Subscription business model concepts.

Mornings for advertising lawyers usually start slow – coffee in one hand and phone in the other while we glance at emails. Imagine our surprise the other morning when we saw that the Federal Trade Commission (FTC) had issued a press release and Federal Register Notice at 6 a.m. so that Chair Lina Khan could appear on NPR’s “Morning Edition” to talk about a new proposed Negative Option Rule. This had to be a big deal, and our assessment is that, yes, it is – if it’s finalized. The term “game changer” is used far too often, but this could be just that – a proposed rule that would cover virtually all subscription services, online and off, impose exacting requirements on cancellations and save-a-sale offers, require annual reminders, and create the threat of civil penalties for any and all misrepresentations made.

But first, let’s get the procedural stuff out of the way – it is important. Back in 2019, way before Khan became the chair, the FTC announced that it was seeking comment on the Prenotification Negative Option Rule and asked whether and how it could be improved or expanded. Now, contrary to its name, the FTC’s existing Negative Option Rule is a very limited thing that only covers prenotification plans, such as book-of-the-month clubs, for which sellers send periodic notices offering goods to participating consumers and then send those goods if the consumers do not decline the offer. That’s not much of a thing in the market today, and the FTC has not had much recent enforcement under this rule.

In response to the request for comments, 18 comments were filed – and then three years of radio silence from the agency until it interrupted our morning coffee. The agency has now responded to the 18 comments with a proposed new Negative Option Rule that would essentially blow up the old rule and create an entirely new rule.

With that background out of the way, here are the highlights of this proposed rule. There are five substantive categories: misrepresentations, important information, consent, simple cancellation (“click to cancel”) and annual reminders. You may think the FTC already released updated guidance along these lines recently, and you’d be right. A lot of what’s in the rule mirrors what the FTC said in an enforcement policy statement for the Restore Online Shoppers’ Confidence Act in October 2021, which also emphasized disclosure of important information, consent and simple cancellation. The FTC wants sellers to get express affirmative consent to the subscription terms, separate from the rest of the transaction, and to offer a simple cancellation method through the same method the consumer used to sign up for the service. In other words, if you enrolled online, then you must be able to cancel online (i.e., click to cancel). Notably, the proposed rule also provides more details on save-a-sale offers at cancellation; they are only allowed if the consumer has specifically consented to receive a save-a-sale offer prior to cancellation. Information such as how to cancel must be included in an annual reminder if the subscription is for nonphysical goods, which is one more way the FTC proposes catching up to what’s already a common requirement at the state level. If this sounds unclear to you and you’d like a bullet point summary, then check out the helpful fact sheet that the FTC released regarding the proposed changes.

Potentially the most significant change included in the proposed rule does not relate to how businesses must comply but instead how the FTC can bring action against what it deems misleading advertising. As we’ve discussed previously, the AMG Capital case severely restricted the FTC’s ability to impose monetary penalties. The agency can seek monetary penalties for violations of a rule such as this one, however, and if the proposed language is finalized, then companies are on the hook for a lot more than misleading subscription practices. So long as the company offers a subscription, the proposed rule allows the FTC to seek penalties in relation to any misleading representations, which can include product claims, pricing claims or any other statements made in the advertising. The rule only directly covers negative options, but the FTC could lodge civil penalties for anything it deems a misrepresentation in advertising. This is a massive increase in the FTC’s power and is sure to be one of the biggest talking points surrounding the proposed rule.

If passed, this rule will have an enormous impact on any business that offers products or services on a negative option basis. While companies have adjusted to complying with the requirements of the Restore Online Shoppers’ Confidence Act (ROSCA) for online transactions and the myriad state laws that have been passed, this rule imposes some restrictions that go well beyond current laws and will require companies to reexamine many of their existing practices. For example, the proposed notice and consent provisions are highly prescriptive in nature and will likely require companies to revisit the manner in which they currently disclose the terms of their offers and obtain the consumer’s consent. Similarly, the requirement that companies obtain consumer consent before presenting any save-a-sale offers is likely a game changer, as such offers are a routine part of any sales transaction and often result in a benefit to consumers.

The most alarming change, however, is the FTC’s proposal to make any misrepresentation stated in an ad subject to a rule violation and civil penalties, even if the alleged misrepresentation has nothing to do with the negative option feature. This means that any advertisement containing a negative option offer is subject to the rule and carries the risk of civil penalties should the FTC determine that any part of the advertising is misleading. As the subscription market economy continues to grow at an exponential rate, this portion of the proposed rule puts this growing economy at heightened risk, particularly as the FTC continues to look for ways to get money after the Supreme Court’s AMG Capital decision.

The proposal was voted out with a strong dissent from soon-departing Commissioner Christine Wilson that raises real concerns about the agency exceeding its authority here. In her dissent, Wilson essentially states that, yes, there are some real issues in the negative option market, but this proposed rule “would extend far beyond the negative option abuses cited in” the record and “far beyond practices for which the rulemaking record supports a prevalence of unfair or deceptive practices.” She focuses particular attention on the aspect of the rule that would cover “any misrepresentation made about the underlying good or service sold with a negative option feature.” Wilson explains that the Federal Register Notice “does not offer evidence that negative option marketing writ large is permeated by deception.”

The issues she raises are very significant and will certainly be raised a lot as this rulemaking proceeds. As for legal authority, it is important to note that this rule is subject to Magnuson-Moss rulemaking requirements. In sum, the FTC can only issue rules that are based on unfair or deceptive practices that are prevalent in the marketplace. More information about this complex and time-consuming process can be found here.

Comments will be due 60 days after the Federal Register Notice is published (technically that has not happened yet), and the notice states that “[t]he Commission will provide an opportunity for an informal hearing if an interested person requests to present their position orally.” Given the intense interest in this proceeding, we anticipate an informal hearing will be one of the next steps in this process.

And finally, we are well aware that 6 a.m. postings by a federal agency do not happen magically. We hope there was some real appreciation for the FTC staff who had to be up at 5 a.m. to make sure the 6 a.m. posting happened so that the chair could appear on the morning show.