June 7, 2023

Volume XIII, Number 158


June 06, 2023

Subscribe to Latest Legal News and Analysis

June 04, 2023

Subscribe to Latest Legal News and Analysis

Negative Option Practices Under Increased Scrutiny in the US

Retailers and service providers with US business operations should take note: the Federal Trade Commission (FTC) is increasing its scrutiny of negative option marketing activity to combat unfair or deceptive practices related to subscriptions, memberships and other recurring-payment programs. The FTC just issued a notice of proposed rulemaking as part of its ongoing review of its 1973 Negative Option Rule—one of the primary guides for the FTC’s enforcement focus.

Negative option arrangements include “free trial” programs that automatically convert to paid subscriptions, and “automatic renewals” which allow sellers to unilaterally renew a consumer’s paid subscription when it expires unless the consumer affirmatively cancels by a certain date. The FTC considers these marketing practices a renewed enforcement priority.

Negative option marketing in the US already requires special considerations, including specific disclosures of material terms, notice at specific intervals before automatic payments or renewals are initiated, prior notice of any changes to the terms of service with an opportunity to cancel, and easy and unimpeded cancellation processes under which compliant requests are timely honored. However, according to recent statements by the FTC, the current patchwork of federal laws and regulations does not provide brands with a consistent legal framework to follow. The proposed rule purports to address the gaps.

Among the several significant updates the FTC is proposing, the new rule would implement the following:

  • Requirement for simple cancellation mechanisms. The proposed rule would require sellers to make it at least as easy to cancel a service as it was to start it. For example, if consumers can sign up online, they must be able to cancel on the same website, in the same number of steps.

  • New requirements before making additional offers. The proposed rule would require sellers to obtain a consumer’s affirmative consent before pitching additional offers or modifications when the consumer tries to cancel. If the consumer does not consent upon request, the seller must immediately implement the cancellation process without further impediment.

  • New requirements regarding reminders. The proposed rule would require sellers to provide an annual reminder before automatically renewing a service subscription.

The FTC developed a Fact Sheet summarizing the proposed changes to the Negative Option Rule and is seeking comments from the public within 60 days of publication in the Federal Register. In the meantime, US retailers and service providers should take note of the proposal and review their current negative option marketing activity to position their business for compliance in this area of renewed focus by the FTC.

Copyright © 2023, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XIII, Number 86

About this Author

Malika Levarlet, Attorney, Sheppard Mullin, Corporate Practice, mergers

Ms. Malika Levarlet is an associate in the Corporate Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Ms. Levarlet's practice focuses on advising international and domestic companies in connection with mergers and acquisitions, cross-border transactions (with a focus on U.S. and European companies), joint ventures, licensing agreements, and corporate governance. She represents clients operating in a wide range of industries including technology, hospitality, fashion and apparel, healthcare, financial services, and aerospace and defense...

 Jason Mueller Sheppard Mullin Intellectual Property

Jason Mueller is a partner in the Intellectual Property Practice Group in the firm's Dallas Office, serves on the Diversity and Inclusion committee and leads the Veterans at Sheppard affinity group within the firm.

Jason provides strategic business counseling on intellectual property and advertising issues, and has extensive trial and appellate experience in copyright, trademark, trade secret, patent and false advertising cases. As lead trial lawyer, he has tried cases before juries in the Eastern, Northern and Southern Districts of Texas to verdict. Outside of Texas Jason has...

Robert E. Hough II Intellectual Property Lawyer Sheppard Mullin Law Firm

Robert Hough is an associate in the Intellectual Property Practice Group...