Ending speculation and uncertainty about whether new leadership at the Federal Trade Commission (FTC) would repeal or continue to defend the agency’s Negative Option Rule, which regulates offerings such as autorenewal of subscription services, this week the agency filed a brief at the Eighth Circuit defending the rule—something of a surprise.
We previously discussed the arguments raised by industry groups that are challenging the rule. Broadly, the challengers assert that the rule exceeds the FTC’s statutory authority, is procedurally defective, and is arbitrary and capricious. The Eighth Circuit previously denied petitioners’ request to stay the rule from taking effect pending litigation.
Link to Negative Option Rule Regulates Multiple Industries Negative Option Rule Regulates Multiple Industries
In response to the challengers’ argument that the rule is overly broad because it regulates across different industries, the FTC noted that no law prohibits the agency from doing so and that it has used its rulemaking authority to promulgate cross-industry rules for decades. It cited a litany of past rules that simultaneously regulated different industries, such as the Mail Order Rule, Franchise Rule, and Holder Rule.
The FTC also faulted the challengers for identifying no genuine ambiguities in the rule that would make it impermissibly vague under Section 18 of the FTC Act, which requires the agency to define specific unfair or deceptive acts or practices. Although the challengers complained of the many seemingly vague standards, such as the rule’s requirements that a cancellation mechanism be “simple” and “easy,” the FTC argued that these were intentionally flexible standards and that the rule provides enough commentary and guidance to put businesses on notice.
Link to FTC Relies on “Copious Evidence” FTC Relies on “Copious Evidence”
Arguing against a finding that the Rule is arbitrary and capricious, the FTC cited to enforcement actions, tens of thousands of consumer complaints, comments from industry and consumer groups, and economic studies purporting to show that unfair and deceptive negative option practices are prevalent. The agency noted these findings are not judicially reviewable and that it “reasonably found” that promulgating the rule therefore was justified.
The FTC pushed back on the challengers’ contention that the FTC Act required the agency to take specific procedural actions, in this case, issuing a preliminary regulatory analysis, which is only required if the effect of the rule was in excess of $100 million. The FTC maintained it was not. Furthermore, even if it did have to issue such an analysis, the FTC argues that any error would be harmless and does not rise to prejudicial error.
Finally, the FTC requested that, should the court find any part of the rule to be unlawful, it sever those provisions rather than vacating the Rule entirely.
The challengers’ reply brief is currently due April 4.
Link to Negative Option Rule Requirements Negative Option Rule Requirements
Reminder: The rule currently prohibits misrepresenting material facts defined as likely to affect a person’s choice of goods and services in addition to any facts related to a negative option offering. A non-exhaustive list includes facts relating to consumer consent, deadlines to stop or cancel future charges, cancellation, costs, purpose or efficacy of the underlying good or service, and health or safety.
Beginning May 14, 2025, the rule’s remaining requirements will become effective, including:
- Disclosure of all material terms, clearly and conspicuously, and immediately adjacent and before the consent mechanism, including:
- That consumers will be charged for the good or service, any applicable trial period, and if applicable the charges will recur unless the consumer takes steps in a timely manner to prevent or stop such charges
- Each deadline (by date or frequency) by which the consumer must act to prevent or stop the charges
- The amount (or range) of costs to the consumer
- The information necessary for the consumer to find the simple cancellation mechanism
- Obtaining the consumer’s unambiguous express informed consent to the negative option feature, separately from any other portion of the transaction, before charging the consumer
- Offer a “simple mechanism” that is “easy to find” for a consumer to cancel through the same medium the consumer used to consent to the negative option
- Sellers cannot include any other information that detracts from, contradicts, or undermines the disclosure of material terms or the consumer’s ability to provide their express informed consent
- Maintain verification of the consumer’s consent for at least three years unless the seller can demonstrate by a preponderance of the evidence it used technology that required consent
The defense of the rule is a bit of a surprise, given the deregulatory push of the Trump administration. How the agency deals with other rules will be interesting to watch. Stay tuned here to stay on top of these issues.
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