Negative Option Marketing Overview:
The Federal Trade Commission (“FTC”) broadly defines “negative option marketing” as a category of transactions where a consumer customer’s failure to take affirmative action, either to reject an offer or cancel an agreement, is interpreted as consent to be charged for goods or services. This shifts the conventional buyer-seller relationship, making subsequent offers deemed accepted unless explicitly rejected. Four plans fall within this category: pre-notification negative option plans, continuity plans, automatic renewals, and free-to-pay or nominal fee-to-pay conversion plans.
Auto-Renewal Contracts:
Auto-renewal contracts, also known as automatic renewal or evergreen contracts, establish agreements between a service provider and a consumer customer. In automatic renewal negative option offers, contracts automatically renew at the end of a fixed period, such as a one-year magazine subscription, unless consumers instruct otherwise. Trial offers are often structured as free-to-pay or nominal fee-to-pay conversion plans, where consumers receive a free or nominally priced service for an introductory period. Charges are incurred only if consumers do not take affirmative action to cancel, reject, or return the service before the trial period ends.
Consumer Concerns
The surge in subscription-based services, spanning streaming platforms, grocery services, magazine subscriptions, software subscriptions, and meal kit services, has led to growing concerns about intricate cancellation processes. Subscribers often grapple with elusive cancellation buttons and prolonged wait times, deeming these obstacles coercive and exploitative.
Federal Law Safeguards
The Federal Trade Commission Act, Section 5, addresses omissions of material information affecting consumer decisions. It specifies seven material terms sellers must disclose in negative option plans. 15 U.S.C. §45. The Restore Online Shoppers’ Confidence Act (“ROSCA”) complements this by mandating clear disclosures, express informed consent, and simple mechanisms to stop recurring charges in online negative option transactions. 15 U.S.C. §8401 et seq. Under ROSCA, if a business charges or attempts to charge any consumer for goods or services online through a negative option, it must: (1) clearly and conspicuously disclose the material terms of the transaction before obtaining billing information; (2) obtain the consumer’s express informed consent before charging the consumer; and (3) provide “simple mechanisms” for a consumer to stop recurring charges. 15 U.S.C. §8402.
California’s Automatic Renewal Law
California’s Automatic Renewal Law (“CA ARL”) imposes robust information, notice, and consent requirements on businesses making auto-renewal offers to California consumers. Cal. Bus. & Prof. Code § 17601 et seq. These include clear and conspicuous offer terms, affirmative consent before charging and providing detailed acknowledgment and cancellation information. CA ARL requires that any auto-renewal provision in the contract must be made to the consumer prior to the agreement being finalized and in “visual proximity, or in the case of an offer conveyed by voice, in temporal proximity, to the request for consent to the offer” and in at least one of the following manner: (a) Set off from the surrounding text in a way that makes the language stand out, (b) In a larger font than the surrounding text, and/or (c) In a type, font, and/or color that is in contrast with the surrounding text. Cal. Bus. & Prof. Code § 17601.
Proposed FTC Rule Changes, 2023
In April 2023, the FTC initiated a proposed rulemaking to overhaul negative option plans.[1] The proposed rule has now closed for stakeholders’ and public comments after a 60-day window. It aims to prohibit misrepresentations, enforce certain disclosures, and mandate an easy cancellation process. Violations could lead to significant penalties, signaling a potential shift in consumer protection enforcement. Navigating the complex landscape of negative option and auto-renewal contracts necessitates vigilance, understanding, and compliance with evolving federal and state regulations.
Stay tuned for updates as the proposed FTC rule unfolds!
[1] A Proposed Rule by the Federal Trade Commission on 04/24/2023, 88 FR 24716. https://www.federalregister.gov/documents/2023/04/24/2023-07035/negative-option-rule
By: Sharvani Navangul