Reed Smith In-depth

On March 23, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rule Making to amend its Negative Option Rule (the Amended Rule), and on June 23, 2023, it concluded its 60-day public comment period. If the FTC finalizes the Amended Rule, it would apply to all negative options (e.g., negative option offers, subscription programs, automatic renewals, continuity plans, and free-to-pay or nominal-fee-to-pay conversion offers) in all media, and it would incorporate a series of both new and existing obligations under the current patchwork of state and federal laws governing negative options. Entertainment and media companies, such as streaming, gaming, and digital publication platforms, that rely heavily on their subscription programs to generate revenue should pay close attention to the FTC’s rulemaking on this topic in order to mitigate the risk of litigation and can take measures now to set up strong compliance programs.
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Summary of the current legal framework

“Negative options” refers broadly to a category of commercial transactions where the subscription will automatically continue or renew unless the consumer takes an affirmative action to prevent it from continuing or renewing. Negative option marketing generally falls into four categories: prenotification plans (e.g., book-of-the-month clubs), continuity plans (e.g., grocery deliveries), automatic renewals (e.g., magazine or newspaper subscriptions), and free trial (i.e., free-to-play or nominal-fee-to-pay) conversion offers. These forms of negative option marketing are governed by a patchwork of federal and state laws, and in particular, the FTC Act, the Restore Online Shoppers’ Confidence Act (ROSCA), the Telemarketing Sales Rule (TSR), and individual state auto-renewal laws.

These laws include specific guidelines concerning the operation of negative option business activities, many of which overlap in varying degrees, but as acknowledged by the FTC, the current legal framework does not provide clear guidance about how to avoid deceptive negative option disclosures and procedures. In response, the FTC proposed the Amended Rule, which would (1) consolidate all legal requirements specifically applicable to negative option marketing; (2) formalize many of the guidelines previously issued by the FTC; and (3) incorporate new requirements not previously addressed at the federal level.

At the close of the FTC’s most recent public comment period, a bipartisan coalition of 26 state attorneys general (AGs) expressed their support of the Amended Rule and how additional guidance and specificity on compliance with negative option rules would benefit consumers. The AGs’ public comment also made a few additional proposals to the Amended Rule, including that (1) an additional consent should be required before charging a customer after the completion of a free trial; (2) as well as being simple, the cancellation mechanism must be “cost effective, timely, and easy to use”; (3) consumers should receive reminders at least annually; and (4) the Amended Rule should not infringe on a state’s authority to regulate negative marketing in its own jurisdiction.