March 28, 2023

Volume XIII, Number 87


March 27, 2023

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CFPB: Negative Option Marketing Practices May Violate CFPA

On January 19, the CFPB issued Circular 2023-01 to affirm that companies offering “negative option” subscription services are required to comply with federal consumer financial protection laws. According to the Circular, “negative option” refers to a term or condition under which a seller may interpret a consumer’s silence, failure to take an affirmative action to reject a product or service, or failure to cancel an agreement as acceptance or continued acceptance of the offer (see our previous blog posts on negative option marketing here and here). The CFPB warns that negative option marketing practices may violate the prohibition on unfair, deceptive, or abusive acts or practices in the CFPA where a seller:

  1. Misrepresents or fails to clearly and conspicuously disclose the material terms of a negative option program;

  2. Fails to obtain consumers’ informed consent; or

  3. Misleads consumers who want to cancel, erects unreasonable barriers to cancellation, or fails to honor cancellation requests that comply with its promised cancellation procedures.

The Circular highlights that negative option programs can be particularly harmful when paired with “dark patterns” because consumers may be misled into purchasing subscriptions and other services with recurring charges and be unable to cancel the unwanted products and services or avoid their charges. The Circular cites to recent CFPB and FTC enforcement to combat the rise of digital dark patterns, designed to deceive, steer, or manipulate users into behavior that is profitable for a company, but often harmful to users or contrary to their intent (see our recent webinar on dark patterns enforcement in the retail space here).

The CFPB notes it has received consumer complaints, including complaints from older consumers, about being repeatedly charged for services they did not intend to buy or no longer want to continue purchasing. Some consumers have reported that they were enrolled in subscriptions without knowledge of the program and its cost. Consumers have also complained about the difficulty of cancelling subscription-based services and about charges made to their credit card or bank account after they requested cancellation.

Putting It Into Practice: In addition the CFPB and FTC, companies must contend with additional regulation of negative option marketing from several states, including new autorenewal laws in California, Colorado, Delaware, and Illinois. Given some of the more aggressive aspects of federal guidance and new state laws, it will be important for companies to carefully monitor federal and state enforcement related to recurring subscription programs and carefully review any recurring billing or subscription programs in light of the ongoing focus on this issue.

Copyright © 2023, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XIII, Number 26

About this Author

Moorari Shah Bankruptcy Lawyer Sheppard Mullin Law Firm

Moorari Shah is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles and San Francisco offices. 

Areas of Practice

Moorari combines deep in-house and law firm experience to deliver practical, business-minded legal advice. He represents banks, fintechs, mortgage companies, auto lenders, and other nonbank institutions in transactional, licensing, regulatory compliance, and government enforcement matters covering mergers and acquisitions, consumer and commercial lending, equipment finance and leasing, and supervisory examinations,...

A.J. S. Dhaliwal Bankruptcy Attorney Sheppard Mullin Washington DC

A.J. is an associate in the Finance and Bankruptcy Practice Group in the firm's Washington, D.C. office. 

A.J. has over a decade of experience helping banks, non-bank financial institutions, and other companies providing financial products and services in a wide range of matters including government enforcement actions, civil litigation, regulatory examinations, and internal investigations.

With a diversified regulatory, compliance, and enforcement background, A.J. counsels financial institutions in matters involving...