Policy statements are neither rules nor notices of penalty offenses, but when the FTC issues a policy statement discussing an area that has been the subject of a lot of enforcement activity, it warrants serious attention, particularly when the press release discusses ramping up enforcement on “illegal dark patterns that trick or trap consumers.” That’s some pretty strong language.
The latest FTC missive arrives with a 3-1 vote featuring a Commissioner Wilson dissent and a Commissioner Phillips concurring statement. More about the statements later, but for now let’s talk about the important content in the Enforcement Policy Statement Regarding Negative Option Marketing (Policy Statement). Whether you call them subscription services or negative options, the fact is that a number of different FTC laws and regulations, including the Restore Online Shoppers’ Confidence Act (ROSCA), the Telemarketing Sales Rule (TSR) and Section 5 of the FTC Act, are part of this regulatory ecosystem. But at its core, the Policy Statement focuses on three fundamental issues that are central to overall FTC negative option enforcement, namely, how disclosures are provided, how consent is obtained and the cancellation process. The provisions of the Policy Statement are not a total surprise because they codify many of the requirements that the FTC has imposed in Consent Orders arising from ROSCA cases. Now, however, all marketers are on notice as to what the FTC expects marketers to do to avoid ROSCA violations, and those requirements far exceed what the statute actually says.
Disclosures
FTC watchers may recall that in the recent MoviePass case, the Commission, for the first time, charged that it was a ROSCA violation for the company to fail to disclose all the material terms of the transaction before obtaining billing information – not just the material terms of the negative option feature. The Policy Statement doubles down, stating that ROSCA requires clear and conspicuous disclosure of “the material terms of the transaction” and that “transaction” as used in ROSCA includes not only billing and charging information and the frequency of charges but also “any material terms related to the underlying product or service that are necessary to prevent deception.” And now may also be a good time to remind readers that ROSCA is a statute that can be enforced with civil penalties.
The statement also details what it means to be clear and conspicuous. Because the Policy Statement addresses all material terms, including those relating to the product or service, the Commission’s statements on clear and conspicuous disclaimers similarly apply to the product or service itself. At first glance, some of what the Commission is stating appears to conflict with guidance the Commission has already given in its “.Com Disclosures” Guide. Perhaps we will hear more from the Commission on this later. For example, although the “.Com” Guides expressly permit the use of hyperlinks for disclosures at least in some circumstances, the Policy Statement says that disclosures revealed by clicking on links or hovering over icons will absolutely not suffice. Similarly, although the “.Com” Guides appear to contemplate that the form of disclosure must match the form in which the underlying claim is made (audio-audio or written-written), the Policy Statement says that even if the claim is only made in one form, the disclosure must appear in both. In other words, if a claim appears on screen in written form only, the disclosure must still be made in both written and audible forms. Other guidance is less groundbreaking, such as that the material terms should be difficult to miss and unavoidable, or that for ads that target audiences such as children or the elderly, the agency will evaluate disclosures from the perspective of reasonable members of that group.
It’s a pretty detailed description of what is and is not a clear and conspicuous disclosure, and we encourage you to take a closer look at the details provided in the statement. Next up is consent, but before we get there, the Disclosures section conveniently also touches on consent. It notes that disclosures regarding the negative option feature must “appear immediately adjacent to the means of recording the consumer’s consent for the negative option feature.” This is a perfect segue to the discussion of consent. This suggests that the FTC may be seeking to impose a standard similar to Vermont in which a separate consent to the negative option feature as distinct from the transaction itself is required.
Consent
The Policy Statement is unambiguous – a pre-checked box is not affirmative consent, and you need express informed consent before charging consumers. The statement even refers to it as unambiguous consent. That is quite the high standard. A few other crucial points are made about consent and negative options – most notably, that consumer acceptance of the negative option feature must be separate from any other portion of the entire transaction and that marketers should be able to verify that consent.
Cancellations
ROSCA states that negative option sellers must offer a simple, reasonable means for consumers to cancel. But one thing ROSCA does not provide is rulemaking authority for the FTC. And questions have often surfaced regarding what exactly the cancellation provision of ROSCA requires. Well, the Commission has provided some more intel here. And it’s an important standard, so here it is verbatim. Negative option sellers should provide “cancellation mechanisms that are at least as easy to use as the method the consumer used to initiate the negative option feature.” Now, the Policy Statement does not prohibit new offers to try to retain the subscription, but in a footnote it suggests that “multiple” offers are problematic and that such offers can’t impose “unreasonable delays on consumers’ cancellation efforts.” There is a lot to digest there, but at its core, you can try to save the deal, but you may need to put your best offer on the table right away, and the method of doing that needs to be simple, straightforward and not confusing to the consumer who is trying to cancel. Of note, the Policy Statement does not make allowances for asking customers why they are canceling. Arguably, limited inquiries in this regard might help companies develop better products and benefit consumers. Of course, companies would still be free to ask that question after the good or service has been canceled, but one wonders how many consumers would still stick around to respond.
As for the cancellation mechanism, at a minimum, if the sale was through an app, that app should have a mechanism for simple cancellation and so forth. You get the picture. And when it comes to telephones, do not leave Blondie or any of your customers “hanging on the telephone.” If telephone cancellations are an option you use, don’t make it difficult. Curiously, the Policy Statement also says that telephone calls to cancel can’t take longer than calls to sign up for a service. Does this then mean that companies can’t make a “saving offer” on the phone if it means the call would take longer than a call to sign up?
Other Observations
This statement is significant. Although it is not an enforceable document in and of itself, it provides a pretty important road map as to what issues the Commission is focused on, and that is valuable insight.
Before we go, however, we are never ones to ignore the dissenting or concurring statements. In fact, some of us look at those first. Commissioner Wilson makes it clear that although she largely supports the guidance contained in the document, she has real concerns that the Commission should not be issuing “expansive policy directives” when related rulemakings are proceeding. And for those who may have forgotten, the FTC initiated a rulemaking in 2019 regarding negative option marketing. That rulemaking is still open, and indeed, the Policy Statement notes that it is still “considering various options in the rule review proceeding.” As for Commissioner Phillips, he flags the importance of “preserving the opportunity for a business to make an offer to induce a customer to stay” and notes his support for apprising industry of its obligations with the option of rulemaking later.
This overview should flag some of the key issues that the FTC is focused on. But keep in mind that ROSCA and the TSR also have some very exacting provisions that you want to be aware of, such as the handling of free-to-pay conversions or the use of pre-acquired account information. No doubt there will be much more to say about much of this in the months to come.
