Last week, a security services company and several trade groups filed their merits brief in the U.S. Court of Appeals for the Eighth Circuit challenging the Federal Trade Commission’s (FTC) newly adopted Negative Option Rule, also called Click-to-Cancel. The rule introduces a host of requirements for companies selling goods or services with a negative option feature in both consumer and B2B transactions, as we outlined last year. Notably, a negative option seller must make cancellation as simple as signing up, including providing an easy online cancellation method if consumers signed up online.
The rule went partially into effect on January 14, 2025, with the prohibition on misrepresentations of material facts relating to the promotion or offering for sale of any good or service with a negative option. The remainder of the rule covering consent and cancellation requirements takes effect in May 2025.
The court previously denied petitioners’ request to stay the rule from taking effect pending litigation.
Petitioners argue that the rule:
- Exceeds the FTC’s statutory authority
- Is procedurally defective
- Is arbitrary and capricious
First, petitioners argue that the rule exceeds the FTC’s limited rulemaking authority under the Magnuson-Moss Amendments to the FTC Act, which limit the FTC’s authority to issuing “specific” rules targeting “prevalent” unfair or deceptive acts or practices.
According to petitioners, the rule is overbroad because it applies across industries, even though many of these industries may have little or nothing in common. Petitioners further argue that the rule fails the “specificity” requirement because it is vague, using loose language such as “material” or “easy” to regulate conduct. Petitioners also argue that the FTC has not shown that the unfair or deceptive practices the rule seeks to address are in fact “prevalent.”
Petitioners contend that the FTC’s overreach is further shown by the rule’s overriding of numerous federal statutes that already regulate recurring subscriptions. They allege that the rule is broader than any of Congress’s regulations for recurring subscriptions, and that it nullifies Congress’s customized regulations for particular recurring subscriptions.
Because of these defects, petitioners argue that the rule contravenes the nondelegation doctrine. The nondelegation doctrine prohibits Congress from delegating its legislative powers to executive agencies without clear and specific guidance. If a court were to find that the FTC is creating substantive rules beyond what Congress intended, it could strike down the rule on nondelegation grounds.
Second, petitioners argue that the FTC failed to follow statutorily required steps in its rulemaking.
Petitioners maintain that the FTC failed to issue a preliminary regulatory analysis on which the public could comment. This requirement applies when the FTC estimates that a rule will affect the economy by $100 million or more annually.
Third, petitioners argue that the rule is arbitrary and capricious because the FTC failed to address “multiple problems” with the rule. According to petitioners, the FTC acknowledged that there would be problems with implementing particular requirements, but then pretended the rule did not contain that requirement. Petitioners also challenged the rule’s effort to regulate “all material terms” of a transaction involving a subscription, even where those terms had nothing to do with a subscription, as arbitrary and capricious.
Link to What Is the Status of the Rule? What Is the Status of the Rule?
The administration change has made the status of the rule somewhat uncertain. Notably, the new FTC chair, Andrew Ferguson, voted against the rule when it was originally promulgated. Commissioner Melissa Holyoak also voted against the rule and issued a lengthy dissent, with arguments that petitioners appear to have echoed in their brief.
Additionally, President Trump recently issued executive orders directing the review of all federal regulations, requiring agency heads to assess rules for potential rescission or modification, adding to the uncertainty of the rule’s future.
The FTC’s responsive brief is due on March 14, 2025.
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