LawFlash

FTC ‘Click-to-Cancel’ Rule Requires Canceling Recurring Charges to Be as Easy as Signing Up

October 21, 2024

The Federal Trade Commission (FTC) recently issued its Final Rule requiring businesses subject to its authority to establish equivalency between the ease of signing up and canceling subscriptions, memberships, and other recurring charges. The new rule also includes significant disclosure requirements, which will require many businesses using or considering using “negative option” features to revise their disclosures as well as their sign-up and cancellation processes.

The new requirements, which will largely come into effect 180 days from publication in the Federal Register, likely April 2025, may result in increased cancellations and terminations initiated by consumers. While the new rule may be welcomed by consumers frustrated with the difficulties that often accompany canceling subscriptions, for businesses, the new rule will necessitate reviewing and possibly adjusting processes and disclosures to ensure compliance.

The essence of the new rule is four-fold:

  1. Simple Cancellation Process: There must be a simple means for a consumer to cancel a subscription or other repetitive goods or services. The test for simplicity is that the cancellation process must be at least as easy as it was to sign up in the first place. Thus, if one can sign up online for a monthly service, one must be able to cancel online in the same manner and with commensurate ease.
  2. No Misrepresenting Negative Options: As with all commerce, the business may not misrepresent material facts when marketing goods or services with a negative option feature. With respect to negative option offerings, this would include describing what the consumer is signing up for and how they may cancel.
  3. Up-Front Disclosure: Material terms must be clearly and conspicuously disclosed prior to seeking a consumer’s billing information in connection with a negative option feature. This avoids the risk that the billing and disclosure occur in the reverse order.
  4. Express Consent to Negative Option Billing: Consumers must give express informed consent to negative option billing before the business may charge the consumer for a good or service in the first place.

As discussed in a prior LawFlash, the rule tracks traditional long-standing federal and state laws prohibiting “unfair or deceptive acts and practices” (UDAP), statutes held by numerous other federal agencies, including the Consumer Financial Protection Bureau (CFPB) and all 56 states and territories. Many of those other enforcement agencies could (and continue to be able to) bring enforcement actions, if not under this rule, but rather by asserting that the conduct prohibited by this rule is also a violation of the relevant UDAP statute. The FTC’s revised rule, however, empowers the FTC to seek civil penalties, consumer redress, and injunctive relief, with a typical resolution with the FTC involving injunctive relief with a 10–20-year duration.

The FTC did accede to two significant changes based on comments it received. First, it abandoned a requirement of an annual reminder to consumers of their cancellation rights, and second, it will permit businesses to inform consumers of benefits associated with their subscription or other offering.

TAKEAWAYS

  1. Any business which offers a negative option product should conduct a comprehensive review of the program in order to assure that there are no “trip wires,” especially when it comes to simplicity in its structure and processes—including alignment of sign-up and cancellation steps, clear and conspicuous nature of disclosures, obtaining informed consent to the negative option, and the nature of the advocacy that is used to retain customers. Adherence to the new rule is of particular importance for emerging companies delivering subscription-based software products or services to consumers.
  2. Consideration should be given in that review process to mitigating the risks of action by not only the FTC but also others, including the CFPB and state attorneys general as well as private actions initiated by plaintiff’s lawyers.
  3. The tenor of the disclosures and process steps should be reviewed, once revised, to enable consumer-friendly engagement and mitigate the prospect of consumer complaints to relevant agencies that often drive both government enforcement and private plaintiffs’ actions.
  4. Consultation with and review by counsel with experience at the intersection of ecommerce and FTC, CFPB, and state attorneys general enforcement activity would be prudent to test and validate process and disclosure changes for compliance and risk mitigation purposes.

We anticipate that affected businesses may challenge this rule under doctrines recently established by the US Supreme Court in both West Virginia v. EPA and Loper Bright v. Raimondo, noting that the rule was approved by the Commission on a 3-2 party-line vote, with Commissioner Melissa Holyoak among the two “no” votes issuing her own statement expressing concern that the rule may exceed the Commission’s authority.

Law clerk Jesse C. Gonzales contributed to this LawFlash.

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