Skylar Stoudt
Associate, Sheppard Mullin
Alejandro Moreno
Partner, Sheppard Mullin
501 W Broadway Ste 1900
San Diego , CA 92101
Phone: (619) 338-6500
Email: amoreno@sheppardmullin.com
Harvard Univ Law School; Cambridge MA
The White House recently teamed up with the Federal Trade Commission (FTC) to make it easier for customers to cancel unwanted subscriptions and memberships. This new crackdown on subscription services is part of the Biden Administration's effort to impose new rules on businesses promoting transparency and discouraging business practices that may aggravate consumers. Under the FTC's proposed rulemaking, companies would be required to make canceling a subscription as simple as signing up.
The proposed rulemaking is part of the FTC's ongoing review of its 1973 Negative Option Rule. The FTC uses the phrase "negative option" program to broadly define a category of commercial transactions in which sellers interpret a customer's failure to take an affirmative action, either to reject an offer or cancel an agreement, as assent to be charged for goods or services. The new regulation would impact subscription services in various sectors, including industries as diverse as gym memberships, periodicals, the cosmetics industry, and streaming services.
A glimpse into the FTC's proposal
The FTC is ushering in significant changes to how subscription services operate with a proposed "click to cancel" provision, which should make it easier to cancel a subscription service. The FTC's proposal introduces stricter guidelines to curb misrepresentations, mandate the clear presentation of crucial information, and ensure that consumers are fully aware of their commitments. The proposed amendment pushes for a streamlined cancellation process - if consumers can subscribe online, businesses will be mandated to make it equally easy to unsubscribe.
FTC Chair Lina M. Khan claims that "Some businesses too often trick consumers into paying for subscriptions they no longer want or didn't sign up for in the first place. The proposed rule would require that companies make it as easy to cancel a subscription as it is to sign up for one." The consumer-friendly initiative could lead to stiff penalties for businesses.
This move is part of the FTC's broader review of its 1973 Negative Option Rule, aimed at combating unfair or deceptive practices in subscriptions, memberships, and other recurring-payment models. While these programs offer considerable benefits to consumers, they are under scrutiny for practices that include inadequate disclosures, billing without consent, and making cancellation a Herculean task.
The FTC's proposal for companies
The FTC's proposed changes are designed to introduce a consistent legal framework for the industry and would require companies to adopt the following practices:
Simple cancellation mechanism: Would eliminate the difficulty in canceling subscriptions by requiring businesses to make cancellation as easy as initiating the subscription. If a subscription can be started online, canceling it should be possible through the same online platform and with the same ease.
New requirements before making additional offers: Before sellers can pitch additional offers or modifications to consumers attempting to cancel, they must first obtain the consumer's consent to hear these offers. The goal is to ensure that consumers have the option to decline further pitches and proceed directly to cancellation.
New requirements regarding reminders and confirmations: For negative option programs not involving physical goods, the proposed rule mandates that sellers send consumers an annual reminder before automatic renewals. This aims to enhance transparency and ensure consumers are well-informed about their subscriptions.
The legal landscape ahead
These proposed changes signal a trend towards more consumer-friendly subscription practices and highlight the potential for increased legal action. The explicit standards and requirements laid out in the proposed rule underscore the likelihood of heightened government enforcement and civil actions against businesses that fail to align with these new regulations.
Government enforcement is poised to become a significant issue for non-compliant entities, with the FTC ready to leverage its authority to ensure adherence to these more transparent, consumer-focused practices. This regulatory shift may spur litigation from the plaintiffs' bar similar to what has happened with respect to the FTC's enforcement against "junk fees." Non-compliance with these forthcoming regulations may expose companies to the risk of incurring damages or being required to disburse settlement awards.
Adapting to the proposed FTC rules
In light of the FTC's proposed amendments targeting "negative option" programs and introducing more stringent requirements for subscription-based services, businesses should take proactive steps to ensure compliance:
Review and revise subscription processes: Audit your current sign-up and cancellation procedures to identify any disparities in ease between the two. Ensure that if customers can subscribe online, they can also cancel their subscription with equal ease online.
Enhance transparency: Clearly disclose all terms and conditions associated with your subscription service upfront, including any obligations or recurring charges. Make sure this information is presented in a clear, conspicuous manner that is easily accessible to consumers before they agree to subscribe.
Implement a straightforward cancellation mechanism: Develop a "click to cancel" function or a similarly simple online mechanism that allows customers to terminate their subscriptions without undue hassle. This should include minimizing the number of steps required to cancel and eliminating the need for customer service intervention.
Consent for additional offers: When consumers attempt to cancel, and you wish to present them with additional offers or incentives to stay, first obtain their affirmative consent to hear these offers and keep a record of such consent.
Annual reminders for renewals: For services that involve recurring payments or automatic renewals, send out clear, timely reminders to consumers ahead of each renewal period. This communication should include details on how to cancel if they choose not to renew.
Legal and regulatory updates: Stay informed about any further updates or clarifications to the FTC's rules regarding negative option programs. Consult with legal counsel to ensure your practices remain in full compliance with evolving regulations.
Adopting these strategies can help businesses comply with the FTC's proposed rules and enhance customer satisfaction and trust. Demonstrating a commitment to transparency and ease of use in subscriptions can differentiate your service in a competitive market.