 604 F.3d 1150, 1157-59
(9th Cir. 2010), amended by 2010 WL 2365956 (9th Cir. June 15,
2010); FTC v. <a href="http://Amazon.com">Amazon.com</a>, Inc., No. 2:14-cv-1038, 2016 WL 10654030,
at *8 (W.D. Wash. Apr. 26, 2016); FTC v. Ideal Fin. Sols., Inc., No.
2:13-cv-00143, 2015 WL 4032103, at *8 (D. Nev. June 30, 2015).
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2. ROSCA
Enacted by Congress in 2010 to address, in part, ongoing problems
with online negative option marketing, ROSCA contains general
provisions related to disclosures, consent, and cancellation.\18\
Specifically, ROSCA prohibits charging or attempting to charge
consumers for goods or services sold on the internet through any
negative option feature unless the marketer: (1) clearly and
conspicuously discloses all material terms of the transaction before
obtaining the consumer's billing information, regardless of whether a
material term directly relates to the terms of the negative option
offer; \19\ (2) obtains a consumer's express informed consent before
charging the consumer's account; and (3) provides simple mechanisms for
the consumer to stop recurring charges.\20\ ROSCA, however, does not
prescribe specific steps marketers must follow to comply with these
provisions and is limited to online transactions.
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\18\ 15 U.S.C. 8401-8405.
\19\ ROSCA, 15 U.S.C. 8403(1); see also In re MoviePass, Inc.,
FTC Docket No. C-4751 (2021).
\20\ 15 U.S.C. 8403. ROSCA incorporates the definition of
``negative option feature'' from the TSR, 16 CFR 310.2(w).
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Furthermore, pursuant to the statute, a violation of ROSCA is
treated as a violation of a Commission trade regulation rule under
section 18 of the FTC Act.\21\ Thus, the Commission may seek a variety
of remedies for violations of ROSCA, including civil penalties under
section 5(m)(1)(A) of the FTC Act; \22\ injunctive relief under section
13(b) of the FTC Act; \23\ and consumer redress, damages, and other
relief under section 19 of the FTC Act.\24\
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\21\ 15 U.S.C. 8404 (citing section 18 of the FTC Act, 15 U.S.C.
57a).
\22\ 15 U.S.C. 45(m)(1)(A).
\23\ 15 U.S.C. 53(b).
\24\ 15 U.S.C. 57b(a)(1), (b).
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3. Telemarketing Sales Rule
The TSR prohibits deceptive telemarketing acts or practices,
[[Page 90479]]
including those involving negative option offers, and certain types of
payment methods common in deceptive negative option marketing.
Specifically, the TSR requires telemarketers to disclose all material
terms and conditions of the negative option feature, including the need
for affirmative consumer action to avoid the charges, the date (or
dates) the charges will be submitted for payment, and the specific
steps the customer must take to avoid the charges. It also prohibits
telemarketers from misrepresenting such information and contains
specific requirements related to payment authorization.\25\ The TSR,
however, only applies to negative option offers made over the
telephone.
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\25\ 16 CFR 310.3(a).
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4. Other Relevant Requirements
EFTA \26\ and the Unordered Merchandise Statute \27\ also contain
provisions relevant to unfair and deceptive negative option marketing.
EFTA prohibits sellers from imposing recurring charges on a consumer's
debit cards or bank accounts without written authorization.\28\ The
Unordered Merchandise Statute provides that mailing unordered
merchandise, or a bill for such merchandise, constitutes an unfair
method of competition and an unfair trade practice in violation of
section 5 of the FTC Act.\29\
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\26\ 15 U.S.C. 1693-1693r.
\27\ 39 U.S.C. 3009.
\28\ EFTA provides that the Commission shall enforce its
requirements, except to the extent that enforcement is specifically
committed to some other Federal government agency, and that a
violation of any of its requirements shall be deemed a violation of
the FTC Act. Accordingly, the Commission has authority to seek
injunctive relief for EFTA violations, just as it can seek
injunctive relief for other section 5 violations.
\29\ The Commission has authority to seek the same remedies for
violations of the Unordered Merchandise Statute that it can seek for
other section 5 violations. The Commission can seek civil penalties
pursuant to section 5(m)(1)(B) of the FTC Act from violators who
have actual knowledge that the Commission has found mailing
unordered merchandise unfair. 15 U.S.C. 45(m)(1)(B).
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IV. Limitations of Existing Regulatory Requirements
The existing patchwork of laws and regulations does not provide
industry and consumers with a consistent legal framework across media
and offers. For instance, as discussed above, the current Rule does not
cover common practices such as continuity plans, automatic renewals,
and free-to-pay conversions.\30\ In addition, ROSCA and the TSR do not
address negative option programs in all media. Yet, harmful negative
option practices that fall outside of ROSCA and the TSR's coverage
still occur.\31\
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\30\ Indeed, the prenotification plans covered by the Rule
represent only a small fraction of negative option marketing. In
2017, for instance, the Commission estimated that fewer than 100
sellers (``clubs'') were subject to the current Rule's requirements.
82 FR 38907, 38908 (Aug. 16, 2017).
\31\ See, e.g., In re Dun & Bradstreet, Inc., FTC Docket No. C-
4761 (2022); FTC v. Nobetes Corp., No. 2:18-cv-10068 (C.D. Cal.
2018); FTC v. Dill, No. 2:16-cv-00023 (D. Me. 2016); FTC v. Shopper
Sys., LLC, No. 1:12-cv-23919 (S.D. Fla. 2012); FTC v. XXL
Impressions, LLC, No. 1:17-cv-00067 (D. Me. 2017); FTC v. Health
Rsch. Labs., LLC, No. 2:17-cv-00467 (D. Me. 2017); FTC v. Mktg.
Architects, No. 2:18-cv-00050 (D. Me. 2018); see also Individual
commenter, FTC-2023-0033-0007 (discussing deceptive and unfair
negative option practices for in-person enrollment); Individual
commenter, FTC-2023-0033-0129 (gym membership in-person enrollment);
Individual commenter, FTC-2023-0033-0299 (same).
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Additionally, ROSCA lacks specificity about cancellation procedures
and the placement, content, and timing of cancellation-related
disclosures. Instead, the statute requires marketers to provide
``simple mechanisms'' for the consumer to stop recurring charges
without guidance about what is simple. While the statute provides more
than adequate specificity to avoid blatant violations, it makes law
enforcement actions much more difficult for closer calls, even when
these practices cause significant harm.
V. Negative Option Rulemaking and Enforcement Efforts
The Commission initiated its last regulatory review of the Negative
Option Rule in 2009,\32\ following a 2007 FTC workshop and subsequent
Staff Report.\33\ The Commission completed the review in 2014.\34\ At
the time, the Commission found the comments supporting the Rule's
expansion ``argue convincingly that unfair, deceptive, and otherwise
problematic negative option marketing practices continue to cause
substantial consumer injury, despite determined enforcement efforts by
the Commission and other law enforcement agencies.'' \35\ It also noted
practices not covered by the Rule (e.g., trial conversions and
continuity plans) accounted for most of the Commission's enforcement
activity in this area. Nevertheless, the Commission declined to expand
or modify the Rule because the enforcement tools provided by the TSR
and, especially, ROSCA, which had only recently become effective, might
prove adequate to address the extant problems. The Commission
emphasized, however, if ROSCA and its other enforcement tools failed to
protect consumers, the Commission would consider whether and how to
amend the Rule.\36\ Since that review, the problems with negative
options have persisted.\37\
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\32\ 74 FR 22720 (May 14, 2009).
\33\ See Staff Report, n.16.
\34\ 79 FR 44271 (July 31, 2014).
\35\ 79 FR 44275. The Commission cited a number of its law
enforcement actions challenging negative option marketing practices,
including, for example, FTC v. Process Am., Inc., No. 2:14-cv-00386
(C.D. Cal. 2014) (processing of unauthorized charges relating to
negative option marketing); FTC v. Willms, No. 2:11-cv-00828 (W.D.
Wash. 2011) (internet free trials and continuity plans); FTC v.
Moneymaker, No. 2:11-cv-00461 (D. Nev. 2011) (internet trial offers
and continuity programs); FTC v. Johnson, No. 2:10-cv-02203 (D. Nev.
2010) (internet trial offers); and FTC v. John Beck Amazing Profits,
LLC, No. 2:09-cv-04719 (C.D. Cal. 2009) (infomercial and
telemarketing trial offers and continuity programs).
\36\ 79 FR 44275-76.
\37\ See sections VI-VII of this SBP.
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VI. Rule Review and Request for Comment
A. 2019 Advance Notice of Proposed Rulemaking
Given the persistence of unfair and deceptive practices despite
significant law enforcement attention at both the Federal and State
level, the Commission published its 2019 advance notice of proposed
rulemaking (``ANPR'') seeking comments on the current Rule, as well as
possible new measures to reduce consumer harm created by deceptive or
unfair negative option marketing.\38\ Specifically, the Commission
sought comment on various alternatives, including amendments to
existing rules to further address disclosures, consumer consent, and
cancellation. The Commission also requested input on whether and how it
should use its authority under section 18 of the FTC Act to expand the
Negative Option Rule to address prevalent unfair or deceptive practices
involving negative option marketing.\39\ In response, the Commission
received 17 comments.\40\
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\38\ ANPR, 84 FR 52393 (Oct. 2, 2019).
\39\ Section 18 of the FTC Act authorizes the Commission to
promulgate rules that define with specificity acts or practices in
or affecting commerce which are unfair or deceptive. 15 U.S.C.
57a(a)(1)(B). The Commission may issue regulations ``where it has
reason to believe that the unfair or deceptive acts or practices
which are the subject of the proposed rulemaking are prevalent.'' 15
U.S.C. 57a(b)(3). The Commission may make such a prevalence finding
if it has issued cease and desist orders regarding such acts or
practices, or any other available information indicates a widespread
pattern of unfair or deceptive acts or practices. Rules under
section 18 ``may include requirements prescribed for the purpose of
preventing such acts or practices.''
\40\ The comments are available online. See Regulations.gov,
Negative Option Rule (ANPR), FTC-2019-0082, <a href="https://www.regulations.gov/docket/FTC-2019-0082">https://www.regulations.gov/docket/FTC-2019-0082</a>.
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B. 2021 Enforcement Policy Statement
On November 4, 2021, the Commission published an ``Enforcement
Policy Statement Regarding Negative Option Marketing'' (``2021
Enforcement Policy Statement'' or ``EPS'') to provide guidance
regarding its enforcement of
[[Page 90480]]
various statutes and FTC regulations.\41\ The 2021 Enforcement Policy
Statement enunciated various principles rooted in FTC case law and
restated previous guidance related to the provision of information to
consumers, consent, and cancellations. Among these principles, the
Statement emphasized ROSCA's requirement that sellers disclose all
material terms related to the underlying product or service that are
necessary to prevent deception, regardless of whether that term relates
directly to the terms of the negative option offer.\42\ In addition,
consistent with ROSCA, judicial decisions applying section 5, and cases
brought by the Commission, the 2021 Enforcement Policy Statement
reiterated sellers should obtain consumers' acceptance of the negative
option feature separately from any other portion of the transaction.
Finally, the Statement explained sellers should provide cancellation
mechanisms at least as easy to use as the method the consumer employed
to initiate the negative option feature.
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\41\ EPS, 86 FR 60822 (Nov. 4, 2021).
\42\ The Commission recently alleged a negative option seller's
failure to disclose it was impeding access to its movie subscription
service violates ROSCA. In re MoviePass, Inc., FTC Docket No. C-4751
(2021).
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C. 2023 Notice of Proposed Rulemaking
After reviewing the comments received in response to the ANPR and
issuing the 2021 Enforcement Policy Statement, the Commission issued a
notice of proposed rulemaking (``NPRM'') on April 23, 2023 (88 FR
24716). In the NPRM, the Commission proposed amending the existing Rule
to prohibit material misrepresentations and to require sellers to
provide important information to consumers, obtain consumers' express
informed consent, and ensure consumers can easily cancel negative
option programs if they choose. All these proposed changes would be
applicable to all forms of negative option marketing across all media
(e.g., telephone, internet, traditional print media, and in-person
transactions).\43\
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\43\ The Commission proposed to issue such amendments pursuant
to section 18 of the FTC Act, which authorizes it to promulgate
rules specifying acts or practices in or affecting commerce which
are unfair or deceptive. 15 U.S.C. 57a(a)(1)(B). Several commenters
raised concerns the Commission failed to follow section 18's
procedures for two reasons. First, commenters argued the
Commission's proposed Rule went beyond the scope of the ANPR. See,
e.g., ESA, FTC-2023-0033-0867; USTelecom-The Broadband Association
(``USTelecom''), FTC-2023-0033-0876; Retail Industry Leaders
Association (``RILA''), FTC-2023-0033-0883; U.S. Chamber of Commerce
(``Chamber''), FTC-2023-0033-0885; The Computer & Communications
Industry Association (``CCIA''), FTC-2023-0033-0984; IAB, FTC-2023-
0033-1000; National Retail Federation (``NRF''), FTC-2023-0033-
1005). Second, they argued the Commission's proposed Rule did not
satisfy the specificity and prevalence requirements of section 18.
The Commission addresses these comments in section VII.A.
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The Commission designed the proposed amendments to curb deceptive
or unfair practices occurring in negative option marketing. The
Commission sought public comment on ``all aspects'' of the proposal,
``including the likely effectiveness of the proposed Rule in helping
the Commission combat unfair or deceptive practices in negative option
marketing.'' \44\ The Commission further identified specific questions
and areas where it solicited available data and evidence, including
data and evidence supporting alternatives to the proposed
regulations.\45\ The Commission did not identify any disputed issues of
material fact that needed to be resolved at an informal hearing.\46\
The comment period closed on June 23, 2023.
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\44\ NPRM, 88 FR 24730.
\45\ See NPRM, 88 FR 24728 (inviting comments on free trials);
id. at 24729 (requesting comments on proposed annual reminder
provision); id. at 24730 (inviting comments on conflicts with
existing state requirements; id. (seeking comments on proposed
material changes provision and exempted activities or entities); id.
(inviting submissions of ``data, views, and arguments on the
proposed amendments''); id. at 24732-33 (inviting comments on the
impacts on small businesses, including any modifications to reduce
costs or burdens for small entities); id. at 24734 (inviting
comments on the Paperwork Reduction Act analysis). See also id. at
24730 (NPRM section XIII, Request for Comments).
\46\ See 16 CFR 1.11(e).
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In response, the Commission received more than 16,000 comments, and
published the 1,162 unique comments from stakeholders representing a
wide range of viewpoints.\47\ Although some commenters raised concerns
and recommended specific modifications or additions to the proposed
Rule (some of which the Commission adopts as discussed herein), the
majority generally supported the Rule. The Commission discusses these
comments in section VII below.
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\47\ Unique public comments to the NPRM are available online.
See <a href="http://regulations.gov">regulations.gov</a>, Negative Option Rule (NPRM), FTC-2023-0033-
0001, <a href="https://www.regulations.gov/document/FTC-2023-0033-0001">https://www.regulations.gov/document/FTC-2023-0033-0001</a>. The
Commission published 1,162 unique comments. As explained at
<a href="http://regulations.gov">regulations.gov</a>, agencies may withhold duplicate/near duplicate
examples of a mass-mail campaign. See Gen. Servs. Admin.,
Regulations.gov Frequently Asked Questions, Find Dockets, Documents,
and Comments FAQs, ``How are comments counted and posted to
Regulations.gov?,'' <a href="https://www.regulations.gov/faq">https://www.regulations.gov/faq</a>. The Commission
cannot quantify the number of individuals or entities represented by
the comments. The number of comments undercounts the number of
individuals or entities represented by the comments because many
comments, including those from different types of organizations,
jointly represent the opinions or interests of many. Overall, the
Commission received 16,612 comments. Of those, 15,449 were not
posted online for various reasons (i.e., 14 unrelated, 23
duplicates, and 15,412 that appear to be non-unique responses to
mass media campaigns) and one comment was withdrawn. The Commission
has considered all timely and responsive public comments it received
in response to its NPRM.
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D. Informal Hearing and Recommended Decision
Section 18 of the Federal Trade Commission Act, 15 U.S.C. 57a, and
the Commission's Rules of Practice, 16 CFR 1.11(e),\48\ provide
interested persons the opportunity to make an oral statement at an
informal hearing upon request.\49\ The Commission received six \50\
such requests. Additionally, although the Commission did not designate
any disputed issues of material fact in the NPRM, two interested
commenters, IAB and NCTA, proposed the Commission consider several
potential disputed issues of material fact.\51\
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\48\ The FTC Act provides that ``an interested person is
entitled to present his position orally or by documentary submission
(or both).'' 15 U.S.C. 57a(c)(2)(A).
\49\ 16 CFR 1.11(e).
\50\ The six requesters were (1) International Franchise
Association; (2) TechFreedom; (3) Performance Driven Marketing
Institute; (4) NCTA--The Internet & Television Association; (5)
Frontdoor; and (6) Interactive Advertising Bureau. All but one--
TechFreedom--identified their interest in the proceeding either as
industry groups or private companies.
\51\ See Notice of Informal Hearing (``Hearing Notice''), 88 FR
85525, 85526 (Dec. 8, 2023).
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On December 8, 2023, the Commission published an Initial Notice of
Informal Hearing (88 FR 85525, ``Hearing Notice''). The Hearing Notice
designated the Honorable Carol Fox Foelak, Administrative Law Judge for
the Securities Exchange Commission, to serve as the presiding officer
of the informal hearing and scheduled the informal hearing for January
16, 2024. In the Hearing Notice, the Commission again did not designate
any disputed issues of material fact, finding the issues raised by IAB
and NCTA did not need to be resolved at the informal hearing through
cross-examination.\52\
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\52\ 88 FR 85526-27.
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On January 16, 2024, Judge Foelak commenced the informal hearing,
at which IAB, NCTA, Performance Driven Marketing Institute (``PDMI''),
TechFreedom, and the International Franchise Association (``IFA'')
appeared and made oral submissions subject to cross-examination.\53\
Included in their oral and written submissions, IAB and
[[Page 90481]]
NCTA renewed their requests to have the presiding officer designate
disputed issues of material fact.\54\ Following the hearing, Judge
Foelak designated two disputed issues: (1) will the proposed rule have
an annual effect on the national economy of $100 million or more?; and
(2) what will the recordkeeping and disclosure costs associated with
the proposed rule be? Judge Foelak held subsequent hearings on January
31, 2024, and February 14, 2024. She allowed post-hearing briefs filed
by February 22, and February 28, 2024, respectively, and issued her
recommended decision on April 12, 2024. Based on the evidence, the
presiding officer found: (1) the proposed Rule will have an annual
effect on the national economy of $100 million or more; and (2) there
is insufficient evidence to make a finding regarding the size of the
recordkeeping and disclosure costs associated with the proposed
Rule.\55\
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\53\ The Hearing Notice also allowed interested persons to make
additional written submissions. The following interested parties
timely filed additional written submissions on December 22, 2023:
(1) BSA--The Software Alliance; (2) PDMI; (3) U.S. Chamber of
Commerce; (4) IAB; (5) NCTA; and two individuals. All filings
related to the Hearing Notice are available online at
<a href="http://regulations.gov">regulations.gov</a> at <a href="https://www.regulations.gov/document/FTC-2023-0073-0001">https://www.regulations.gov/document/FTC-2023-0073-0001</a>.
\54\ Subsequently, IFA also asserted there were disputed issues
of material fact regarding the impact to both small businesses and
their consumers. IFA, FTC-2024-0001-0009.
\55\ Recommended Decision by Presiding Officer, <a href="https://www.regulations.gov/comment/FTC-2024-0001-0042">https://www.regulations.gov/comment/FTC-2024-0001-0042</a>.
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VII. Discussion of Final Rule
A. Legal Standard for Promulgating the Final Rule
As explained above in section II, the Commission promulgates the
final Rule, 16 CFR part 425, pursuant to section 18 of the FTC Act,
also known as Magnuson-Moss rulemaking (``Magnuson-Moss''). Under
section 18 and the Commission Rules,\56\ to promulgate a rule the
Commission must: (1) issue a SBP with statements detailing: (a) the
prevalence of the acts or practices treated by the rule; (b) the manner
and context in which such acts or practices are unfair or deceptive;
and (c) the economic effect of the rule, taking into account the effect
on small business and consumers; and (2) ``define with specificity acts
or practices which are unfair or deceptive.'' The Commission addresses
these requirements in part A.1-2. In part A.3, the Commission addresses
additional legal issues, including the ANPR's scope and the ``major
questions'' doctrine.
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\56\ 15 U.S.C. 57a and 16 CFR 1.14(a)(1).
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1. Statements Required Under Section 18(d) of the FTC Act
(a) Statement Regarding Prevalence of the Acts and Practices Treated by
the Rule
Under the Magnuson-Moss statute, the Commission may promulgate
rules if it ``has reason to believe that the unfair or deceptive acts
or practices which are the subject of the proposed rulemaking are
prevalent.'' \57\ An act or practice is ``prevalent'' if the FTC has
previously issued cease and desist orders regarding the act or
practice, or if ``any other information available to the Commission
indicates a widespread pattern of unfair or deceptive acts or
practices.'' \58\ Based on the rulemaking record, the Commission has
more than sufficient reason to believe unfair or deceptive acts and
practices in the negative option marketplace are prevalent. These
practices include: (1) material misrepresentations made while marketing
using negative option features to induce consumers to enter into
negative option programs; (2) failure to provide important information
about material terms prior to billing consumers; (3) lack of informed
consumer consent; and (4) failure to provide consumers with a simple
cancellation method, including failure to honor cancellation requests,
refusal to provide refunds to consumers who unknowingly enrolled in
programs, denying consumers refunds, forcing them to pay to return the
unordered goods, requiring consumers to cancel using a more difficult
method than the one used to sign up for the program, and forcing
consumers to contend with multiple upsells before allowing
cancellation.\59\ These practices cause consumer harm by luring
consumers into purchasing goods and services they do not want, or
ensnaring consumers into unwanted recurring payments that are difficult
or impossible to cancel.
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\57\ 15 U.S.C. 57a(b)(3).
\58\ 15 U.S.C. 57a(b)(3)(A)-(B); see also Compassion Over
Killing v. FDA, 849 F.3d 849, 855 (9th Cir. 2017).
\59\ NPRM, 88 FR 24725.
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The Commission relies on substantial evidence in the record showing
a widespread pattern of unfair or deceptive conduct in the negative
option marketplace. This evidence generally falls into three
categories: State, private, and Federal actions (including
administrative and Federal court FTC law enforcement actions); consumer
complaints and comments; and studies. The Commission discusses each in
turn below.
Federal, State, and Private Actions. As discussed in the ANPR and
NPRM, the volume of enforcement efforts in recent years seeking to stem
illegal negative option marketing is significant. These matters involve
a range of deceptive and unfair practices, including: failure to
adequately disclose the existence of negative options, including after
the expiration of free trials; enrollment without consumer consent; and
inadequate or unnecessarily burdensome cancellation and refund
procedures. The FTC itself has brought at least 35 such cases in the
years since ROSCA was enacted.\60\ The Consumer Financial Protection
Bureau (``CFPB'') also has brought many of its own negative option
cases.\61\ Truth in Advertising, Inc. (``TINA''),\62\ a consumer
advocacy organization, stated in 2019 that more than 100 Federal class
actions involving various negative option terms and conditions have
been filed since 2014. Notwithstanding these actions, according to
TINA, ``the incidence of deceptive negative option
[[Page 90482]]
offers continues to rise.'' \63\ TINA also reports that deceptive
negative options ``have only continued to grow'' since its 2019
comment.\64\
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\60\ In the NPRM, the Commission cited a number of its law
enforcement actions challenging negative option marketing practices,
including, for example, FTC v. Process Am., Inc., No. 1:14-cv-00386
(C.D. Cal. 2014) (processing of unauthorized charges relating to
negative option marketing); FTC v. Willms, No. 2:11-cv-00828 (W.D.
Wash. 2011) (internet free trials and continuity plans); FTC v.
Moneymaker, No. 2:11-cv-00461 (D. Nev. 2011) (internet trial offers
and continuity programs); FTC v. Johnson, No. 2:10-cv-02203 (D. Nev.
2010) (internet trial offers); and FTC v. John Beck Amazing Profits,
LLC, No. 2:09-cv-04719 (C.D. Cal. 2009) (infomercial and
telemarketing trial offers and continuity programs). Further
examples of these matters include: FTC v. Triangle Media Corp., No.
3:18-cv-01388 (S.D. Cal. 2018); FTC v. Credit Bureau Ctr., LLC, No.
1:17-cv-00194 (N.D. Ill. 2017); FTC v. JDI Dating, Ltd., No. 1:14-
cv-08400 (N.D. Ill. 2014); FTC v. One Techs., LP, No. 3:14-cv-05066
(N.D. Cal. 2014); FTC v. Health Formulas, LLC, No. 2:14-cv-01649 (D.
Nev. 2014); FTC v. NutraClick, LLC, No. 2:16-cv-06819 (C.D. Cal.
2016); FTC v. XXL Impressions, LLC, No. 1:17-cv-00067 (D. Me. 2017);
FTC v. AAFE Prods. Corp., No. 3:17-cv-00575 (S.D. Cal. 2017); FTC v.
Pact, Inc., No. 2:17-cv-1429 (W.D. Wash. 2017); FTC v. Tarr, No.
3:17-cv-02024 (S.D. Cal. 2017); FTC v. AdoreMe, Inc., No. 1:17-cv-
09083 (S.D.N.Y. 2017); FTC v. <a href="http://DOTAuthority.com">DOTAuthority.com</a>, Inc., No. 0:16-cv-
62186 (S.D. Fla. 2016); FTC v. BunZai Media Grp., Inc., No. 2:15-cv-
04527 (C.D. Cal. 2015); and FTC v. RevMountain, LLC, No. 2:17-cv-
02000 (D. Nev. 2017); see also FTC v. WealthPress, Inc., No. 3:23-
cv-00046 (M.D. Fla. 2023); FTC v. Bridge It, Inc., No. 1:23-cv-09651
(S.D.N.Y. 2023); FTC v. <a href="http://Amazon.com">Amazon.com</a>, Inc., No. 2:23-cv-0932 (W.D.
Wash. 2023); FTC v. FloatMe Corp., No. 5:24-cv-00001 (W.D. Tex.
2024); United States v. Adobe, Inc., No. 5:24-cv-03630 (N.D. Cal.
2024).
\61\ See, e.g., CFPB v. Transunion, No. 1:22-cv-01880 (N.D. Ill.
2022); CFPB v. ACTIVE Network, LLC, No. 4:22-cv-00898 (E.D. Tex.
2022); CFPB v. Sterling Jewelers, Inc., No. 1:19-cv-00448 (S.D.N.Y.
2019); In re Equifax Inc., et al., CFPB No. 2017-CFPB-0001, 2017 WL
1036710 (Jan. 3, 2017) (consent order); CFPB v. Prime Mktg.
Holdings, LLC, No. 2:16-cv-07111 (C.D. Cal. 2016); In re Transunion
Interactive, Inc., et al., CFPB No. 2017-CFPB-0002, 2017 WL 1036711
(Jan. 3, 2017) (consent order); CFPB v. Student Financial Aid
Servs., Inc., No. 2:15-cv-00821 (E.D. Cal. 2015); CFPB v. Affinion
Group Holdings, Inc., No. 5:15-cv-01005 (D. Conn. 2015); CFPB v.
Intersections Inc., No. 1:15-cv-835 (E.D. Va. 2015). Notably, the
CFPB has independent authority to enforce FTC rules, and both
agencies share some overlapping jurisdiction. See 12 U.S.C.
5581(b)(5)(B)(ii).
\62\ TINA, FTC-2019-0082-0014 (cmt. to ANPR, <a href="https://www.regulations.gov/comment/FTC-2019-0082-0014">https://www.regulations.gov/comment/FTC-2019-0082-0014</a>) and FTC-2023-0033-
1139 (cmt. to NPRM).
\63\ NPRM, 88 FR 24720.
\64\ TINA, FTC-2023-0033-1139.
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Several state Attorneys General \65\ also referenced dozens of
enforcement actions taken in recent years to address the proliferation
of deceptive negative option practices they regularly encounter,
including the ``lack of informed consumer consent, lack of clear and
conspicuous disclosures, failure to honor cancellation requests and/or
refusal to provide refunds to consumers who unknowingly enrolled in
plans.'' \66\ These agencies explained their actions ``demonstrate that
problems persist in this area and that additional regulatory action is
needed.'' \67\ For example, over the last decade, New York alone has
reached 23 negative option settlements involving a variety of products
and services such as membership programs, credit monitoring, dietary
supplements, and apparel.\68\ They also described several multi- and
individual state law enforcement actions involving negative option
offers for products and services such as satellite radio, social
networking services, language learning programs, security monitoring,
and dietary supplements. They further recounted numerous, illustrative
complaints from consumers who ordered what they thought were free, no-
obligation samples but then found themselves enrolled in costly
continuity programs.\69\
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\65\ Several State Attorneys General offered comments to the
ANPR (FTC-2019-0082-0012 (State Attorneys General cmt. to ANPR,
<a href="https://www.regulations.gov/comment/FTC-2019-0082-0012">https://www.regulations.gov/comment/FTC-2019-0082-0012</a>)), and
additionally 26 Attorneys General for the States of Alabama,
Arizona, California, Colorado, Connecticut, Delaware, District of
Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Nebraska, Nevada, New Jersey, New York, North
Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Vermont,
Washington, and Wisconsin (``State AGs'') filed comments in response
to the NPRM. See State AGs, FTC-2023-0033-0886 (cmt. to NPRM).
\66\ NPRM, 88 FR 24720; State Attorneys General (ANPR), FTC-
2019-0082-0012. They further explained the nature of the underlying
products often fails to alert consumers of their enrollment in a
negative option program. For instance, many offers involve credit
monitoring or anti-virus computer programs costing less than $20 a
month and have no tangible presence for consumers. The State AGs
explained consumers are often unaware of having ordered these
products, never use them, and never notice them on their bills. The
State AGs further explained these transactions often pull consumers
into a stream of recurring payments by obtaining credit card
information to ostensibly pay for a small shipping charge.
Consequently, they commented many consumers have been billed for
such services for years before discovering the unauthorized charges.
Id.
\67\ NPRM, 88 FR 24721.
\68\ State Attorneys General (ANPR), FTC-2019-0082-0012.
\69\ Id.
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Additionally, the State AGs outlined several ongoing investigations
into deceptive or unfair negative option programs since 2019. These
investigations include allegations of misrepresenting offers as free
when they were not; and failure to clearly and conspicuously disclose
negative option features.\70\
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\70\ State AGs, FTC-2023-0033-0886.
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Additionally, consumer advocacy organizations and others explained
that the widespread prevalence of deceptive acts and practices
underscores the ``ongoing need for [S]tate engagement to limit negative
option abuses.'' \71\ Several commenters observed that more than half
of States specifically regulate some aspect of negative option
marketing.\72\ A group of law professors explain this ``ongoing
engagement just shows that unscrupulous negative-option business models
remain such a problem that [S]tates increasingly find themselves
needing to step in.'' \73\
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\71\ See, e.g., Joint comment from Professor Kaitlin Caruso (U.
of Maine School of Law), Professor Jeff Sovern (St. John's U. School
of Law), Professor Dee Pridgen (U. of Wyoming College of Law),
Professor Chrystin Ondersma (Rutgers Law School), Professor Vijay
Raghavan (Brooklyn Law School), Professor David Vladeck (Georgetown
U. Law Center), Professor Edward Janger (Brooklyn Law School), and
Professor Susan Block-Lieb (Fordham U. School of Law) (collectively,
``Law Professors''), FTC-2023-0033-0861.
\72\ See, e.g., PDMI, FTC-2023-0033-0864 (stating over 27 states
regulate negative option marketing); N/MA, FTC-2023-0033-0873
(stating 35 states and the District of Columbia now have automatic
renewal laws, and at least 20 address all forms of automatic
renewals); Service Contract Industry Council (``SCIC''), FTC-2023-
0033-0879 (noting about half of U.S. states enacted auto-renewal
laws); NRF, FTC-2023-0033-1005 (stating at least half of all states
have statutes governing free-trial, negative-option, and/or
automatic-renewal programs); see also Law Professors, FTC-2323-0033-
0861 (stating the ``number of states that have recently adopted
specific laws targeting negative option marketing, on top of their
general prohibitions on unfair and deceptive practices and ability
to enforce ROSCA, is particularly noteworthy.''); IHRSA, The Global
Health & Fitness Association (``IHRSA''), FTC-2023-0033-0863 (noting
many states have laws on negative options). But see The Center for
Consumer Law and Economic Justice at UC Berkeley School of Law
(``Berkeley Consumer Law Center''), FTC-2023-0033-0855 (stating that
``fewer than half the states have a law specifically addressing
negative option marketing'').
\73\ Law Professors, FTC-2023-0033-0861. This group also points
out that private industry, too, has felt the need for more action in
this area, noting that VISA and Mastercard have their own
requirements for businesses that bill using a negative option model.
---------------------------------------------------------------------------
Consumer Complaints and Comments. The FTC receives tens of
thousands of complaints about negative options each year through its
Sentinel complaint database, and marketers receive many more as
demonstrated by evidence in FTC cases.\74\ Additionally, TINA explained
that negative options are one of its top complaint categories. These
complaints usually involve consumers who unwittingly enroll in programs
and then find it difficult or impossible to cancel.\75\
---------------------------------------------------------------------------
\74\ See, e.g., United States v. Adobe, Inc., No. 5:24-cv-03630
(N.D. Cal. 2024) (ECF No. 40, Amd. Compl.); FTC v. <a href="http://Amazon.com">Amazon.com</a>, Inc.,
No. 2:23-cv-0932 (W.D. Wash. 2023) (ECF No. 67, Amd. Compl.).
\75\ TINA, FTC-2023-0033-1139.
---------------------------------------------------------------------------
Moreover, hundreds of consumer comments detailed specific practices
(discussed more thoroughly in connection with the section-by-section
analysis below) demonstrating the prevalence of unfair or deceptive
negative option practices. Likewise, comments from public interest and
consumer advocacy groups further describe existing deceptive or unfair
practices prevalent in the negative option marketplace. For example,
Berkeley Consumer Law Center explained businesses regularly use dark
patterns \76\ to facilitate enrollment in subscription-based products
and inhibit cancellation, and provided numerous examples of these
activities.\77\ A group of law professors referenced the burgeoning
industry offering to help consumers identify and cancel their unwanted
subscriptions. As they explained: ``One might expect that, if consumers
experienced the marketplace as one in which they are adequately
informed of recurring payments and readily able to cancel them, there
would not be an emerging industry to help them do just that.'' \78\
---------------------------------------------------------------------------
\76\ The term ``dark patterns'' has been used to describe design
practices that trick or manipulate users into making choices they
would not otherwise have made and that may cause harm See Bringing
Dark Patterns to Light, FTC Staff Report (Sept. 2022), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/P214800%20Dark%20Patterns%20Report%209.14.2022%20-%20FINAL.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/P214800%20Dark%20Patterns%20Report%209.14.2022%20-%20FINAL.pdf</a>.
\77\ Berkeley Consumer Law Center, FTC-2023-0033-0855.
\78\ Law Professors, FTC-2023-0033-0861.
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Members of Congress also detailed ongoing problems in this area.
Citing the increase in consumer complaints and consumer harm in recent
years, Representative Takano stated, ``deceptive online marketing and
unclear recurring payment plans are leaving too many consumers on the
hook for products they may not want or even know they purchased.'' \79\
Representatives Schiff and Norton noted their constituents' desire for
greater protections in the negative option marketplace, stating the
``proposed updates will help put the consumers
[[Page 90483]]
back in control of their purchases and subscriptions.'' \80\
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\79\ NPRM, 88 FR 24720-21.
\80\ Schiff and Norton, FTC-2023-0033-0868.
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Studies. Finally, ``studies cited by commenters confirm a pattern
of consumer ensnarement in unwanted recurring payments.'' \81\ A Better
Business Bureau study of FTC data, titled ``Subscription Traps and
Deceptive Free Trials Scam Millions with Misleading Ads and Fake
Celebrity Endorsements,'' demonstrated complaints about free trials
doubled between 2015 and 2017, with complaints during the period
reaching nearly 37,000.\82\ The BBB study shows consumer losses in FTC
``free trial offer'' cases exceeded $1.3 billion (over the ten years
covered by the study).\83\ A group of consumer and public interest
advocacy organizations, including the National Consumers League \84\
stated that, according to the BBB, the average consumer loss for a free
trial is $186.\85\
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\81\ NPRM, 88 FR 24725.
\82\ Steve Baker, Subscription Traps and Deceptive Free Trials
Scam Millions with Misleading Ads and Fake Celebrity Endorsements,
Better Business Bureau (Dec. 2018), <a href="https://www.bbb.org/article/investigations/18929-subscription-traps-and-deceptive-free-trials-scammillions-with-misleading-ads-and-fake-celebrity-endorsements">https://www.bbb.org/article/investigations/18929-subscription-traps-and-deceptive-free-trials-scammillions-with-misleading-ads-and-fake-celebrity-endorsements</a>.
\83\ Id.; see also Better Business Bureau, BBB Investigation
Update: Free Trial Offer Scams (Apr. 2020), <a href="https://www.bbb.org/article/news-releases/22040-bbb-update-free-trial-offerscams">https://www.bbb.org/article/news-releases/22040-bbb-update-free-trial-offerscams</a>
(reporting the total has risen to nearly $1.4 billion since the 2018
BBB study); id. (observing that while celebrities, credit card
companies and government agencies have increased their efforts to
fight deceptive free trial offer scams, victims continue to lose
millions of dollars to fraudsters after the release of a December
2018 BBB study about the shady practices).
\84\ The six public interest and consumer advocacy groups are:
Consumer Action, Consumer Federation of America, Demand Progress
Education Fund, National Association of Consumer Advocates, Nation
Consumer Law Center (on behalf of its low income clients,) and
National Consumers League (``NCL'') (collectively, the ``Public
Interest Groups'').
\85\ Steve Baker, Subscription Traps and Deceptive Free Trials
Scam Millions with Misleading Ads and Fake Celebrity Endorsements,
Better Business Bureau (Dec. 2018).
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Referring to another survey conducted in 2016, TINA noted unwanted
fees associated with trial offers and automatically renewing
subscriptions ranked as ``the biggest financial complaint of
consumers.'' \86\ Similarly, TINA noted the FBI's internet Crime
Complaint Center recorded a rise in complaints about free trial offers,
growing from 1,738 in 2015 to 2,486 in 2017.\87\ A 2019 <a href="http://Bankrate.com">Bankrate.com</a>
survey cited by NCL found that 59% of consumers have been signed up
``against their will'' for ``free trials'' that automatically converted
into a recurring payment.\88\
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\86\ NPRM, 88 FR 24720 (citing Rebecca Lake, ``Report: Hidden
Fees Are #1 Consumer Complaint,'' <a href="http://mybanktracker.com">mybanktracker.com</a> (updated Oct.
16, 2018), <a href="https://www.mybanktracker.com/money-tips/money/hidden-fees-consumercomplaint-253387">https://www.mybanktracker.com/money-tips/money/hidden-fees-consumercomplaint-253387</a>.)
\87\ NPRM, 88 FR 24721.
\88\ Bankrate, ``Despite safety concerns, 64% of U.S. debit or
credit cardholders save their information online'' (Oct. 24, 2019),
at <a href="https://www.bankrate.com/pdfs/pr/20191024-online-shopping-survey.pdf">https://www.bankrate.com/pdfs/pr/20191024-online-shopping-survey.pdf</a> (as cited by Civil Society Organizations, FTC-2023-0033-
0870).
---------------------------------------------------------------------------
NCL and others also cited a 2017 national telephone survey
commissioned by <a href="http://CreditCards.com">CreditCards.com</a> finding 35% of U.S. consumers have
enrolled in at least one automatically renewing contract without
realizing it.\89\ In response to the NPRM, the Public Interest Groups
cited more recent studies confirming the continued prevalence of harms
from deceptive and unfair negative option practices. For instance,
consumer groups referenced a 2022 study, which concluded ``on average,
consumers pay two-and-a-half times what they originally estimated on
monthly subscriptions, likely due to the lack of adequate notice from
sellers.'' \90\ They also noted burdensome cancellation procedures
remain rampant. ``One survey found that more than half of respondents
reported it took an average of three months to cancel unwanted
recurring payments.'' \91\ That same study reported 71% of individuals
lost more than $50 a month in unwanted subscriptions. Another study
concluded consumers underestimate how much they pay to maintain their
subscriptions by an average of $133/month (or $1,596 per year), and 42%
of the consumers had forgotten about a subscription for which they
continued to pay.\92\
---------------------------------------------------------------------------
\89\ NPRM, 88 FR 24720.
\90\ Public Interest Groups, FTC-2023-0033-0880 (citing
``Subscription Service Statistics and Costs,'' C+R Research Blog
(May 18, 2022)).
\91\ Public Interest Groups, FTC-2023-0033-0880 (citing Chase,
``Survey from Chase Reveals That Two-Thirds of Consumers Have
Forgotten About At Least One Recurring Payment In The Last Year''
(Apr. 1, 2021), <a href="https://media.chase.com/news/survey-from-chase-reveals">https://media.chase.com/news/survey-from-chase-reveals</a>).
\92\ State AGs, FTC-2023-0033-00866 (citing Sarah Brady and
Korrena Bailie, ``5 Tools To Help You Cancel Unwanted
Subscriptions,'' Forbes (July 13, 2022), <a href="https://www.forbes.com/advisor/personal-finance/manage-subscriptions">https://www.forbes.com/advisor/personal-finance/manage-subscriptions</a>). See also Einav,
Liran, et al., ``Selling Subscriptions'' (Dec. 1, 2023), <a href="https://nmahoney.people.stanford.edu/sites/g/files/sbiybj23976/files/media/file/mahoney_subscriptions.pdf">https://nmahoney.people.stanford.edu/sites/g/files/sbiybj23976/files/media/file/mahoney_subscriptions.pdf</a>.
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Finally, TINA also noted a consumer survey by the Washington
Attorney General's office finding ``59% of Washingtonians (3.5 million
residents) may have been unintentionally enrolled in a subscription
plan or service when they thought they were making a one-time
purchase.'' \93\ TINA contended this is ``consistent with'' the 2022
Bankrate survey finding more than half of U.S. adults experience
unwanted charges from a subscription or membership.\94\ These findings
are further supported by a Chase Bank study in 2021 finding nearly
three-quarters of Americans waste more than $50 a month on unwanted
subscription fees.\95\
---------------------------------------------------------------------------
\93\ TINA, FTC-2023-0033-1139.
\94\ Id.
\95\ See n.91.
---------------------------------------------------------------------------
Despite the robust evidence that unfair or deceptive practices are
exceedingly prevalent, several trade organizations challenged the
Commission's proposed prevalence determination. However, their
arguments, as discussed below, are not persuasive.
First, they argued the Commission must show prevalence in a
specific industry in order to regulate negative option practices in
that industry, but the Commission failed to do so. For instance, NCTA
asserted there is no evidence of widespread deceptive negative option
practices in the broadband, cable, or voice industries warranting
regulation.\96\ Other commenters argued the Commission must identify
the prevalence of a specific deceptive or unfair act to warrant
regulating that specific act or practice under Section 18. For
instance, IAB, NCTA, TechNet, and TechFreedom argued the Commission
failed to show prevalence of misrepresentations about the underlying
product or service in connection with negative option contracts.
Similarly, three commenters argued the Commission should limit the
scope of the Rule to business-to-consumer transactions and exclude
business-to-business (``B2B'') transactions, in part, because the
Commission failed to show ``the prevalence of harms created by
automatically-renewing subscriptions entered into in the business-to-
business context.'' \97\
---------------------------------------------------------------------------
\96\ NCTA, FTC-2023-0033-0858; see also SCIC, FTC-2023-0033-
0879.
\97\ BSA, FTC-2023-0033-1015; see also Anonymous commenter, FTC-
2023-0033-1007; NCTA, FTC-2023-0033-0858.
---------------------------------------------------------------------------
As demonstrated above, however, there is ample evidence in the
record demonstrating the prevalence of the specific unfair and
deceptive practices across numerous sectors of the economy, which the
Commission now addresses in an industry-neutral fashion.\98\ Moreover,
nothing in Section 18 requires the Commission to find prevalence
regarding a specific industry or group.\99\ The Commission need only
[[Page 90484]]
find ``some basis or evidence'' demonstrating the practice the
Commission seeks to regulate ``does indeed occur.'' \100\ Such evidence
exists here in abundance. As NCTA itself pointed out, individual
consumers complained of deceptive and unfair practices in its members'
industries.\101\ Further, ``consumer subscription models are rapidly
growing in popularity,'' \102\ and there is evidence of the
proliferation of negative option features in virtually every
industry.\103\ The harms outlined here resulted from the negative
option transaction itself, and many businesses, regardless of industry,
are incentivized to continue to leverage negative options to the
possible detriment of consumers.\104\ The Commission also declines to
limit the scope of the final Rule by excluding business-to-business
transactions. As explained in Section VII.B.1, the Commission has a
long history of protecting businesses, particularly small business, in
their role as consumers; the practices and harms described here impact
these consumers, as well.
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\98\ See sections VII.A.1.a-b and section II.A.1.b of this SBP.
\99\ See generally 15 U.S.C. 57a.
\100\ Pennsylvania Funeral Dirs. Ass'n, Inc. v. FTC, 41 F.3d 81,
87-88 (3d Cir. 1994) (holding the FTC did not need ``substantial,
rigorous, quantitative studies'' or to show the practice occurs in a
certain percentage of transactions through the country to find
prevalence). ``Further, even where there is a limited record as to
the prevalence of a practice on a nationwide basis or where the data
reviewed only relates to a few states, the practice can be found to
be prevalent enough to warrant a regulation.'' Id. at 87.
\101\ NCTA, FTC-2023-0073-0008.
\102\ CTA, FTC-2023-0033-0997. CTA reports that a 2022 study
found the global subscription e-commerce market is expected to reach
$904.2 billion by 2026, and between 2021 and 2022, existing
subscription brands grew their customer bases by 31 percent.
\103\ According to a 2018 McKinsey & Company study, the
subscription e-commerce market increased more than 100% over a five-
year period prior to the study's publication. Tony Chen, Ken Fenyo,
Sylvia Yang, and Jessica Zhang, ``Thinking Inside the Subscription
Box: New Research on E-Commerce Consumers,'' McKinsey & Company
(February 2018) (as cited by, e.g., TechNet, FTC-2023-0033-0869 and
Individual commenter, FTC-2023-0033-0800). PDMI also observed that
negative options are offered in a wide array of product and services
from major brands including media services, meal preparation kits,
shaving and beauty products, beer and wine, contacts and ordinary
household consumables. FTC-2023-0033-0864. Digital Content Next
(``DCN''), FTC-2023-0033-0983, reports the United States had more
than one billion paid subscriptions in Q1 2023 across the digital
media landscape, indicating almost all online U.S. households
subscribe to one or more digital media subscription services. See
also, e.g., Individual commenter, FTC-2023-0033-0137 (detailing
difficulty cancelling recurring subscriptions for newspaper, mobile,
and other businesses); Individual commenter, FTC-2023-0033-0217
(reported spending hours on the phone and online to cancel mobile
account); Individual commenter, FTC-2023-0033-0465 (reported
difficulty cancelling rewards program subscription); Individual
commenter, FTC-2023-0033-0674 (complaint reporting difficulty
canceling mobile device protection subscription); Individual
commenter, FTC-2023-0033-0965 (trying to cancel mobile phone service
because they bill for different amount every month); Individual
commenter, FTC-2023-0033-0003 (difficulty cancelling ``home
warranty'' subscription); Individual commenter, FTC-2023-0033-0004
(full cost and refund policy for gym contract not clearly
disclosed); Individual commenter, FTC-2023-0033-0006 (``2 attempts
and far too much time'' to cancel radio subscription); Individual
commenter, FTC-2023-0033-0008 (discussing how ``subscription
services in particular pervade the market. Even long-standing `buy-
it-once' products such as certain software suits have moved to
subscription models''); Anonymous commenter, FTC-2023-0033-0013
(difficulty canceling home security monitoring contract, including
hearing unwanted upsells); Anonymous commenter, FTC-2023-0033-0023
(webhosting service); Anonymous commenter, FTC-2023-0033-0024 (cable
service); Individual commenter, FTC-2023-0033-0039 (language
learning app); Anonymous commenter, FTC-2023-0033-0046 (software);
Individual commenter, FTC-2023-0033-0049 (cannot cancel streaming
service); Individual commenter, FTC-2023-0033-0050 (virus protection
software and charity); Individual commenter, FTC-2023-0033-0052 (e-
news service subscription); Individual commenter, FTC-2023-0033-0057
(magazine subscription service); Individual commenter, FTC-2023-
00330061 (newspaper); Individual commenter, FTC-2023-0033-0063 (big
box retailer membership); Individual commenter, FTC-2023-0033-0064
(cosmetics); Anonymous commenter, FTC-2023-0033-0066 (home warranty
service); Individual commenter, FTC-2023-0033-0071 (lawncare
service).
\104\ See Prof. Chris Jay Hoofnagle, UC Berkeley
(``Hoofnagle''), FTC-2023-0033-1137 (discussing the subscription
economy). See also nn.245-252, collecting cases showing deceptive
and unfair negative option practices occur across a wide range of
industries and involve a variety of claims.
---------------------------------------------------------------------------
(b) The Manner and Context in Which the Acts or Practices Are Unfair or
Deceptive
Pursuant to Section 18 and the Commission's Rules, the Commission
must also state the manner and context in which the prevalent acts or
practices are unfair or deceptive. The record demonstrates consumers
are often lured into enrolling in negative option programs through
seller misrepresentations about material facts--for instance, when a
seller offers a product for ``free'' when it is not.\105\ Additionally,
sellers misrepresent other aspects of the deal, such as product
features, processing or shipping fees, billing information use,
deadlines, consumer authorization, refunds, cancellations, among other
facts.\106\
---------------------------------------------------------------------------
\105\ State AGs, FTC-2023-0033-0886 (consumer paid for shipping
on ``free'' gift only to have it converted to a paid item because
she retained the item); id. (Money Map Press), FTC v. Triangle Media
Corp., No. 3:18-cv-01388 (S.D. Cal. 2018) (consumers who clicked on
ads for risk free trials, paid for shipping and handling fees
unwittingly enrolled in negative option programs).
\106\ See nn.245-252 (collecting cases).
---------------------------------------------------------------------------
Sellers also often fail to disclose important information about the
offer prior to billing the consumer. As detailed in the comments from,
inter alia, State AGs and TINA, sellers fail to disclose in a clear and
conspicuous manner the existence of the negative option feature, refund
and cancellation deadlines, or other material terms of the agreement,
resulting in consumers purchasing goods or services they do not
want.\107\ All of these unfair or deceptive acts are further supported
in dozens of FTC, State AG, and class action cases.\108\
---------------------------------------------------------------------------
\107\ See State Attorneys General (ANPR), FTC-2019-0082-0012 and
State AGs, FTC-2023-0033-0886; TINA, FTC-2019-0082-0014 and FTC-
2023-0033-1139.
\108\ See, e.g., id.; see also FTC v. Pact, Inc., No. 2:17-cv-
1429 (W.D. Wash. 2017); United States v. <a href="http://MyLife.com">MyLife.com</a>, Inc., No. 2:20-
cv-6692 (C.D. Cal. 2020); FTC v. NutraClick, LLC, No. 2:20-cv-08612
(C.D. Cal. 2020); In re Dun & Bradstreet, Inc., FTC Docket No. C-
4761 (2022). See generally Staff Report, n.16.
---------------------------------------------------------------------------
The record also demonstrates sellers fail to obtain consumers'
express informed consent to the negative option feature before charging
them. For instance, as detailed in representative consumer complaints
from State AGs and several FTC cases, consumers are often unwittingly
enrolled into recurring subscriptions with promises of no- or low-cost
or discounted rates (not knowing that agreeing will result in
subscription to a costly membership), with consumers not realizing the
deceptive and unfair enrollment until they see unexpected charges,
often after several billing cycles.\109\
---------------------------------------------------------------------------
\109\ See, e.g., State Attorneys General (ANPR), FTC-2019-0082-
0012 and State AGs, FTC-2023-0033-0886; FTC v. FloatMe Corp., No.
5:24-cv-00001 (W.D. Tex. 2024); United States v. Cerebral, Inc., No.
1:24-cv-21376 (S.D. Fla. 2024); FTC v. Bridge It, Inc., No. 1:23-cv-
09651 (S.D.N.Y. 2023); FTC v. Benefytt Techs., Inc., No. 8:22-cv-
01794 (M.D. Fla. 2022); FTC v. First Am. Payment Sys., No. 4:22-cv-
00654 (E.D. Tex. 2022); FTC v. NutraClick, LLC, No. 2:20-cv-08612
(C.D. Cal. 2020); FTC v. F9 Advert., LLC, No. 3:19-cv-01174 (D.P.R.
2019); FTC v. Age of Learning, Inc., No. 2:20-cv-07996 (C.D. Cal.
2020); FTC v. NutraClick, LLC, No. 2:16-cv-06819 (C.D. Cal. 2016);
FTC v. AH Media Grp., LLC, No. 3:19-cv-04022 (N.D. Cal. 2019); In re
Urthbox, Inc., FTC Docket No. C-4676 (2019); FTC v. Health Rsch.
Labs., LLC, No. 2:17-cv-00467 (D. Me. 2017); FTC v HispaNexo, Inc.,
No. 1:06-cv-424 (E.D. Va. 2006).
---------------------------------------------------------------------------
Finally, substantial record evidence shows sellers often fail to
provide a simple cancellation method. If consumers cannot easily leave
a negative option program when they wish, the negative option feature
is merely a means of charging consumers for goods or services they no
longer want. Commission cases, the Sentinel complaint database, and
State Attorneys General's complaints all show sellers often use
difficult and cumbersome cancellation mechanisms to prevent or curtail
cancellations.\110\ This fact is further corroborated by studies
discussed above.\111\
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\110\ See section VII.B.6.
\111\ Section VII.A.1.a.
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[[Page 90485]]
(c) Statement as to the Economic Effect of the Rule
Finally, pursuant to section 18 and the Commission's Rules, the SBP
must include a statement regarding the economic effect of the Rule. As
part of these rulemaking proceedings, the Commission solicited and
received comments on the economic impact of the proposed Rule. In
issuing the final Rule, the Commission has carefully considered the
comments and other information received as well as the costs and
benefits of each provision, as discussed in more detail in section X,
Final Regulatory Analysis. That analysis demonstrates the benefits of
the Rule far exceed the costs. Benefits were evaluated on a per-
cancellation basis; that is, the analysis assumes the primary consumer
benefit of the Rule will come in the form of faster cancellations.
Costs were evaluated primarily to reflect resources spent by businesses
to review and come into compliance with the Rule. The overall net
benefit of the Rule is estimated to exceed $5.3B (and could be as much
as $49.2B) over the first 10 years (in 2023 dollars).
2. Magnuson-Moss Specificity Requirement
Pursuant to Magnuson-Moss, the Commission must also define with
specificity acts or practices which are unfair or deceptive and either
prohibit those activities or establish rules to prevent them. The
Commission has done just that, despite some commenters' arguments to
the contrary. Specifically, IAB and others \112\ argue the provision
prohibiting material misrepresentations fails to define claims that
fall within its scope, and therefore, ``fails to identify covered acts
with the requisite level of specificity.'' \113\
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\112\ IAB, FTC-2023-0033-1000; Coalition Comments from CCIA,
Direct Selling Association, Information Technology Industry Council,
IAB, Software & Information Industry Association, and Chamber
(``Coalition''), FTC-2023-0033-0884; PDMI, FTC-2023-033-0864;
TechNet, FTC-2023-0033-0869; TechFreedom, FTC-2023-0033-0872; ACT-
The App Association (``ACT App Association''), FTC-2023-0033-0874;
USTelecom, FTC-2023-0033-0876.
\113\ IAB, FTC-2023-0033-1000.
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First, section 18 does not require the Commission to define claims
with specificity, only acts or practices. The practice of
misrepresenting the material facts of a transaction, for instance, is a
deceptive practice, but could vary depending on the transaction's
terms. Requiring the Commission to identify particular claims would
make its rules no better than a leaky sieve, unable to effectively
address consumer harm.
Second, the NPRM and the final Rule do define with the requisite
specificity the unfair or deceptive negative option acts and practices
covered by the Rule.\114\ While those critical of the proposed Rule
cite to Katharine Gibbs School v. FTC, 612 F.2d 658 (2d Cir. 1979),
this case is inapposite. In Katharine Gibbs School, the Second Circuit
held the Commission failed to connect elements of its trade regulation
rule to specifically defined unfair or deceptive acts or practices. The
opinion held the Commission may not merely set requirements and then
define failure to meet those requirements as unfair or deceptive acts
or practices. The Commission must instead identify some underlying
deceptive or unfair conduct and connect the rule requirements to that
conduct.
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\114\ See Section I; Section VII.A, defining the acts and
practices covered in Sec. Sec. 425.3 through 425.6 as unfair or
deceptive and a violation of the Rule. As acknowledged by USTelecom,
the ``contours of the `specificity' requirement have not been
precisely defined.'' FTC-2023-0033-0876.
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In contrast here, the Commission specifically identified
misrepresentation of material facts as a deceptive practice, and
defined the term ``material'' with the same meaning it has under
Section 5 of the FTC Act.\115\ Moreover, the misrepresentations
provision goes further, providing categories of potentially material
facts to assist the marketplace in understanding the provision and
supporting those examples with cases.\116\ Thus, the final Rule's
prohibition against material misrepresentations is not only connected
to underlying deceptive or unfair conduct, but in fact prohibits that
very conduct.
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\115\ See SBP Section VII.B.3 discussing Sec. 425.3.
\116\ Id. As explained in the Katharine Gibbs School dissent,
``Congress required specific definitions of such practices so that a
rule would `reasonably and fairly inform those within its ambit of
the obligation to be met and the activity to be avoided.' '' 612
F.2d 658, 672 (quoting H.R. Rep. No.93-1107, 93d Cong., 2d Sess. 46
(1974), reprinted in (1974) U.S.C.C.A.N., pp. 7702, 7727).
---------------------------------------------------------------------------
3. Other Legal Issues
Several commenters raised additional challenges to the Commission's
ability to promulgate the Rule. These challenges fall into two
categories. First, some commenters argued the Commission failed to give
adequate notice of the scope of the proposed amendments to the Rule in
the ANPR in accordance with Section 57a(b)(2)(A) of the FTC Act.
Second, four commenters argued the Commission exceeded its grant of
Congressional authority under the ``major questions'' doctrine. The
Commission addresses each argument below.
(a) ANPR
Several commenters asserted the ANPR, issued in 2019, failed to
provide adequate notice of the acts and practices to be covered by the
proposed Rule. Specifically, ESA, USTelecom, RILA, a coalition of trade
associations, Chamber, CCIA, IAB, and NRF argued the ANPR failed to
provide notice the proposed Rule would cover misrepresentations of all
material facts; would require express informed consent to opt-in to
receive a save; \117\ and would require an annual reminder.\118\ Thus,
according to these commenters, including these provisions in the final
Rule would violate Section 18(b)(2)(A). They further argued the lack of
these topics' inclusion in the ANPR meant that affected entities had
inadequate opportunity to provide input, leading to an inadequate
rulemaking record.\119\
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\117\ As discussed in Section VII.B.6, the Commission removes
the proposed save provision from the final Rule.
\118\ As discussed in Section VII.B.7, the Commission removes
the proposed annual reminder provision from the final Rule.
\119\ E.g., IAB, FTC-2023-0033-1000.
---------------------------------------------------------------------------
These arguments, however, are unpersuasive. Section 18 imposes no
requirement the ANPR have the level of specificity the commenters
demand. In fact, the statute only says the ANPR must include ``a brief
description of the area of inquiry under consideration, the objectives
which the Commission seeks to achieve, and possible regulatory
alternatives under consideration by the Commission.'' \120\ The
Commission included a discussion of each of these topics in the
ANPR.\121\ Moreover, the affected entities have had the chance to raise
concerns with the Rule in their comments to the NPRM, which the
Commission has considered and responded to in this Statement of Basis
and Purpose.
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\120\ 15 U.S.C. 57a(b)(2)(A). ``The Advance Notice [of Proposed
Rulemaking] is a formal invitation to participate in shaping the
proposed rule and starts the notice[hyphen]and[hyphen]comment
process in motion.'' Office of the Federal Register, ``A Guide to
the Rulemaking Process,'' <a href="https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf">https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf</a>.
\121\ ANPR, 84 FR 52393; see also id. 52396-8 (Request for
Comments); Section VII.B.3.b.1 (discussing ANPR in context of Sec.
425.3).
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(b) Major Questions Doctrine
Four commenters asserted the Rule implicates the ``major
questions'' doctrine.\122\ According to the Supreme Court, the major
questions doctrine is implicated in ``extraordinary cases . . . in
which the history and the breadth of the authority that the agency has
[[Page 90486]]
asserted, and the economic and political significance of that
assertion, provide a reason to hesitate before concluding that Congress
meant to confer such authority.'' \123\ Citing this authority, the
commenters argue Congress only granted the FTC ``limited and tailored
authorities to regulate certain mediums and types of negative option
marketing, but not all mediums and types as the NPRM encompasses.''
\124\ Further, they assert Congress never intended for the Commission
to create a comprehensive regulatory scheme for negative option
marketing that encompasses the variety of requirements proposed in the
NPRM. Because negative option programs play an ever-increasing role in
the economy, these commenters claim the proposed Rule would
``dramatically alter'' how companies structure their subscription
services.\125\ More specifically, they assert the prohibition against
misrepresentations, together with the ability to seek civil penalties
in Federal court, would expand the FTC's authority beyond that
envisioned by Congress.
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\122\ PDMI, FTC-2023-0033-0864; ACT App Association, FTC-2023-
0033-0874; Coalition, FTC-2023-0033-0884; Chamber, FTC-2023-0033-
0885.
\123\ West Virginia v. EPA, 597 U.S. 697, 721 (2022) (internal
quotations cleaned up). Accord Biden v. Nebraska, 143 S. Ct. 2355,
2372 (2023).
\124\ Coalition, FTC-2023-0033-0884.
\125\ See, e.g., PDMI, FTC-2023-0033-0864.
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However, far from exceeding Congressional intent, the Rule merely
effectuates that intent in a way wholly consistent with the specific
requirements set forth in Section 18 of the FTC Act. Specifically,
Congress explicitly authorized the Commission to prescribe ``rules
which define with specificity acts or practices which are unfair or
deceptive acts or practices in or affecting commerce (within the
meaning of such section 5(a)(1)),'' which ``may include requirements
prescribed for the purpose of preventing such acts or practices.''
\126\ As demonstrated below, each of the Rule's provisions identifies
specific deceptive or unfair acts or practices that are prevalent
throughout the marketplace and ties each Rule provision tightly to
those findings.
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\126\ 15 U.S.C. 57a(a)(1)(B).
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As the Supreme Court explained, courts use the ``major questions
doctrine'' when examining ``extraordinary cases'' where agency action
would ``make a radical or fundamental change'' to a statutory scheme
and assert ``extravagant'' authority over the national economy through
``ambiguous statutory text,'' citing ``modest words,'' ``vague terms,''
``subtle device[s],'' or ``oblique or elliptical language.'' \127\
Here, no such extraordinary circumstance exists. The prohibitions and
disclosures in the Rule do not effect a major change in the economy. In
fact, all the substantive requirements in the Rule are already extant
under section 5 of the FTC Act, ROSCA, or the TSR. Moreover, the Rules'
terms, as explained below, are neither vague, oblique, or elliptical--
in fact, if anything, they are clearer than the legal authority just
cited.
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\127\ West Virginia v. EPA, 597 U.S. at 723 (cleaned up).
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B. Discussion of Specific Rule Provisions, Section-by-Section Analysis
Below, for each provision of the proposed Rule, the Commission
reviews the provision, summarizes comments received in response, and
sets forth the final Rule with an analysis of the comments and other
record evidence.
1. Proposed Sec. 425.1 Scope
The Commission proposed eliminating the old Rule's prescriptive
requirements applicable to prenotification plans and replacing them
with flexible, but enforceable, standards. The proposed requirements
would apply to all forms of negative option marketing, including
prenotification and continuity plans, automatic renewals, and free
trial offers.\128\ The expanded coverage would establish a common set
of requirements applicable to all types of negative option marketing.
The proposed Rule would cover offers made in all media, including
internet, telephone, in-person, and printed material, and would apply
to all ``negative option sellers.'' With certain exceptions, not
applicable here, the FTC Act provides the agency with jurisdiction over
nearly every economic sector.\129\
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\128\ The proposed Rule stated it applied to any form of
negative option plan. Because ``negative option plan'' was a defined
term in the old Rule specifically referring to prenotification
plans, the Commission modifies the scope to apply to any form of
``negative option program.''
\129\ Certain entities or activities are wholly or partially
exempt from FTC jurisdiction under the FTC Act, including most
depository institutions, charities, transportation and
communications common carriers, and the business of insurance. Under
Sections 4 and 5 of the FTC Act, however, the Commission's
jurisdiction extends to companies organized to carry on business for
their own profit or that of their members, even if those companies
are organized under state law as a not-for-profit entity. See
California Dental Ass'n v. FTC, 526 U.S. 756 (1999). But see n.151.
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(a) Negative Option Seller
(1) Comments
The scope of the proposed Rule covered ``negative option seller,''
defined to mean ``the person selling, offering, promoting, charging
for, or otherwise marketing goods or services with a negative option
feature.'' Several commenters raised concerns regarding the scope of
this definition.
The Chamber, for example, suggested the Commission delete the term
``promoting'' from the definition.\130\ It cited a wide variety of
actors who could be swept in by the term, including ``advertising
companies, web designers, [and] entities in the supply chain,'' who
``may not actually play an active role in determining'' what consumers
see and hear about negative option programs.\131\ An individual
business commenter also criticized the term, saying to include
``promoting'' ``would potentially burden our technicians and our
business when we provide service for equipment manufacturers that have
their own service contract programs.'' \132\
---------------------------------------------------------------------------
\130\ Chamber, FTC-2023-0033-0885.
\131\ Id.
\132\ Individual commenter, FTC-2023-0033-1136.
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ETA, representing the payments industry, addressed the words
``charging for'' in the definition.\133\ ETA interpreted those words
not to cover ``intermediaries, such as payment processors, that merely
effect the transfer of funds from the consumer buyer to the merchant
seller resulting from a negative option feature.'' \134\ ETA noted that
payment intermediaries typically ``do not control the terms of the
negative option feature and do not control the interface with the
consumer buyer.'' \135\ ETA therefore suggested the final Rule
``include an express exemption for payment processors and other
intermediaries.'' \136\
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\133\ Electronic Transactions Association (``ETA''), FTC-2023-
0033-1004.
\134\ Id.
\135\ Id.
\136\ Id. IHRSA noted health and fitness membership charges are
typically processed on a monthly basis from the time of agreement,
and in many cases by a third-party service provider. IHRSA, FTC-
2023-0033-0863.
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Other commenters, while not specifically criticizing the definition
of negative option seller, raised concerns about the scope of the
proposed Rule where third parties are involved in marketing and
cancellation. For example, several suggested the Rule exempt a seller
who contracts with a third party for subscription enrollment,
management, or cancellation services.\137\ PDMI argued, ``it is
[[Page 90487]]
imperative that the Proposed Rule exempt sellers from compliance with
those provisions that are not under their direct control . . . [and]
should also exempt the seller from any misrepresentations made by a
third-party platform.'' \138\ NRF expressed concern a careful retailer
could still ``face steep financial penalties for negligent
misrepresentations (concerning, e.g., product efficacy) based on
information provided by third-party vendors.'' \139\
---------------------------------------------------------------------------
\137\ NCTA asserted, ``The proposed rule also fails to account
for third-party sign-up arrangements. For example, programmers have
arrangements with Roku, Amazon, Apple, and others that allow
consumers to sign up through these third parties for their streaming
services.'' NCTA, FTC-2023-0033-0858. N/MA suggested the Commission
``should make clear that when a sale with a negative option feature
is made through a third party that controls the process of
purchasing and/or cancelling a subscription with a negative option
feature, any new requirements would apply to the third party only,
and not to the company that fulfills the subscription.'' N/MA, FTC-
2023-0033-0873. Marketplace Industry Association (``MIA'') requested
``the Commission clarify that where there are third-party payment
platforms managing Subscriptions on behalf of businesses . . .
(collectively, ``Third Party Subscription Managers''), that such
Third Party Subscription Managers be legally responsible and legally
liable for compliance with the proposed Rule. As is the case with
Third Party Subscription Managers, businesses that offer
Subscriptions have zero control over such Subscriptions, including
the initiation of Subscriptions or the cancellation of
Subscriptions. Said another way, it is impossible for businesses to
comply with the proposed Rule where there are Third Party
Subscription Managers. As such, the Association requests that the
Commission make clear that Third Party Subscription Managers be
responsible for compliance with the proposed Rule, including any
penalties for noncompliance.'' MIA, FTC-2023-0033-1008.
\138\ PDMI, FTC-2023-003-0864.
\139\ NRF, FTC-2023-0033-1005.
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(2) Analysis
Based on the record, the Commission revises the definition of
``negative option seller'' to remove the word ``promoting,'' but
declines to create status-based exemptions.\140\ Moreover, the
Commission clarifies it will enforce the final Rule in accordance with
established section 5 principles regarding parties' responsibilities
for, and involvement in, relevant activity. This approach should fully
address commenters' concerns while maintaining the Rule's consumer
protections.
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\140\ See also Section VII.B.1; Section VIII.A.1.
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As several commenters observed, a wide variety of actors may have
secondary or tertiary roles in promoting products or services with a
negative option feature. Further, as the Chamber noted, ``many of those
participants . . . may not actually play an active role in determining
how the negative option is presented to the consumer.'' \141\
Similarly, participants in the promotion process may have no role in
cancellation. Deleting the word ``promoting'' from the definition of
negative option seller addresses this issue by ensuring those who have
no active participation in the negative option feature are outside the
Rule's coverage. However, this amendment does not mean all actors
involved in promotion are exempt from the Rule. A participant who
promotes and takes on a further role ``selling, offering, charging for,
or otherwise marketing goods or services with a negative option
feature'' remains subject to the final Rule, including the provisions
covering ``promoting'' such goods or services for those who meet the
negative option seller definition.\142\
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\141\ Chamber, FTC-2023-0033-0885.
\142\ See, e.g., FTC v. LeadClick Media, LLC, 838 F.3d 158, 172
(2d Cir. 2016) (operator of affiliate marketing network liable where
it did not create ads but ``directly participat[ed] in the deceptive
scheme by recruiting, managing, and paying a network of affiliates
to generate consumer traffic through the use of deceptive
advertising and allowing the use of deceptive advertising where it
had the authority to control the affiliates participating in its
network.'').
---------------------------------------------------------------------------
The Commission declines to adopt a status-based exemption for
payment intermediaries. Such exemptions are overbroad, excluding actors
engaged in the practices condemned by the Rule. For example, a payment
processor selling its own services on a negative option basis, as
opposed to just providing payment services for another negative option
seller, is no different than any other business covered by the Rule.
Additionally, as ETA correctly noted, the words ``charging for'' as
used in the Rule do not cover intermediaries merely effecting the
transfer of funds from the consumer buyer to the merchant seller. This
is consistent with the Commission's interpretation of ROSCA's coverage
of persons who ``charge or attempt to charge any consumer.'' \143\
Based on longstanding section 5 principles, the Commission has not
enforced ROSCA against payment intermediaries solely for their conduct
in effecting funds transfers.\144\ The Commission will apply the same
principles to the Rule.\145\
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\143\ 15 U.S.C. 8403.
\144\ See FTC v. Apex Capital Grp., LLC, No. 2:18-cv-09573 (C.D.
Cal. 2018). In this ROSCA matter, the Commission amended its
complaint to add payment intermediary defendants for their unlawful
conduct in connection with the scheme. However, the Commission did
not assert ROSCA claims against the payment intermediary defendants,
instead asserting counts for credit card laundering and manipulation
of chargeback levels as Section 5 violations.
\145\ Id.; see FTC v. First Am. Payment Sys., No. 4:22-cv-00654
(E.D. Tex. 2022) (ROSCA case against payment processor for its
unlawful acts and practices against its merchant customers).
---------------------------------------------------------------------------
Similarly, the Commission will not grant blanket exemptions to
sellers who contract with third parties while offering subscription
services. The Commission expects negative option sellers to evaluate
their commercial relationships with the Rule's provisions in mind. Even
where a seller does not directly manage its negative option feature
disclosures, consent, or cancellation, it can satisfy its obligations
under the Rule by choosing to contract with third parties who act in
accordance with the Rule and monitoring those parties' performance. An
exemption for all sellers who contract with third parties to manage
aspects of their negative option programs would effectively nullify the
Rule by incentivizing less than legitimate sellers to contract with
actors engaged in deceptive practices to maximize negative option
enrollments and frustrate cancellation with impunity. A seller cannot
evade its responsibility to deal honestly with consumers by contracting
with a third party who does not.\146\
---------------------------------------------------------------------------
\146\ E.g., FTC v. LeadClick Media, LLC, 838 F.3d 158, 170 (2d
Cir. 2016) (``A defendant may be held liable for its own acts of
deception under the FTC Act, whether by directly participating in
deception or by allowing deceptive acts or practices to occur that
are within its control.''); see also FTC v. <a href="http://Inc21.com">Inc21.com</a> Corp., 688 F.
Supp. 2d 927, 939 (N.D. Cal. 2010) (``Even if Inc21 did not approve
of the fraud (and it seems likely that it did approve), the fact
remains that Inc21 is responsible for organizing this engine of
fraud and reaping its profits. As such, Inc21 may certainly be held
accountable[.]'') (emphasis in original).
---------------------------------------------------------------------------
(b) Insurance
(1) Comments
Several commenters asked the Commission to expressly exclude
insurance and State-regulated service contracts from the Rule.\147\
They argued Congress prohibited the FTC from regulating the ``business
of insurance'' in section 2 of the McCarran-Ferguson Act and the FTC
exempted insurance sales in its Cooling-Off Rule.\148\ They also
asserted, ``State regulations in every jurisdiction require an insurer
to give notice of a policy renewal,'' and State rules prohibit negative
options.\149\ Other commenters argued the Commission should exempt all
service contract providers from the Rule due to existing State laws and
regulations,\150\ regardless
[[Page 90488]]
of whether they are engaged in the ``business of insurance'' within the
meaning of the McCarran-Ferguson Act.
---------------------------------------------------------------------------
\147\ Asurion, FTC-2023-0033-0878; Florida Service Agreement
Association, FTC-2023-0033-0882; American Property Casualty
Insurance Association (``APCIA''), FTC-2023-0033-0996; National
Association of Mutual Insurance Companies (``NAMIC''), FTC-2023-
0033-1143.
\148\ See 15 U.S.C. 1012; 16 CFR 429(a)(6).
\149\ NAMIC, FTC-2023-0033-1143.
\150\ SCIC, FTC-2023-0033-0879 (noting SCIC's comment to the
ANPR stated most states have substantial regulatory frameworks for
service contracts and that industry operates nationwide consistent
with the intent of the proposed Rule); CTIA, FTC-2023-0033-0866
(noting service contracts are typically regulated by state
departments of insurance and most states with autorenewal laws,
including California, New York, and Oregon, provide an exemption for
entities regulated by the state department of insurance); Frontdoor,
Inc. (``Frontdoor''), FTC-2023-0033-0862 (noting majority of states
have rigorous laws for the offering, sale, and renewal of home
service contracts, including the use of automatic renewals and
applicable cancellation rights).
---------------------------------------------------------------------------
(2) Analysis
The Commission declines to exempt insurance or service contracts
from the Rule. The final Rule can be enforced by the Commission only
against covered persons and activities within the Commission's
jurisdiction.\151\ Restating or further specifying each jurisdictional
limit in the final Rule's text, therefore, is not necessary.
---------------------------------------------------------------------------
\151\ Nothing in this Rule, however, shall limit another
agency's ability to enforce this Rule within its own statutory
authority, even if that authority is different than the FTC's
authority. See, e.g., 12 U.S.C. 5581(b)(5)(B)(ii).
---------------------------------------------------------------------------
Additionally, the requested industry-wide exemption is considerably
broader than the FTC's jurisdictional limitations. The McCarran-
Ferguson Act does not exempt entities engaged in the business of
insurance from the Commission's jurisdiction unless such entities are
subject to State regulation.\152\ Moreover, activities of entities
within the insurance industry that are beyond the scope of the
``business of insurance'' are subject to the Commission's
jurisdiction.\153\ No commenter provided any compelling reason to
exempt these otherwise covered activities from the Rule.
---------------------------------------------------------------------------
\152\ FTC v. IAB Mktg. Assocs. LP, 746 F.3d 1228, 1235 (11th
Cir. 2014) (``[T]he FTC Act applies to the business of insurance
only to the extent that such business is not regulated by state
law.'').
\153\ The Supreme Court has explained that, under the McCarran-
Ferguson Act, a three-part factual inquiry is necessary to evaluate
whether any particular activity constitutes the business of
insurance. See Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119,
129 (1982). First, does the activity have the effect of transferring
or spreading a policyholder's risk; second, is the activity an
integral part of the policy relationship between the insurer and the
insured; and third, is the practice limited to entities within the
insurance industry. Id. This inquiry requires a factual analysis of
the activities in question.
---------------------------------------------------------------------------
Finally, commenters' citations to existing State laws and
regulations governing service contract sellers indicate these sellers
already provide disclosures and protections consistent with the Rule.
As a practical matter, sellers who already provide consumers the Rule's
protections should not be burdened by its application.\154\
---------------------------------------------------------------------------
\154\ Moreover, service contract sellers, like other interested
persons, may seek full or partial exemption from the final Rule. See
Section VIII.A.1 (discussing new Sec. 425.8, Exemptions provision).
---------------------------------------------------------------------------
(c) Business-to-Business
(1) Comments
Nine commenters noted the NPRM did not expressly address whether
the proposed Rule would apply to business-to-business (``B2B'')
transactions. Seven, including five industry associations,\155\ said it
should not apply.\156\ Two individuals disagreed.\157\
---------------------------------------------------------------------------
\155\ BSA, FTC-2023-0033-1015 (B2B software sellers); CTIA, FTC-
2023-0033-0866 (wireless communication industry); ETA, FTC-2023-
0033-1004 (payments industry); NCTA, FTC-2023-0033-0858 (internet
and television); USTelecom, FTC-2023-0033-0876 (broadband). A sixth
association, the U.S. Chamber of Commerce, asked the Commission to
ensure that the scope of its cost-benefit analysis includes
business-to-business transactions. FTC-2023-0033-0885.
\156\ Anonymous commenter, FTC-2023-0033-1007; BSA, FTC-2023-
0033-1015; CTIA, FTC-2023-0033-0866; ETA, FTC-2023-0033-1004; NCTA,
FTC-2023-0033-0858; USTelecom, FTC-2023-0033-0876; ZoomInfo, FTC-
2023-0033-0865.
\157\ Individual commenter, FTC-2023-0033-0755; Individual
commenter, FTC-2023-0033-0042.
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Commenters advocating against including B2B sales in the Rule
asserted the Commission should presume businesses are more
sophisticated than individual consumers,\158\ and contended B2B
contracts typically are individually negotiated.\159\ For example,
ZoomInfo maintained business consumers are generally ``more
sophisticated than individual consumers,'' explaining B2B contracts
``are assumed to result from arm's-length negotiation and often benefit
from professional legal counsel.'' \160\ Similarly, NCTA, an
organization representing the internet and television industry,
characterized business consumers as ``typically sophisticated,'' and
said the Commission should not intervene in transactions based on
``[n]on-form contracts that are the subject of extensive bargaining
between sophisticated companies.'' \161\
---------------------------------------------------------------------------
\158\ Anonymous commenter, FTC-2023-0033-1007; CTIA, FTC-2023-
0033-0866; NCTA, FTC-2023-0033-0858; ZoomInfo, FTC-2023-0033-0865.
\159\ CTIA, FTC-2023-0033-0866; NCTA, FTC-2023-0033-0858;
USTelecom, FTC-2023-0033-0876; ZoomInfo, FTC-2023-0033-0865.
\160\ ZoomInfo, FTC-2023-0033-0865.
\161\ NCTA, FTC-2023-0033-0858. NCTA requested any final rule
exclude individually negotiated business-to-business contracts. FTC-
2023-0033-0858.
---------------------------------------------------------------------------
Seller and consumer commenters differed on whether the harmful
negative option practices discussed in the NPRM are extant for B2B
consumers. In support of excluding B2B transactions, two commenters
asserted there is insufficient evidence of harm in the B2B context to
support a prevalence finding.\162\ A B2B consumer, however, noted
individuals and small businesses both suffer from the harms of
deceptive and unfair negative option practices. ``As a small business
owner,'' the individual wrote, ``as well as a consumer, I am especially
aware of how purposely difficult many companies make it to cancel their
services. From telephone companies to travel channel companies . . . to
email targeting campaigns . . . the cancelling process is ridiculously
complex and at times hidden, if it exists at all on their websites.''
\163\
---------------------------------------------------------------------------
\162\ BSA, FTC-2023-0033-1015; NCTA, FTC-2023-0033-0858. The
Commission discusses the subject of prevalence more broadly at
Section VII.A.
\163\ Individual commenter, FTC-2023-0033-0755.
---------------------------------------------------------------------------
Seller and consumer commenters also differed on the significance of
existing State law B2B exclusions. Three B2B sellers recommended the
Commission follow those States that exclude B2B transactions.\164\ A
consumer, however, asserted such exclusions are why this Rule is
necessary.\165\ Specifically, the commenter explained: ``negative
option marketing also greatly affect[s] many individual sellers and
small businesses,'' but due to B2B exclusions, ``some larger
corporations or companies are able to take advantage of that loophole
and use predatory negative option practices against individual sellers
and small businesses.'' \166\
---------------------------------------------------------------------------
\164\ Anonymous commenter, FTC-2023-0033-1007 (California); BSA,
FTC-2023-0033-1015 (California, Colorado, Delaware); ZoomInfo, FTC-
2023-0033-0865 (California, Colorado, Connecticut, Delaware, Hawaii,
New York, Oregon, Tennessee, Virginia).
\165\ Individual commenter, FTC-2023-0033-0042.
\166\ Id.
---------------------------------------------------------------------------
Some sellers also referred to other Federal regulations to support
excluding businesses from the scope of the Rule. For instance, ETA and
NCTA each noted the Commission excluded most B2B transactions in the
TSR. ETA made the same observation about the Cooling Off Rule.\167\
Both CTIA and USTelecom approvingly cited the FCC's approach. USTelecom
explained, ``the FCC has limited certain consumer protection rules to
`mass-market retail services' '' that are `` `marketed and sold on a
standardized basis to residential customers, small businesses, and
other end-user customers such as schools and libraries.' '' \168\
USTelecom further explained, ``Mass-market retail services stand in
contrast to `customized or individually negotiated arrangements' that
are typically offered to larger organizations.'' \169\
---------------------------------------------------------------------------
\167\ 16 CFR 429.0-429.3.
\168\ USTelecom, FTC-2023-0033-0876.
\169\ Id.
---------------------------------------------------------------------------
ETA questioned whether the Commission has authority to address B2B
transactions. ETA argued the proposed Rule would let the Commission
``interpose regulatory influence and law enforcement authority in
contractual arrangements between businesses in a way that has not been
authorized by Congress or
[[Page 90489]]
justified by the Commission's own rationale for the Proposed Rule.''
\170\ ETA cited the Commission's use of ROSCA in the First American
Payment Systems case to illustrate its view the Rule's application in
the B2B context would be impermissible regulation of ``an automatic
renewal clause in an arm's length commercial agreement.'' \171\
---------------------------------------------------------------------------
\170\ ETA, FTC-2023-0033-1004.
\171\ Id. (citing FTC v. First Am. Payment Sys., No. 4:22-cv-
00654 (E.D. Tex. 2022)).
---------------------------------------------------------------------------
Finally, ETA and ZoomInfo argued various provisions of the Rule,
such as the disclosure and notice requirements, could present unusual
implementation problems in B2B transactions. For instance, ETA asserted
disclosure requirements could result in operational uncertainty because
the Commission did not consider all the typical terms included in B2B
agreements. Similarly, ZoomInfo explained ``B2B agreements are often
complex, involving multiple decision-makers and points of contact, who
might rotate or leave their roles over the course of a contract.''
\172\
---------------------------------------------------------------------------
\172\ ZoomInfo, FTC-2023-0033-0865. ETA also raised a concern
about the definition of negative option seller, addressed in Section
VII.B.1.a.
---------------------------------------------------------------------------
(2) Analysis
The final Rule, like the proposed Rule, covers B2B transactions. It
has been the Commission's longstanding view that section 5 of the FTC
Act \173\ protects business consumers as well as individual consumers.
Moreover, commenters' arguments that, under section 5, all business
consumers must be held to a heightened standard of sophistication are
inconsistent with settled law.
---------------------------------------------------------------------------
\173\ 15 U.S.C. 45(a).
---------------------------------------------------------------------------
The Commission has long enforced the FTC Act against those who
deceive and act unfairly to businesses and other organizations.\174\ As
the Supreme Court explained in FTC v. Standard Educ. Soc., 302 U.S.
112, 116 (1937), ``Laws are made to protect the trusting as well as the
suspicious.'' This principle applies no less to the business consumer
than to the individual.\175\ The Commission maintains a decades-long
list of business protection cases on its website and dedicates
significant effort to educate and protect small businesses.\176\
Indeed, the Commission has made protecting small businesses a
priority.\177\
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\174\ See, e.g., Indep. Directory Corp. v. FTC, 188 F.2d 468 (2d
Cir. 1951) (deceptive practices in selling directory ads to
businesses).
\175\ Indep. Directory Corp., 188 F.2d at 470 (applying Standard
Educ. Soc.); see also, e.g., FTC v. LoanPointe, LLC, 525 F. App'x
696, 701 (10th Cir. 2017) (FTC need only prove ``the likelihood that
a consumer (here, employers)'' would be deceived); FTC v.
Crittenden, 19 F.3d 26 (9th Cir. 1994) (Table) (noting stipulated
judgment with B2B office supplier); FTC v. <a href="http://Inc21.com">Inc21.com</a> Corp., 688 F.
Supp. 2d 927 (N.D. Cal. 2010) (preliminary injunction against
deceptive and unfair B2B billing scheme); FTC v. IFC Credit Corp.,
543 F. Supp. 2d 925, 934 (N.D. Ill. 2008) (FTC Act applies to B2B
sales).
\176\ See Fed. Trade Comm'n, ``Protecting Small Businesses:
Cases,'' <a href="https://www.ftc.gov/business-guidance/small-businesses/protecting-small-businesses-cases">https://www.ftc.gov/business-guidance/small-businesses/protecting-small-businesses-cases</a> (last visited October 23, 2024);
Fed. Trade Comm'n, ``Protecting Small Businesses,'' <a href="https://www.ftc.gov/business-guidance/small-businesses">https://www.ftc.gov/business-guidance/small-businesses</a> (last visited October
23, 2024); Fed. Trade Comm'n, ``Scams and Your Small Business: A
Guide For Business,'' <a href="https://www.ftc.gov/business-guidance/resources/scams-your-small-business-guide-business">https://www.ftc.gov/business-guidance/resources/scams-your-small-business-guide-business</a> (last visited
October 23, 2024).
\177\ See Press Release, Fed. Trade Comm'n, ``FTC, BBB, and Law
Enforcement Partners Announce Results of Operation Main Street:
Stopping Small Business Scams Law Enforcement and Education
Initiative'' (June 18, 2018), <a href="https://www.ftc.gov/news-events/press-releases/2018/06/ftc-bbb-law-enforcement-partners-announce-results-operation-main">https://www.ftc.gov/news-events/press-releases/2018/06/ftc-bbb-law-enforcement-partners-announce-results-operation-main</a> (last visited October 23, 2024).
---------------------------------------------------------------------------
Moreover, the TSR never exempted B2B transactions entirely.
Importantly, the Commission recently amended the TSR to cover a broader
scope of B2B activity. Specifically, in 2024, the Commission expanded
the TSR to prohibit material misrepresentations and false or misleading
statements in B2B calls due to the ongoing harm to small businesses
from such practices.\178\
---------------------------------------------------------------------------
\178\ TSR, 89 FR 26760 (April 16, 2024).
---------------------------------------------------------------------------
Additionally, recent Commission actions to protect small businesses
underscore the fact deceptive practices pertaining to negative option
features occur in B2B transactions just as they do with individual
consumers. None of these cases present the arms-length negotiation of
contracts by sophisticated parties that commenters claim to be
universal. For example, in its 2022 action against First American
Payment Systems,\179\ the Commission alleged the defendants violated
section 5 and ROSCA by making false claims about fees and cost savings
to persuade merchants in small- and medium-sized businesses, many of
whom had limited English proficiency, to enter into payment processing
agreements.\180\ Once enrolled, the defendants allegedly withdrew funds
from merchants' accounts without consent, and made it difficult and
expensive to cancel the service. Under a stipulated court order, the
defendants must (among other things) make it easier for merchants to
cancel their services.
---------------------------------------------------------------------------
\179\ FTC v. First Am. Payment Sys., No. 4:22-cv-00654 (E.D.
Tex. 2022).
\180\ In describing the basis for the misrepresentations
provision of the proposed Rule, the NPRM cited (among other cases)
First Am. Payment Sys. NPRM, 88 FR 24726 n.65. See also ETA, FTC-
2023-0033-1004.
---------------------------------------------------------------------------
In the Commission's 2022 Dun & Bradstreet <SUP>181</SUP> matter,
the complaint alleged multiple deceptive practices pertaining to
products the defendant marketed to small- and medium-sized businesses,
in violation of section 5. The resulting consent order includes
substantial provisions pertaining to negative option features.
---------------------------------------------------------------------------
\181\ In re Dun & Bradstreet, Inc., FTC Docket No. C-4761
(2022).
---------------------------------------------------------------------------
The Commission's 2022 action against Vonage \182\ also illustrates
this point. The complaint detailed the defendants' deceptive and unfair
practices targeting both business and residential customers and alleged
those practices violated section 5 and ROSCA.\183\ The stipulated court
order includes multiple provisions relating to consent, cancellation,
and disclosures pertaining to both individual and business consumers.
---------------------------------------------------------------------------
\182\ FTC v. Vonage Holdings Corp., No. 3:22-cv-06435 (D.N.J.
2022).
\183\ The Adobe matter provides another recent example of a
matter alleging unlawful negative option practices targeting both
individual and business consumers. United States v. Adobe, Inc., No.
5:24-cv-03630 (N.D. Cal. 2024).
---------------------------------------------------------------------------
Nonetheless, two arguments for excluding B2B transactions warrant
additional discussion. First, several commenters elide the distinction
between B2B agreements generally and individually negotiated B2B
agreements. It is neither the purpose nor the effect of the final Rule
to prevent businesses from entering into agreements with individually
negotiated negative option terms. By requiring the cancellation
mechanism to be ``at least as easy to use'' as the consent mechanism,
the final Rule incorporates a symmetrical standard that accounts for
individually negotiated B2B agreements. A B2B consumer who consents to
a negative option feature through an individually negotiated term of an
agreement can also individually negotiate the cancellation mechanism.
Moreover, as the Commission noted above, it will enforce this Rule in
the same manner in which it enforces section 5 of the FTC Act.\184\ The
Commission has not used its consumer protection authority in the type
of large individually negotiated B2B transactions commenters are
worried about.\185\ Unsurprisingly, no commenter cited any historical
instance to the contrary. Thus, the Rule preserves the ability of
sophisticated business consumers to individually negotiate B2B
agreement terms.\186\
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\184\ See section VII.B.1.a.
\185\ See 16 CFR 2.3.
\186\ The Vonage order expressly exempts negative option feature
provisions in B2B contracts where the defendants ``possess evidence
that consumers negotiated significant terms of the negative option
feature that are only negotiable with business consumers.'' FTC v.
Vonage Holdings Corp., No. 3:22-cv-06435 (D.N.J. 2022). The final
Rule is less prescriptive and more flexible than that order, thereby
promoting more flexibility in the marketplace.
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[[Page 90490]]
Second, it appears several commenters mistakenly thought the
required simple cancellation mechanism would necessarily terminate all
aspects of any broader contract or agreement. In fact, this provision
only pertains to cancellation of the negative option feature. Complex
commercial agreements, such as those described by ETA, will have
numerous provisions unrelated to negative option features. Nothing in
this Rule prohibits these provisions from being subject to separate
cancellation and termination terms.
2. Proposed Sec. 425.2 Definitions
In the NPRM, the proposed Rule set forth several definitions. For
example, the proposed Rule defined ``negative option feature'' as a
contract provision under which the consumer's silence or failure to
take affirmative action to reject a good or service or to cancel an
agreement is interpreted by the negative option seller as acceptance or
continuing acceptance of an offer. This definition is consistent with
the TSR and ROSCA (which references the TSR's definition). The proposed
term includes, but is not limited to, automatic renewals, continuity
plans, free-to-pay conversion or fee-to-pay conversions, and pre-
notification negative option plans.\187\
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\187\ Section II of this Notice contains descriptions of these
various plans.
---------------------------------------------------------------------------
Additionally, the proposed Rule defined ``clear and conspicuous,''
``negative option seller,'' and ``save.'' To define ``clear and
conspicuous,'' the FTC imported its definition developed through years
of enforcement experience. As explained in the NPRM, the proposed
definition substantially overlaps with the concepts provided in
California and District of Columbia negative option laws,\188\ with one
exception. Specifically, the District of Columbia definition requires
disclosures to be visually proximate to any request for consumer
consent. The final Rule incorporates this requirement in a separate
consent section.
---------------------------------------------------------------------------
\188\ Cal. Bus. & Prof. Code section 17601 and DC Code section
28A-202.
---------------------------------------------------------------------------
(a) Summary of Comments
The Commission did not receive any comments specifically supporting
any proposed definition, though several commenters generally supported
the concepts incorporated in the definitions, such as ``clear and
conspicuous disclosures.'' Several commenters critiqued the
Commission's omission of certain definitions, such as ``material'' in
connection with Sec. 425.3 and Sec. 425.4,\189\ ``simple cancellation
mechanism,'' \190\ ``practical,'' and ``normal business hours,'' \191\
because these terms are used throughout the Rule. Other commenters
asked the Commission to add a definition for ``consumer'' that excludes
businesses,\192\ while another asked the Commission to include small
businesses in that definition.\193\ Similarly, other commenters asked
the Commission to ``exempt'' certain industries from, or otherwise
alter the scope of, the definition of ``negative option seller.'' \194\
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\189\ See, e.g., BSA, FTC-2023-0033-1015 (material is not
defined); Chamber, FTC-2023-0033-0885 (same).
\190\ Center for Data Innovation (``CDI''), FTC-2023-0033-0887;
see also Act App Association, FTC-2023-0033-0874; NRF, FTC-2023-
0033-1005 (failed to defined ``as simple as'').
\191\ International Carwash Association, FTC-2023-0033-1142.
\192\ See, e.g., Anonymous commenter, FTC-2023-0033-1007;
Zoominfo, FTC-2023-0033-0865; CTIA, FTC-2023-0033-0866; BSA, FTC-
2023-0033-1015.
\193\ Individual commenter, FTC-2023-0033-0042.
\194\ See, e.g., Asurion, FTC-2023-0033-0878 (exempt service
contracts); Chamber, FTC-2023-0033-0885 (exclude promoting); ETA,
FTC-2023-0033-1004 (exclude ``charging for''). These requests are
more appropriately addressed in the scope and requested exemptions,
and the Commission does not consider them here.
---------------------------------------------------------------------------
Several commenters critiqued the proposed definitions. For example,
ESA stated ``the definition of `save' \195\ is overly broad and would
prohibit the presentation of useful, consumer-friendly details about a
consumer's subscription before they cancel it.'' \196\ Other commenters
questioned why the ``clear and conspicuous'' definitions says a
disclosure is not clear and conspicuous, if a consumer must click on a
hyperlink to see it.\197\
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\195\ Save was defined in the proposed Rule as an attempt by a
seller to present any additional offers, modifications to the
existing agreement, reasons to retain the existing offer, or similar
information when a consumer attempts to cancel a negative option
feature.
\196\ ESA, FTC-2023-0033-0867. PDMI argued similarly as to the
definition of save. FTC-2023-0033-0864 (arguing sellers should be
able to be able to immediately discuss pause, skip or modification
options without having to ask for permission, particularly because
it is impossible to know which customers prefer to cancel as opposed
to merely modify their current plan). Accord USTelecom, FTC-2023-
0033-0876 (definition of Save overly broad); RILA, FTC-2023-0033-
0883 (modify definition of save to allow short clarification and
confirmation of intent follow-up communications); Chamber, FTC-2023-
0033-0885; CDI, FTC-2023-0033-0887 (``Commission should exclude
information about permanent, irreparable harms that may result from
cancellation, and is relevant to the current subscription or product
plan.''); CCIA, FTC-2023-0033-0984; IAB, FTC-2023-0033-1000
(definition of save overly broad and ``would prohibit the
presentation of useful, consumer-friendly details about a consumer's
subscription before they cancel it.'').
\197\ See, e.g., NCTA, FTC-2023-0033-0858 (definition does not
take into account small screens); Chamber, FTC-2023-0033-0885 (``The
requirements that disclosure on the internet or mobile applications
be `unavoidable' and `immediately adjacent' rase practical
concerns.''); CCIA, FTC-2023-0033-0984 (definition should ``hew
closely to the Commission's guidance in its .com Disclosures policy
to ensure regulatory consistency.'').
---------------------------------------------------------------------------
Additionally, several commenters requested the Commission revise
certain of its proposed definitions for clarity. For instance, the
National Federation of Independent Businesses (``NFIB'') asked the
Commission to revise the definitions for ``clear and conspicuous'' and
``negative option feature'' to ``make their meanings clearer'' \198\
by, for example, using simpler words in the clear and conspicuous
definition (``words and grammar'' versus ``diction and syntax'') or by
providing detailed examples of each type of program covered in the
definition of negative option feature. NFIB further explained ``Those
regulated by and served by subsection 425.2(d) most likely would
understand the meaning of an automatic renewal, but perhaps not the
meaning of the other examples.'' \199\
---------------------------------------------------------------------------
\198\ NFIB, FTC-2023-0033-0789. Accord Kuehn, FTC-2023-0033-0871
(proposed revised definition of negative option feature); Chamber,
FTC-2023-0033-0885 (requests the definition of negative option
feature to be revised to exclude monthly subscription services). See
section VII.B.4 for further discussion of proposed modifications.
See also ETA, FTC-2023-0033-1004 (clarify and narrow ``automatic
renewal in the definition).
\199\ NFIB, FTC-2023-0033-0789 (requesting specific examples of
each type of program be included in the definition of negative
option feature); see also IHRSA, FTC-2023-0033-0863 (observes the
Commission does not define what ``automatic renewal, continuity
plan'' and other examples of negative option features mean).
---------------------------------------------------------------------------
(b) Analysis
Based on the record, the Commission makes several changes to the
proposed definitions. First, as explained in sections VII.B.1.3
(material) and VII.B.6.c.2.b.ii (interactive electronic medium), it
adds definitions of material and interactive electronic medium for
clarity. Further, as discussed in section VII.B.4, the Commission
modifies the definition of clear and conspicuous.
Second, the Commission removes the definition of save. As discussed
in section VII.B.6.c the proposed saves provision did not achieve the
right balance between protecting consumers from unfair tactics and
allowing sellers to provide necessary and valuable information about
cancellation. Therefore, the Commission declines to include the NPRM's
proposed limitation on saves, and instead will consider issuing an
SNPRM in the future for
[[Page 90491]]
further comment. Accordingly, without the saves provision, the
Commission determines there is no need for a defined term at this time.
Although several commenters critiqued the lack of definitions for
such terms as ``simple cancellation mechanism,'' ``practical,'' or
``normal business hours,'' the Commission addresses these concerns with
further clarification, rather than with formal definitions, in the
section-by-section analysis below. As to commenter requests for a
definition of ``consumer'' expressly excluding (or including) business-
to-business transactions, the Commission similarly addresses these
requests in the sections regarding scope and requested exemptions,
above.
Finally, NFIB asked the Commission to add specific examples of each
type of negative option program to the text of the Rule, stating those
served by the Rule would likely not understand these ``terms of art.''
\200\ The Commission discusses examples of each type of negative option
program in more detail as part of the SBP at section II. Further, the
Commission typically engages in robust consumer and business education
campaigns when promulgating and issuing final rules and will do so
here. The Commission therefore disagrees the Rule must incorporate
these examples into the text.\201\
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\200\ NFIB, FTC-2023-0033-0789.
\201\ Further, as explained in n.307, the Commission also
declines to revise the definition of ``clear and conspicuous'' to
replace the words ``diction and syntax'' with ``words and grammar.''
---------------------------------------------------------------------------
3. Proposed Sec. 425.3 Misrepresentations
Section 425.3 of the proposed Rule prohibited sellers from
misrepresenting ``any material fact related to the transaction, such as
the negative option feature, or any material fact related to the
underlying good or service.'' \202\ As explained in the NPRM,
``misrepresentations in negative option marketing cases often involve
deceptive representations not only related to the negative option
feature but to the underlying product (or service) or other aspects of
the transaction as well.'' \203\ These include ``misrepresentations
related to costs, product efficacy, free trial claims, processing or
shipping fees, billing information use, deadlines, consumer
authorization, refunds, [and] cancellation.'' \204\
---------------------------------------------------------------------------
\202\ NPRM, 88 FR 24734.
\203\ NPRM, 88 FR 24726.
\204\ Id. (citing e.g., FTC v. Tarr, No. 3:17-cv-02024 (S.D.
Cal. 2017); FTC v. First Am. Payment Sys., No. 4:22-cv-00654 (E.D.
Tex. 2022); FTC v. XXL Impressions, LLC, No. 1:17-cv-00067 (D. Me.
2017); United States v. <a href="http://MyLife.com">MyLife.com</a>, Inc., No. 2:20-cv-6692 (C.D.
Cal. 2020); FTC v. Health Rsch. Labs., LLC, No. 2:17-cv-00467 (D.
Me. 2017); FTC v. Leanspa, LLC, No. 3:11-cv-01715 (D. Conn. 2011);
FTC v. WealthPress, Inc., No. 3:23-cv-00046 (M.D. Fla. 2023); FTC v.
BunZai Media Grp., Inc., No. 2:15-cv-04527 (C.D. Cal. 2015); FTC v.
Willms, No. 2:11-cv-00828 (W.D. Wash. 2011); FTC v. Universal
Premium Servs., No. 2:06-cv-00849 (C.D. Cal. 2006); FTC v. Remote
Response Corp., No. 1:06-cv-20168 (S.D. Fla. 2006); and FTC v.
Johnson, No. 2:10-cv-02203 (D. Nev. 2016).
---------------------------------------------------------------------------
The FTC Act provides the legal basis for the Commission to prevent
and remedy misrepresentations in the negative option context.
Specifically, section 5(a)(1) of the FTC Act declares unfair or
deceptive acts or practices in or affecting commerce to be unlawful.
Negative option sellers making material misrepresentations are engaged
in deceptive practices. Addressing these practices through the Rule
prevents deception by giving the Commission the ability to seek civil
penalties (where appropriate under 5(m)(1)(a)), where they are not
already provided, thus deterring misrepresentations, protecting
consumers, and leveling the playing field for ``honest sellers who must
compete with those who engage in deception.'' \205\
---------------------------------------------------------------------------
\205\ NPRM, 88 FR 24726.
---------------------------------------------------------------------------
(a) Summary of Comments
The State AGs strongly supported this provision, stating, for
example, it would ``combat[ ] seller misrepresentations, by providing
the FTC with authority to seek civil penalties and consumer redress for
material misrepresentations in all types of media.'' \206\ Echoing the
NPRM, they explained, ``[l]ike the FTC, we have found that negative
option marketing cases `often involve deceptive representations not
only related to the negative option feature but to the underlying
product (or service) or other aspects of the transaction as well.' ''
\207\
---------------------------------------------------------------------------
\206\ State AGs, FTC-2023-0033-0886.
\207\ Id.
---------------------------------------------------------------------------
Law Professors further supported prohibiting ``material
misrepresentations . . . whether or not the false claim is exclusively
about the negative option feature.'' \208\ They, too, offered evidence
of the prevalence of misconduct, stating ``entities like the Better
Business Bureau have long reported, based on FTC and other data, the
prevalence of misrepresentation in certain negative option
arrangements, and non-FTC enforcement efforts confirm the problem.''
\209\ Citing multiple sources, they argued the ``Commission thus has
more than ample `reason to believe that' co-occurring negative option
violations and other misrepresentations `are prevalent.' '' \210\
---------------------------------------------------------------------------
\208\ Law Professors, FTC-2023-0033-0861.
\209\ Id., citing Better Business Bureau, ``BBB Investigation
Update: Free Trial Offer Scams'' (Apr. 2020), <a href="https://www.bbb.org/article/news-releases/22040-bbb-update-free-trial-offerscams">https://www.bbb.org/article/news-releases/22040-bbb-update-free-trial-offerscams</a>; C.
Steven Baker & Better Business Bureau, ``Subscription Traps and
Deceptive Free Trials Scam Millions with Misleading Ads and Fake
Celebrity Endorsements'' (Dec. 2018), <a href="https://www.bbb.org/article/investigations/18929-subscription-traps-and-deceptive-free-trialsscam-millions-with-misleading-ads-and-fake-celebrity-endorsements">https://www.bbb.org/article/investigations/18929-subscription-traps-and-deceptive-free-trialsscam-millions-with-misleading-ads-and-fake-celebrity-endorsements</a>. The Law professors further pointed to evidence found
by searching BBB's ScamTracker for terms like ``subscription.'' See,
e.g., Better Business Bureau, ScamTracker, ID #720953, <a href="https://www.bbb.org/scamtracker/lookupscam/720953">https://www.bbb.org/scamtracker/lookupscam/720953</a>. They additionally cited
Consumer Financial Protection Bureau, ``CFPB Charges TransUnion and
Senior Executive John Danaher with Violating Law Enforcement Order''
(Apr. 2022), <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-charges-transunion-and-seniorexecutive-john-danaher-with-violating-law-enforcement-order/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-charges-transunion-and-seniorexecutive-john-danaher-with-violating-law-enforcement-order/</a>; David Pierson, `Santa Monica fitness brand
Beachbody is fined $3.6 million over automatic renewals,'' L.A.
Times (Aug. 29, 2017), <a href="https://www.latimes.com/business/la-fi-beachbody-20170829-story.html">https://www.latimes.com/business/la-fi-beachbody-20170829-story.html</a>; Bruce A. Craig, Negative-Option
Billing--Understanding the Stealth Scams of the `90s, 7 Loy.
Consumer L. Rev. 5 (1994).
\210\ Law Professors, FTC-2023-0033-0861.
---------------------------------------------------------------------------
These commenters further argued the Commission should not adopt a
narrower provision limited strictly to the elements of a negative
option feature because, in their view, it would be difficult ``to fully
separate misrepresentations regarding the negative option feature from
all other material misrepresentations.'' \211\
---------------------------------------------------------------------------
\211\ Law Professors, FTC-2023-0033-0861.
---------------------------------------------------------------------------
Several commenters, largely trade groups and sellers, criticized
the proposed provision. As discussed in section V.A, several questioned
the prevalence of misrepresentations \212\ and asserted the provision
was not within the scope of the ANPR.\213\ Additionally, several
commenters argued the provision is overbroad, and suggested it is
unnecessary in light of existing law. Finally, they proposed ways to
narrow the proposed provision.
---------------------------------------------------------------------------
\212\ CTA, FTC-2023-0033-0997; ESA, FTC-2023-0033-0867; IAB,
FTC-2023-0033-1000; N/MA, FTC-2023-0033-0873; RILA, FTC-2023-0033-
0883; TechFreedom, FTC-2023-0033-0872. See section VII.A for a
discussion of prevalence addressing these comments.
\213\ ANA, FTC-2023-0033-1001; CCIA, FTC-2023-0033-0984;
Coalition, FTC-2023-0033-0884; ESA, FTC-2023-0033-0867; Frontdoor,
FTC-2023-0033-0862; IAB, FTC-2023-0033-1000; NRF, FTC-2023-0033-
1005; RILA, FTC-2023-0033-0883. See section VII.A for a discussion
addressing these comments.
---------------------------------------------------------------------------
Several commenters objected to the scope of the proposed provision.
Citing Commissioner Wilson's dissent to the NPRM, TechNet noted the
proposed Rule ``would capture alleged misrepresentations regarding the
underlying product or service `wholly unrelated' to the negative option
feature.'' \214\ Three commenters asserted no current trade regulation
rule
[[Page 90492]]
prohibits misrepresentations so broadly.\215\
---------------------------------------------------------------------------
\214\ TechNet, FTC-2023-0033-0869.
\215\ NCTA, FTC-2023-0033-0858; PDMI, FTC-2023-0033-0864;
TechFreedom, FTC-2023-0033-0872.
---------------------------------------------------------------------------
Similarly on scope, some commenters also argued the proposed
language lacked the specificity necessary to give sellers notice of
what conduct would violate the Rule.\216\ For example, ACT App
Association asserted, ``Notwithstanding best efforts, tech startups'
ability to flawlessly adhere to the vague and broad language used in
this rule is unrealistic.'' \217\
---------------------------------------------------------------------------
\216\ For example, the Coalition and IAB both said, ``The NPRM
fails, however, to identify which claims would constitute a material
fact, and thus fails to identify covered acts with the requisite
level of specificity.'' Coalition, FTC-2023-0033-0884; IAB, FTC-
2023-0033-1000. PDMI similarly claimed the proposed provision's lack
of specificity ``renders [the proposed Rule] overly vague and
unlawful.'' FTC-2023-0033-0864. See also ESA, FTC-2023-0033-0867;
TechFreedom, FTC-2023-0033-0872; USTelecom, FTC-2023-0033-0876
(citing Katharine Gibbs School v. FTC, 612 F.2d 658 (2d Cir. 1979)).
\217\ ACT App Association, FTC-2023-0033-0874.
---------------------------------------------------------------------------
A few commenters provided hypotheticals or asked rhetorical
questions to illustrate concerns about the proposal's breadth. MIA, for
example, stated, ``if a streaming service advertises, `movies that you
will love,' but you do not `love' them, is that a violation of this
rule subject to penalties? If a housekeeping service claims, `great
cleaning every time,' but the resulting cleanliness is not up to the
consumer's `standards,' will that trigger this provision and any
resulting penalties?'' \218\ The Chamber asked, ``[c]ould a privacy
policy, for example, be considered a material representation covered
under this requirement?'' \219\
---------------------------------------------------------------------------
\218\ MIA, FTC-2023-0033-1008.
\219\ Chamber, FTC-2023-0033-0885. See also CDI, FTC-2023-0033-
0887 (``consumers could argue that the dish detergent they received
through a subscription service did not clean dishes as
advertised.'').
---------------------------------------------------------------------------
Many of these commenters argued the reach of the proposed Rule
would negatively impact consumers by discouraging negative option
offerings. TechNet said, ``[f]or a variety of subscription services,
the main drivers of consumer engagement are the subscription services'
ability to provide financial savings, convenience, and access to
premium services. . . . Unfortunately, the NPRM ignores these benefits
and would discourage the offering of subscription services
altogether.'' \220\ ESA feared ``this section will discourage industry
members from developing and offering innovative negative option plans
that consumers will enjoy.'' \221\
---------------------------------------------------------------------------
\220\ TechNet, FTC-2023-0033-0869.
\221\ ESA, FTC-2023-0033-0867; see also IAB, FTC-2023-0033-1000
(predicting ``autorenewing (sic) subscriptions will become less
common and significantly more costly because of the regulatory
risks'' and ``businesses and consumers will be harmed by the loss of
convenience and savings offered by autorenewal arrangements.'');
Chamber, FTC-2023-0033-0885 (contending ``many entities may forgo
negative options altogether. This decreases consumer choice in the
marketplace given the clear popularity and use of negative option
features across the economy.'').
---------------------------------------------------------------------------
Several commenters asserted existing laws and regulations make the
proposed provision unnecessary. Some argued section 5's prohibition
against deceptive practices already provides the Commission sufficient
authority on this issue.\222\ Others asserted State laws and
regulations prohibiting misrepresentations are sufficient to protect
the public.\223\
---------------------------------------------------------------------------
\222\ ANA, FTC-2023-0033-1001; Consumer Technology Association
(``CTA''), FTC-2023-0033-0997; N/MA, FTC-2023-0033-0873.
\223\ NRF, FTC-2023-0033-1005; RILA, FTC-2023-0033-0883; SFE
Energy, Inc. (``SFE''), FTC-2023-0033-1151.
---------------------------------------------------------------------------
Commenters were divided on ROSCA's coverage. NRF, for example, said
``[i]n light of the Commission's decision that ROSCA already prohibits
deceptive statements made in connection with a subscription, even if
not directly related to subscription terms, many of the proposed
amendments are unnecessary.'' \224\ In contrast, PDMI said while
MoviePass ``perhaps reflects a colorable approach,'' the application of
ROSCA there ``exceeded Congress' intent.'' \225\ Similarly, IAB
asserted the proposed Rule would break new ground by ``grant[ing] the
Commission authority to seek monetary remedies against a first-time
offender for misrepresentations that would not give rise to monetary
relief if made outside the context of an autorenewal agreement.'' \226\
---------------------------------------------------------------------------
\224\ NRF, FTC-2023-0033-1005.
\225\ PDMI, FTC-2023-003-0864.
\226\ IAB, FTC-2023-0033-1000.
---------------------------------------------------------------------------
Several commenters recommended changes if the proposed provision
remains in the Rule. BSA, for example, suggested the Commission should
define the term ``material,'' citing the TSR and the FTC Policy
Statement on Deception as examples.\227\ Separately, RILA urged the
Commission ``to include clear language stating a `reasonable person
standard' will apply to determinations of `material facts' related to
products.'' \228\
---------------------------------------------------------------------------
\227\ BSA, FTC-2023-0033-1015; see also Chamber, FTC-2023-0033-
0885 (noting ``materiality'' not defined in NPRM).
\228\ RILA, FTC-2023-0033-0883.
---------------------------------------------------------------------------
Several commenters suggested the Commission limit the
misrepresentation provision to the terms of the negative option
feature. For instance, BSA advocated for limiting the provision ``to
facts relating to the transaction and not every material fact relating
to the underlying good or service.'' \229\ CCIA and CDI agreed, stating
the final phrase should instead cover only those material facts related
to the underlying negative option feature and exclude ``any material
fact related to the underlying good or service.'' \230\
---------------------------------------------------------------------------
\229\ BSA, FTC-2023-0033-1015.
\230\ CCIA, FTC-2023-0033-0984; CDI, FTC-2023-0033-0887; see
also TechFreedom, FTC-2023-0033-0872.
---------------------------------------------------------------------------
(b) Analysis
Based on the record, the Commission adopts a clarified version of
the material misrepresentation section and adds a definition for
further clarification. Specifically, the final Rule omits the proposed
language referring to ``any material fact related to the transaction,
such as the negative option feature, or any material fact related to
the underlying good or service'' and instead prohibits
misrepresentation of ``any material fact,'' and defines ``material''
consistent with the TSR and section 5 of the FTC Act. Further, to
enhance clarity and specificity, the text lists several examples of
potentially material fact categories, taken from Commission precedent.
As further explained below: (1) despite commenters' concerns to the
contrary, this provision is consistent with the ANPR and prevalence
requirements of section 18 of the FTC Act; (2) consistent with ROSCA,
the final provision is not limited to material misrepresentations about
the negative option feature itself; (3) the Commission declines to
exclude any subset of material misrepresentations from the scope of the
Rule; and (4) for clarity, the Commission adds a definition of
``material'' consistent with established law of section 5 and other
Commission Rules.
(1) Adoption of a prohibition against misrepresentations is
consistent with the ANPR and is appropriate to address prevalent unfair
or deceptive acts or practices.
Prior to the publication of any notice of proposed rulemaking
promulgated under the Magnuson Moss Act, the Commission must publish an
advance notice of proposed rulemaking (ANPR).\231\ That notice must
contain a ``brief description of the area of inquiry under
consideration, the objectives which the Commission seeks to achieve,
and possible regulatory alternatives
[[Page 90493]]
under consideration by the Commission.'' \232\ The ANPR in this case
meets this standard. Specifically, in the ANPR, the Commission stated
the objective of the Rule was to prevent deceptive or unfair practices
in the marketing of products and services with negative option
features. Several industry associations submitted comments in response
to the ANPR, illustrating the effectiveness of the ANPR in soliciting
views of the interested public and affected industry before issuing the
NPRM.\233\ Moreover, as detailed herein, the Commission has reviewed
and carefully considered the views of the public and industry as
expressed in response to both the ANPR and NPRM.
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\231\ 15 U.S.C. 57a(b)(2).
\232\ 15 U.S.C. (b)(2)(A)(i).
\233\ Section 425.3 is the only remaining section as to which
commenters made this ANPR argument.
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The record demonstrates misrepresentations made to induce consumers
to enter into negative option programs are prevalent. Specifically, the
Commission's enforcement experience (including consumer complaints,
matters cited in the NPRM, and matters cited in this Statement of Basis
and Purpose) as well as the experiences of the State AGs, the
information cited by the Law Professors, and comments by consumer
commenters all support this conclusion.\234\
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\234\ See section VII.1.a. In the cited Commission law
enforcement matters, the Commission has applied its established
materiality standard, limiting its actions to misrepresentations
that are likely to affect consumers' choice of, or conduct
regarding, goods or services. In re Cliffdale Assocs., Inc., 103
F.T.C. 110 (1984). That is to say, in the cited matters the
Commission alleged defendants made misrepresentations to induce
consumers to enter into negative option programs.
---------------------------------------------------------------------------
As several commenters critical of the proposed provision correctly
note, misrepresentations to induce consumers to join negative option
programs are already unlawful under section 5, as well as under other
State and Federal laws and regulations, depending on (among other
things) media used and jurisdiction. This fact, however, does not
undermine the need for the Rule provision. By definition, a section 18
trade regulation rule addresses conduct that is already prohibited
under section 5. With such prohibited conduct defined, the trade
regulation rule may also more broadly ``include requirements prescribed
for the purpose of preventing such acts or practices,'' but the core of
a trade regulation rule is the description of acts or practices already
violative of section 5.\235\ The misrepresentations section of the Rule
is narrower than the full scope of tools available under section 18. It
simply prohibits conduct that is already deceptive. Such a provision
promotes clarity and confidence in the marketplace and provides for
more effective remedies (i.e., civil penalties, where appropriate)
against wrongdoers.
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\235\ 15 U.S.C. 57a(a)(1)(B).
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Moreover, the fact that ROSCA's disclosure requirement \236\
already essentially prohibits material misrepresentations about online
negative option transactions, means much of the rhetoric predicting the
downfall of negative option marketing simply is ill-founded. Indeed,
the Chamber pointed to the ``clear popularity and use of negative
option features across the economy'' even as ROSCA has been law for
over a decade.\237\ Far from undermining legitimate business, the
Rule's express prohibition on misrepresenting material facts in
connection with promoting or offering for sale a negative option
feature should increase consumer confidence in negative option
marketing, thus making it easier for legitimate businesses to market
their products.
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\236\ 15 U.S.C. 8403(1).
\237\ Chamber, FTC-2023-0033-0885.
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(2) Prohibiting misrepresentation of any material facts, not just
those pertaining to the negative option feature, promotes clarity
consistent with ROSCA and Commission precedent.
The final Rule prohibits misrepresentation of ``any material
fact.'' In doing so, it provides a non-exhaustive list of categories of
potentially material facts (including transaction terms) and adds a
definition of ``material,'' consistent with section 5 and the TSR.
Specifically, consistent with section 5, ``material'' means ``likely to
affect a person's choice of, or conduct regarding, goods or services.''
\238\ This approach both clarifies the terms most at issue and ensures
the Rule accords with longstanding section 5 precedent.
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\238\ 16 CFR 310.2(t) (TSR); 16 CFR 461.1 (Impersonation Rule);
Policy Statement on Deception (Oct. 14, 1983) (appended to In re
Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)). See also BSA, FTC-
2023-0033-1015 (requesting definition of material consistent with
TSR and Policy Statement); Chamber, FTC-2023-0033-0885 (criticizing
the proposed Rule for not defining materiality).
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The Commission declines to limit the misrepresentations prohibition
solely to elements of the negative option feature.\239\ First, the
Commission finds imposing such a narrow restriction would be
inconsistent with existing protections. Pursuant to ROSCA section 8403,
sellers must ``clearly and conspicuously disclose all material terms of
the transaction before obtaining the consumer's billing information.''
As Congress has explained, a healthy marketplace ``must provide
consumers with clear, accurate information and give sellers an
opportunity to fairly compete with one another for consumers'
business.'' \240\ Limiting a misrepresentations prohibition solely to
misrepresentations about the negative option feature itself would fall
well short of the scope of ROSCA and the Commission's responsibility to
protect the public.
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\239\ E.g., ESA, FTC-2023-0033-0867; NFIB, FTC-2023-0033-0789;
TechFreedom, FTC-2023-0033-0872.
\240\ 15 U.S.C. 8401(2).
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Moreover, seller commenters themselves highlighted transaction
elements other than negative option terms as critical to inducing
consumers to choose negative option features. IAB, for example, pointed
to the promise of ``broader selection and lower prices'' or
``convenience and savings.'' \241\ Similarly, TechNet identified the
``ability to provide financial savings, convenience, and access to
premium services'' as ``the main drivers'' of varied
subscriptions.\242\
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\241\ IAB, FTC-2023-0033-1000.
\242\ TechNet, FTC-2023-0033-0869.
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Furthermore, such a distinction may invite dishonest actors to
misrepresent material facts about a transaction so long as they felt
they could evade monetary liability for such misrepresentations.
Moreover, simply refraining from making material misrepresentations is
hardly a significant burden given the fact that such misrepresentations
are already illegal under section 5 of the FTC Act, and subject to
civil penalties when made on the internet and over the telephone
pursuant to ROSCA and the TSR, respectively.
(3) The Commission declines to exclude any material facts from the
scope of the provision.
To further promote clarity, the Commission includes a list of non-
exclusive examples in the text of Sec. 425.3. In addition to the
negative option feature itself, the examples include certain
characteristics the Commission has identified as presumptively material
for more than 40 years \243\ and which have in fact appeared as the
subject of material misrepresentations in Commission negative option
cases--cost,\244\ purpose
[[Page 90494]]
or efficacy,\245\ and health or safety.\246\ The record demonstrates
the list must be non-exclusive because the Commission has observed the
use of material misrepresentations other than those enumerated to
induce consumers to enter into transactions with negative option
features, including, for example, characteristics of the seller,\247\
the format of the ad or other sales communication,\248\ consumer
authorization,\249\ consumer privacy or data security,\250\ and
endorsements or testimonials.\251\ The Commission cannot predict what
other material misrepresentations dishonest actors may employ in the
future.
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\243\ Policy Statement on Deception (Oct. 14, 1983) (appended to
In re Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)) (describing
and citing materiality of purpose, safety, efficacy, and cost); In
re Thompson Medical Co., Inc., 104 F.T.C. 648, 816-17 (1984)
(listing cost, purpose, efficacy, and safety as presumptively
material characteristics).
\244\ In the negative option context, material cost
misrepresentations may include any cost (and total costs) from
inception through the course of the commercial relationship,
including misrepresentations as to recurring costs and refunds or
guarantees. See, e.g., FTC v. FloatMe Corp., No. 5:24-cv-00001 (W.D.
Tex. 2024); United States v. Cerebral, Inc., No. 1:24-cv-21376 (S.D.
Fla. 2024); FTC v. Bridge It, Inc., No. 1:23-cv-09651 (S.D.N.Y.
2023); FTC v. Benefytt Techs., Inc., No. 8:22-cv-01794 (M.D. Fla.
2022); FTC v. First Am. Payment Sys., No. 4:22-cv-00654 (E.D. Tex.
2022); FTC v. XXL Impressions, LLC, No. 1:17-cv-00067 (D. Me. 2017);
FTC v. Cardiff, No. 5:18-cv-02104 (C.D. Cal. 2018); FTC v. Health
Rsch. Labs., LLC, No. 2:17-cv-00467 (D. Me. 2017); FTC v. Tarr, No.
3:17-cv-02024 (S.D. Cal. 2017); FTC v. AdoreMe, Inc., No. 1:17-cv-
09083 (S.D.N.Y. 2017); FTC v. Pact, Inc., No. 2:17-cv-1429 (W.D.
Wash. 2017); FTC v. Leanspa, LLC, No. 3:11-cv-01715 (D. Conn. 2011);
FTC v. Willms, No. 2:11-cv-00828 (W.D. Wash. 2011); FTC v. Universal
Premium Servs., No. 2:06-cv-00849 (C.D. Cal. 2006).
\245\ See, e.g., FTC v. FloatMe Corp., No. 5:24-cv-00001 (W.D.
Tex. 2024); United States v. Cerebral, Inc., No. 1:24-cv-21376 (S.D.
Fla. 2024); FTC v. NGL Labs, LLC, No. 2:24-cv-05753 (C.D. Cal.
2024); FTC v. Bridge It, Inc., No. 1:23-cv-09651 (S.D.N.Y. 2023);
FTC v. WealthPress, Inc., No. 3:23-cv-00046 (M.D. Fla. 2023); In re
Dun & Bradstreet, Inc., FTC Docket No. C-4761 (2022); FTC v. First
Am. Payment Sys., No. 4:22-cv-00654 (E.D. Tex. 2022); In re
MoviePass, Inc., FTC Docket No. C-4751 (2021); United States v.
<a href="http://MyLife.com">MyLife.com</a>, Inc., No. 2:20-cv-6692 (C.D. Cal. 2020); FTC v.
<a href="http://RagingBull.com">RagingBull.com</a>, LLC, No. 1:20-cv-03538 (D. Md. 2020); FTC v. Match
Grp., Inc., No. 3:19-cv-02281 (N.D. Tex. 2019); FTC v. XXL
Impressions, LLC, No. 1:17-cv-00067 (D. Me. 2017); FTC v. Cardiff,
No. 5:18-cv-02104 (C.D. Cal. 2018); FTC v. JDI Dating, Ltd., No.
1:14-cv-08400 (N.D. Ill. 2014); FTC v. Credit Bureau Ctr., LLC, No.
1:17-cv-00194 (N.D. Ill. 2017); FTC v. Health Rsch. Labs., LLC, No.
2:17-cv-00467 (D. Me. 2017); FTC v. Health Formulas, LLC, No. 2:14-
cv-01649 (D. Nev. 2014); FTC v. Leanspa, LLC, No. 3:11-cv-01715 (D.
Conn. 2011); FTC v. Willms, No. 2:11-cv-00828 (W.D. Wash. 2011); FTC
v. Johnson, No. 2:10-cv-02203 (D. Nev. 2010); FTC v. Remote Response
Corp., No. 1:06-cv-20168 (S.D. Fla. 2006).
\246\ See, e.g., FTC v. XXL Impressions, LLC, No. 1:17-cv-00067
(D. Me. 2017); FTC v. Cardiff, No. 5:18-cv-02104 (C.D. Cal. 2018);
FTC v. Health Rsch. Labs., LLC, No. 2:17-cv-00467 (D. Me. 2017); FTC
v. Health Formulas, LLC, No. 2:14-cv-01649 (D. Nev. 2014); FTC v.
Leanspa, LLC, No. 3:11-cv-01715 (D. Conn. 2011); FTC v. Willms, No.
2:11-cv-00828 (W.D. Wash. 2011).
\247\ E.g., FTC v. Elite IT Partners, Inc., No. 2:19-cv-00125
(D. Utah 2019) (affiliation with well-known companies); In re
Urthbox, Inc., FTC Docket No. C-4676 (2019) (independence of
reviews); FTC v. BunZai Media Grp., Inc., No. 2:15-cv-04527 (C.D.
Cal. 2015) (BBB accreditation and ratings); FTC v. <a href="http://DOTAuthority.com">DOTAuthority.com</a>,
Inc., No. 0:16-cv-62186 (S.D. Fla. 2016) (ratings); FTC v. FTN
Promotions, Inc., No. 8:07-cv-1279 (M.D. Fla. 2007) (affiliation
with consumer's bank).
\248\ E.g., FTC v. XXL Impressions, LLC, No. 1:17-cv-00067 (D.
Me. 2017) (radio news show); FTC v. Leanspa, LLC, No. 3:11-cv-01715
(D. Conn. 2011) (news reports).
\249\ E.g., In re Dun & Bradstreet, Inc., FTC Docket No. C-4761
(2022) (charging for same product consumer previously purchased);
FTC v. Benefytt Techs., Inc., No. 8:22-cv-01794 (M.D. Fla. 2022)
(charging for authorized products); FTC v. Triangle Media Corp., No.
3:18-cv-01388 (S.D. Cal. 2018) (completeness of order); FTC v. Apex
Capital Grp., LLC, No. 2:18-cv-09573 (C.D. Cal. 2018) (completeness
of order); FTC v. Moneymaker, No. 2:11-cv-00461 (D. Nev. 2011)
(purpose of authorization).
\250\ E.g., United States v. Cerebral, Inc., No. 1:24-cv-21376
(S.D. Fla. 2024) (data security and privacy); In re MoviePass, Inc.,
FTC Docket No. C-4751 (2021) (data security).
\251\ E.g., FTC v. XXL Impressions, LLC, No. 1:17-cv-00067 (D.
Me. 2017); FTC v. Cardiff, No. 5:18-cv-02104 (C.D. Cal. 2018); FTC
v. Willms, No. 2:11-cv-00828 (W.D. Wash. 2011).
---------------------------------------------------------------------------
Some commenters asserted section 18 does not authorize the
Commission to prohibit material misrepresentations in a given area of
commerce. Section 18, however, permits the FTC to promulgate ``rules
which define with specificity acts or practices which are unfair or
deceptive acts or practices in or affecting commerce (within the
meaning of [section 5(a)(1)]) . . . [and] may include requirements
prescribed for the purpose of preventing such acts or practices.''
\252\ It places no additional restrictions on the scope of this
rulemaking.
---------------------------------------------------------------------------
\252\ 15 U.S.C. 57a(a)(1)(B).
---------------------------------------------------------------------------
Several commenters appear to think section 18 requires the
Commission to define specific claims as deceptive; for example, two
commenters cited the Business Opportunity Rule's treatment of
misrepresentations.\253\ While the cited Rules show one way to meet the
statute's specificity requirements, the statute does not require the
Commission to define claims with specificity, but instead acts or
practices.\254\ For example, in the Business Opportunity Rule, the
practice of misrepresenting ``any material aspect of any assistance
offered to a prospective purchaser'' in a business opportunity
transaction is a specific type of deceptive practice in or affecting
commerce.\255\ By the same token, the practice of misrepresenting
material facts to induce consumers to consent to negative option
features constitutes a specific type of deceptive practice.
---------------------------------------------------------------------------
\253\ PDMI, FTC-2023-003-0864 (contrasting the proposed Rule
language with Business Opportunity Rule language, saying ``The
Business Opportunity Rule does not prohibit any misrepresentation in
connection with business opportunities. It prohibits specific
misrepresentations about earnings claims.''); TechFreedom, FTC-2023-
0033-0872 (``For example, the Business Opportunity Rule prohibits no
fewer than 21 different kinds of misrepresentation regarding
business opportunities. This specificity is typical of trade
regulation rules.'') (footnotes omitted).
\254\ 15 U.S.C. 57a(a)(1)(B).
\255\ 16 CFR 437.6(i).
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The record, including the submissions of many industry commenters,
shows negative option features are found across industries, but are
consistently distinguishable as a subset of general commercial
practices. As commenters point out, negative option features offer many
distinct benefits to consumers and sellers. These benefits do not lose
their distinct character merely because they occur across different
kinds of goods and services sold across different channels. While the
record shows this practice offers distinct benefits, it also shows the
practice is plagued by distinct abuse. This is not a hypothetical
statement; the Commission is not promulgating the final Rule because
negative option features may engender deception, whether relating to
the feature itself or to other material facts, but rather because the
record shows they have.\256\ Just as with the benefits of
[[Page 90495]]
negative option marketing, these problems do not lose their distinct
character, in other words they are distinct practices, even though they
appear in a variety of contexts.
---------------------------------------------------------------------------
\256\ See, e.g., FTC v. FloatMe Corp., No. 5:24-cv-00001 (W.D.
Tex. 2024); United States v. Cerebral, Inc., No. 1:24-cv-21376 (S.D.
Fla. 2024); FTC v. NGL Labs, LLC, No. 2:24-cv-05753 (C.D. Cal.
2024); FTC v. Bridge It, Inc., No. 1:23-cv-09651 (S.D.N.Y. 2023);
FTC v. WealthPress, Inc., No. 3:23-cv-00046 (M.D. Fla. 2023); FTC v.
Benefytt Techs., Inc., No. 8:22-cv-01794 (M.D. Fla. 2022); In re Dun
& Bradstreet, Inc., FTC Docket No. C-4761 (2022); FTC v. First Am.
Payment Sys., No. 4:22-cv-00654 (E.D. Tex. 2022); In re MoviePass,
Inc., FTC Docket No. C-4751 (2021); United States v. <a href="http://MyLife.com">MyLife.com</a>,
Inc., No. 2:20-cv-6692 (C.D. Cal. 2020); FTC v. <a href="http://RagingBull.com">RagingBull.com</a>, LLC,
No. 1:20-cv-03538 (D. Md. 2020); FTC v. Match Grp., Inc., No. 3:19-
cv-02281 (N.D. Tex. 2019); FTC v. Elite IT Partners, Inc., No. 2:19-
cv-00125 (D. Utah 2019); In re Urthbox, Inc., FTC Docket No. C-4676
(2019); FTC v. Triangle Media Corp., No. 3:18-cv-01388 (S.D. Cal.
2018); FTC v. Apex Capital Grp., LLC, No. 2:18-cv-09573 (C.D. Cal.
2018); FTC v. XXL Impressions, LLC, No. 1:17-cv-00067 (D. Me. 2017);
FTC v. Cardiff, No. 5:18-cv-02104 (C.D. Cal. 2018); FTC v. JDI
Dating, Ltd., No. 1:14-cv-08400 (N.D. Ill. 2014); FTC v. Credit
Bureau Ctr., LLC, No. 1:17-cv-00194 (N.D. Ill. 2017); FTC v. BunZai
Media Grp., Inc., No. 2:15-cv-04527 (C.D. Cal. 2015); FTC v.
<a href="http://DOTAuthority.com">DOTAuthority.com</a>, Inc., No. 0:16-cv-62186 (S.D. Fla. 2016); FTC v.
Health Rsch. Labs., LLC, No. 2:17-cv-00467 (D. Me. 2017); FTC v.
Tarr, No. 3:17-cv-02024 (S.D. Cal. 2017); FTC v. AdoreMe, Inc., No.
1:17-cv-09083 (S.D.N.Y. 2017); FTC v. Pact, Inc., No. 2:17-cv-1429
(W.D. Wash. 2017); FTC v. RevMountain, LLC, No. 2:17-cv-02000 (D.
Nev. 2017); FTC v. AAFE Prods. Corp., No. 3:17-cv-00575 (S.D. Cal.
2017); FTC v. Health Formulas, LLC, No. 2:14-cv-01649 (D. Nev.
2014); FTC v. Dill, No. 2:16-cv-00023 (D. Me. 2016); FTC v. Leanspa,
LLC, No. 3:11-cv-01715 (D. Conn. 2011); FTC v. Willms, No. 2:11-cv-
00828 (W.D. Wash. 2011); FTC v. Moneymaker, No. 2:11-cv-00461 (D.
Nev. 2011); FTC v. Johnson, No. 2:10-cv-02203 (D. Nev. 2010); FTC v.
<a href="http://Inc21.com">Inc21.com</a> Corp., 745 F. Supp. 2d 975 (N.D. Cal. 2010); FTC v. JAB
Ventures, LLC, No. 2:08-cv-04648 (C.D. Cal. 2008); FTC v. Ultralife
Fitness, Inc., No. 2:08-cv-07655 (C.D. Cal. 2008); FTC v. FTN
Promotions, Inc., No. 8:07-cv-1279 (M.D. Fla. 2007); FTC v. Think
All Publ'g, LLC, No. 4:07-cv-00011 (E.D. Tex. 2007); FTC v
HispaNexo, Inc., No. 1:06-cv-424 (E.D. Va. 2006); FTC v. Universal
Premium Servs., No. 2:06-cv-00849 (C.D. Cal. 2006); FTC v. Remote
Response Corp., No. 1:06-cv-20168 (S.D. Fla. 2006).
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In addressing this deceptive practice, the Commission remains
guided by core principles articulated in its 1983 Deception Policy
Statement. As the Commission explained, in considering whether to act
against a deceptive practice, the Commission will observe the extent to
which consumers themselves have been able to police and generate
consequences for seller deception.
Finally, as a matter of policy, when consumers can easily
evaluate the product or service, it is inexpensive, and it is
frequently purchased, the Commission will examine the practice
closely before issuing a complaint based on deception. There is
little incentive for sellers to misrepresent (either by an explicit
false statement or a deliberate false implied statement) in these
circumstances since they normally would seek to encourage repeat
purchases. Where, as here, market incentives place strong
constraints on the likelihood of deception, the Commission will
examine a practice closely before proceeding.\257\
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\257\ Policy Statement on Deception (Oct. 14, 1983) (appended to
In re Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)).
The record shows the practice of misrepresenting material facts to
induce consent to negative option features has created distinct issues
consumers have not been able to address themselves, enabling sellers to
collect numerous recurring payments before consumers detect the
misrepresentation and act to stop the charges. This problem is not
confined to a particular subset of industries or misrepresentations but
instead is a too-frequent practice throughout negative option
marketing.\258\ Specifically, when a consumer makes a series of
purchases from the same seller in ordinary circumstances (rather than
through a negative option), each purchase requires the consumer to
actively, even if only briefly, re-evaluate the transaction and
affirmatively consent. Dishonest negative option sellers too easily
bypass these typical guardrails of ``repeat purchases.'' Thus, up-front
misrepresentations can induce consumers into recurring transactions
lacking ordinary sales' built-in interruptions for re-evaluation and
renewed consent. As with other areas where consumers have limited
opportunities for critical up-front evaluation (for example, consumers
cannot easily evaluate medical claims about dietary supplements), so
too, here, the Commission finds additional protection warranted.
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\258\ See n.257.
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The Commission has considered commenters' section 18 specificity
concerns pertaining to material misrepresentations and finds them
unsupported by the record. These commenters suggest a hypothetical
world where negative option features provide distinguishable commercial
benefits without presenting distinguishable material misrepresentation
challenges. The reality is otherwise. Thus, the final Rule prohibits
the specific practice of sellers misrepresenting material terms or
facts in connection with negative option sales.
(4) For clarity, the final Rule adds a definition of ``material''
consistent with precedent.
As noted above, and as suggested by commenters, the Commission
defines ``material'' in the final Rule. This definition adds clarity
and addresses the rhetorical questions raised by commenters regarding
scope. Specifically, consistent with section 5, the TSR, and
longstanding Commission policy and case law, the final Rule defines the
term to mean likely to affect a person's choice of, or conduct
regarding, goods or services.\259\ Thus, mere puffery is not
material.\260\
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\259\ 16 CFR 310.2(t); In re Cliffdale Assocs., Inc., 103 F.T.C.
110 (1984).
\260\ See FTC v. Direct Mktg. Concepts, Inc., 624 F.3d 1, 11
(1st Cir. 2010) (``Where a claim is merely `exaggerated advertising,
blustering, and boasting upon which no reasonable buyer would rely,'
it may be un-actionable puffery.'').
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The hypotheticals posed by MIA--``movies that you will love'' or
``great cleaning every time''--are classic examples of puffery, and
thus, are not within the scope of materiality.\261\ The response to the
question posed by the Chamber--whether misrepresentation of a privacy
policy would be covered--depends, as it always has, on whether the
seller misrepresents its privacy policy in a way likely to affect
consumer choice or conduct.
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\261\ The Commission declines to add language defining a
``reasonable person standard'' as suggested by RILA, and refers
instead to the discussion of reasonableness set forth in the
Commission's Policy Statement on Deception (Oct. 14, 1983) (appended
to In re Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)).
---------------------------------------------------------------------------
4. Proposed Sec. 425.4 Important Information
Section 425.4 of the proposed Rule prohibited sellers from failing
to disclose ``any material conditions related to the underlying product
or service that is necessary to prevent deception, regardless of
whether that term directly relates to the terms of the negative option
offer.'' \262\ As explained in the NPRM, the Commission drafted this
provision because ``many sellers fail to provide adequate disclosures,
thereby luring consumers into purchasing goods or services they do not
want.'' \263\ To address this issue, the proposed Rule required sellers
to provide the following important information prior to obtaining a
consumer's billing information: ``(1) that consumers' payments will be
recurring, if applicable; (2) the deadline by which consumers must act
to stop charges; (3) the amount or ranges of costs consumers may incur;
(4) the date the charge will be submitted for payment; and (5)
information about the mechanism consumers may use to cancel the
recurring payments.'' \264\
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\262\ NPRM, 88 FR 24727.
\263\ NPRM, 88 FR 24726-27.
\264\ NPRM, 88 FR 24726.
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The Commission also proposed requirements regarding the form and
location of this important information, as its ``law enforcement
experience and consumer complaints are replete with examples of hidden
disclosures, including those in fine print, buried in paragraphs of
legalese and sales pitches, and accessible only through hyperlinks.''
\265\ Thus, under the proposed Rule, information ``directly related to
the negative option feature . . . must appear immediately adjacent to
the means of recording the consumer's consent for the negative option
feature.'' Information ``not directly related to the negative option
feature . . . must appear before consumers make a decision to buy
(e.g., before they `add to shopping cart').''
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\265\ NPRM, 88 FR 24727.
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Further, the proposal stated all disclosures must be clear and
conspicuous as defined in Sec. 425.2(c). Among other elements of the
clear and conspicuous definition, the proposed Rule specified that in
any communication using an interactive electronic medium, such as the
internet, mobile application, or software, the disclosure must be
unavoidable. The proposed Rule also specified that a disclosure is not
clear and conspicuous if a consumer ``must take any action, such as
clicking on a hyperlink or hovering over an icon, to see it.''
Finally, the proposed Rule prohibited sellers from including any
information that interferes with, detracts from, contradicts, or
otherwise undermines the ability of consumers to read, hear, see, or
otherwise understand the required disclosures. The final clause of this
prohibition ``includ[ed] any
[[Page 90496]]
information not directly related to the material terms and conditions
of any negative option feature.''
Through these provisions, the Commission sought to prevent
deception by businesses taking advantage of the gray areas in current
law, to deter fraudulent actors through the possibility of monetary
relief, and to ``level the playing field for legitimate businesses,
freeing them from having to compete against those employing
deception.'' \266\
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\266\ NPRM, 88 FR 24727.
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(a) Summary of Comments
Thousands of commenters supported the important information
requirement, stating it is ``critically important that companies make
it explicitly clear what consumers are signing up for.'' \267\
Consumers identified problematic practices the provision would address,
including insufficient and unclear disclosures in small print or those
appearing too late in the transaction. For example, an individual
commenter said, ``[t]oo many [sellers] hide these details in extra fine
print, and increasingly text is in a very light gray color, making it
even harder to read.'' \268\ Another individual commenter noted, ``I
ordered skin care from a tv infomercial only to find out it was a
subscription thing though none of this was disclosed by famous
actresses on the promotion. . . . I went back to my receipt of what I
originally ordered and in fine print saw that I had been duped!'' \269\
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\267\ Thousands of consumers submitted the following identical
comment in their own names: ``It's critically important that
companies make it explicitly clear what consumers are signing up for
and to make canceling fast and easy. If you signed up online, you
should be able to cancel online. If it took one click to join, it
should take one click to cancel. Implementing this consumer
protection rule has the potential to save American consumers
millions of dollars and I hope it is implemented as soon as
possible.'' While apparently a response to a mass solicitation, many
consumers further personalized their submission by adding their
unique experiences and desire for the Rule. See, e.g., Individual
commenter, FTC-2023-0033-0161; -0163; -0164; 0198; -0204; -0545;
0658.
\268\ Individual commenter, FTC-2023-0033-0268. Similarly,
another individual commenter said, ``Businesses should not present
agreements in tiny print on an agent's tablet for the customer to
sign. I can't read the print.'' Individual commenter, FTC-2023-0033-
0349.
\269\ Individual commenter, FTC-2023-0033-0345.
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Several individual commenters indicated clear upfront disclosures
would help them make informed choices and improve their willingness to
try negative option offerings, particularly if the disclosure provided
an easy cancellation mechanism. As one put it, ``I am much more
like[ly] to try--and buy--a new service if I know there is an easy way
to cancel online.'' \270\ Another said, ``I actually subscribe to far
fewer services than I would if I knew that I could easily cancel once I
had tried a sample.'' \271\
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\270\ Individual commenter, FTC-2023-0033-0781.
\271\ Individual commenter, FTC-2023-0033-0031. Accord
Individual commenter, 0196 (``I have had to get to the point of not
subscribing to any online offers, as far too many times I have found
it nearly impossible to unsubscribe''); Individual commenter, FTC-
2023-0033-0306 (``you could win over more subscribers to your
services if you took away the fear and doubts of the public that
they will probably be hooked into something that would be more
troublesome to get out of . . . I can tell you that I have passed
over many opportunities that I was interested in for this very
reason.''); Individual commenter, FTC-2023-0033-0333 (``I've had
some difficulty in the past cancelling enrollments or subscriptions,
so that now I've become very wary of products or services I would
otherwise appreciate having. Implementing this consumer protection
rule would help me feel more confident again.'').
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Public advocacy commenters also supported the provision. The
Berkeley Consumer Law Center said, ``the requirement of `clear and
conspicuous' disclosures of `any material term related to the
underlying goods or services that is necessary to prevent deception'
will help prevent cancellation terms from being shrouded in mystery
through complicated terms and conditions, while also blocking the
practice of hiding subscription services that are needed to fully use a
product.'' \272\ Similarly, a coalition of consumer and public interest
advocacy organizations asserted the proposed disclosure requirement
``will clearly inform consumers of the terms of the contract and how
they may terminate the agreement.'' \273\
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\272\ Berkeley Consumer Law Center, FTC-2023-0033-0855.
Similarly, for the same reasons they provided in connection with the
misrepresentations provision, the Law Professors encouraged the
Commission to maintain the proposed disclosure provision's coverage
of material terms necessary to prevent deception, regardless of
whether such terms are exclusively about the negative option
feature. Law Professors, FTC-2023-0033-0861.
\273\ Public Interest Groups, FTC-2023-0033-0880.
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Law enforcement commenters likewise supported the important
information requirements. The State AGs said they would ``repel the
abusive practices of hidden disclosures, `including those in fine
print, buried in paragraphs of legalese and sales pitches, and
accessible only through hyperlinks.' '' \274\ They particularly
emphasized their support for ``the required disclosure of `the
information necessary for the consumer to cancel the negative option
feature.' '' \275\ The California Auto-Renew Task Force (``CART''), a
group of Southern California prosecutors, supported disclosures
appearing ``immediately adjacent to the means of recording the
consumer's consent for the negative option feature.'' \276\ CART
asserted this provision, together with others, ``will greatly minimize
consumer deception and ensure that consumers fully understand--and
agree to--the nature of the transaction under consideration.'' \277\
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\274\ State AGs, FTC-2023-0033-0886.
\275\ Id.
\276\ CART, FTC-2023-0033-0698.
\277\ Id.
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Other commenters, mostly industry groups,\278\ expressed several
concerns with the proposed requirements, specifically with the
definition of ``clear and conspicuous,'' the scope and timing of the
material terms to be disclosed, specific disclosure requirements,
placement, and treatment of other information.\279\
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\278\ Not all industry groups criticized the provision.
Specifically, MIA wrote, ``The Association agrees with the important
information requirement under the proposed Rule.'' MIA, FTC-2023-
0033-1008.
\279\ In addition, some commenters cited industry-specific laws
and regulations pertaining to disclosures as
[…truncated; see source link]Indexed from Federal Register on November 15, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.