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7th Edition: Trends in Marketing Communications Law

E-tail/Retail >> E-Tailers Beware: Regulators Are Drilling Down on Negative Option Marketing

October 6, 2020

If you look at your credit card statements, chances are that you have one or more recurring monthly or annual charges, whether for media subscriptions, meal delivery services, workout apps, cosmetics shipments or clothing rentals. Subscription services, with their “negative option” business model, are the new normal of e-commerce, appealing to a younger demographic that is plugged into the sharing economy and craves personalization, efficiency and convenience.

The Federal Trade Commission (FTC) has increasingly sought to regulate negative option marketing through both enforcement cases and regulation, including its Negative Option Rule and Telemarketing Sales Rule (TSR). The FTC also relies on the federal Restore Online Shoppers’ Confidence Act (ROSCA) to address online negative option practices and protect consumers from being billed on a recurring basis for products they did not intend to purchase — and cannot easily cancel. Further, states such as California have stringent local laws that go above and beyond the federal requirements.

States have started to follow California’s example, implementing new consent and disclosure requirements for “free trial” or automatic renewal programs. Vermont now requires consumers to affirmatively opt-in to automatic renewal terms, in addition to accepting the underlying subscription contract. For free trial offers of one month or longer, Washington, D.C. requires that consumers affirmatively and specifically consent to the automatic renewal before being charged. Like other states, both Vermont and D.C. impose specific requirements for clarity and conspicuousness of renewal terms and require that consumers are notified of upcoming automatic renewals.

The FTC also continues to focus on subscription programs. San Francisco snack company UrthBox recently settled allegations by the FTC that it failed to adequately disclose material terms of the company’s “free trial” negative option marketing plans. The FTC alleged that customers who had ordered a free UrthBox snack box were unaware that Urthbox had enrolled them in a six-month subscription plan until discovering the charge on their credit card statements. UrthBox’s settlement payment may be used to compensate consumers deceived by the trial offers.

The FTC also filed a complaint against Match Group (owner of Match.com, Tinder and other dating sites) alleging that the company violated ROSCA by failing to provide a simple method for consumers to stop recurring charges and that it misled consumers with a “confusing and cumbersome cancellation process” that caused consumers to believe they had cancelled their subscriptions when they had not. “Each step of the online cancellation process… confused and frustrated consumers and ultimately prevented many consumers from cancelling their Match.com subscriptions,” the FTC said.

In light of these actions, the FTC recently collected public comments on its existing regulations governing negative option marketing, which may pave the way for significant expansion of the existing Negative Option Rule. The current Negative Option Rule applies only to “prenotification plans” for the sale of goods and does not cover other common forms of modern negative option marketing, such as continuity plans, automatic renewals and trial conversions.

Further, ROSCA and the TSR do not address negative option plans in all media: ROSCA applies only to online negative option marketing and the TSR applies only to telemarketing programs. The FTC’s call for public guidance on the Negative Option Rule to better address prenotification negative option marketing, continuity plans, trial conversions and/or automatic renewals is likely a harbinger of more scrutiny in this area to come.

Key Takeaways:

  • The FTC and state regulators continue to focus their attention on the “negative option” business model of subscription services.
  • The last year has brought new states implementing consent and disclosure requirements aimed at ensuring that consumers are not charged for subscription renewals and trial conversions without their awareness and agreement.
  • Marketers can expect more scrutiny of negative option marketing activities going forward, given that the FTC recently collected public comments on the Negative Option Rule to better address prenotification negative option marketing, continuity plans, trial conversions and/or automatic renewals.