Earlier this week, we discussed the Federal Trade Commission’s (FTC) final amendments to the Negative Option Rule, now retitled the Rule Concerning Recurring Subscriptions and Other Negative Option Programs. These amendments, which are set to take effect 180 days after publication in the Federal Register, are purportedly aimed at stopping deceptive and unfair practices in negative option marketing. However, the rule has now drawn a legal challenge.
Yesterday, the Electronic Security Association, Interactive Advertising Bureau, and NCTA – The Internet & Television Association filed a petition for review in the U.S. Court of Appeals for the Fifth Circuit. The petitioners seek to vacate the FTC’s final rule, arguing that it is arbitrary, capricious, and an abuse of discretion under the Administrative Procedure Act. They also contend that the rule is unsupported by substantial evidence and exceeds the FTC’s statutory authority.
Background:
As discussed in our previous blog, the FTC’s final rule introduces several key provisions, including:
- Prohibition of Misrepresentations: The rule prohibits misrepresentations of any material fact made while marketing goods and services using negative option features.
- Required Disclosures: Sellers must provide clear and conspicuous disclosures of recurring payments, deadlines to stop charges, costs, billing dates, and cancellation methods before obtaining consumers’ billing information.
- Affirmative Consent: Sellers must obtain consumers’ unambiguously affirmative consent to the negative option feature before charging them.
- Simple Cancellation Mechanisms: Sellers must provide consumers with simple mechanisms to immediately halt all recurring charges.
The final rule applies to all negative option programs in any media, covering a wide range of industries from gym memberships to internet services.
The Lawsuit:
The petitioners argue that the FTC’s final rule imposes onerous new regulatory obligations on companies offering negative option plans. “The Final Rule is an attempt to regulate consumer contracts for all companies in all industries and across all sectors of the economy in which the customer purchases a service or subscription that will continue unless the customer exercises the option to cancel.”
The petitioners further claim that the rule deems all negative option contracts to be deceptive unless they comply with these new requirements. “The Final Rule calls these ‘negative option’ contracts — estimated as covering over a billion paid subscriptions in the United States … — and deems them all to be deceptive unless they comply with onerous new regulatory obligations regarding disclosures, how those disclosures are communicated, a ‘separate’ consent requirement, regulations of truthful company representative communications with customers, and prescriptive mandates for service cancellation, among others.”
The petition seeks to have the court vacate the final rule on the basis that it is arbitrary and capricious, unsupported by substantial evidence, and exceeds the FTC’s statutory authority.
A separate lawsuit was filed challenging the final rule in the Sixth Circuit one day prior.
Our Take:
Unless its implementation is stayed by the courts, the FTC’s final rule will take effect 180 days after its publication. Businesses offering recurring subscriptions and memberships must prepare to comply with the new requirements or risk facing legal and regulatory consequences.
Troutman Pepper will continue to monitor this litigation and provide updates.