Rome LLP

Written by Bradley O. Cebeci, Partner at Rome LLP | Payments Law, FTC Defense, E-commerce, and Complex Business Litigation.

On October 16, 2024, the FTC issued its final amendments to the Click-to-Cancel Rule.

On October 22, 2024, four petitions for review were filed—in the Fifth Circuit, Sixth Circuit,

Eighth Circuit and Eleventh Circuit, respectfully—challenging the Click-to-Cancel Rule on the grounds that it is “arbitrary, capricious, and an abuse of discretion”; “unsupported by substantial evidence”; “based on determinations that ‘precluded disclosure of disputed material facts which w[ere] necessary for fair determination … of the rulemaking proceeding taken as a whole’”; and “in excess of the Commission’s statutory authority, in violation of the U.S. Constitution, and otherwise contrary to law.” Thus, Petitioners request the Court hold unlawful, vacate, enjoin and set aside the Rule.

On November 22, 2024, the U.S. Judicial Panel on Multidistrict Litigation entered a Consolidation Order consolidating all four petitions in the United States Court of Appeals for the Eighth Circuit. Pursuant to the docket in the lead case (Custom Communications Inc. v. FTC (No. 24-3137), Petitioner’s Opening Brief is due December 16, 2024 and FTC’s Responsive Brief is due 30 days after the Court issues the notice of docket activity filing the Opening Brief (i.e. mid-January 2025).

It bears separate emphasis that the FTC passed the Click-to-Cancel Rule on a 3-2 vote across party lines. Democratic Commissioners Lina Khan (Chair), Rebecca Slaughter and Alvaro Bedoya voted in favor of the Rule, while Republican Commissioners Andrew Ferguson and Melissa Holyoak voted against the Rule, with Holyoak issuing a detailed dissent. Importantly, Khan’s term officially expired on September 26, 2024, and she is likely to resign following Trump’s inauguration. Whether Khan leaves on her own or is “fired” (as Musk has promised), Khan’s replacement will surely be a Republican (potential candidates reportedly include Mark Meador, Todd Zywicki and Alex Okuliar) with markedly different views, which means that the Republican Commissioners will have a majority, and will likely withdraw or amend the Click-to-Cancel Rule in the event it survives the current court challenges.

While the future of the Click-to-Cancel Rule remains in doubt, it was published in the Federal Register on November 15, 2024, which means that (absent action to stay, set aside or repeal the Rule) the new Disclosure requirements will take effect on January 14, 2025, with the remaining affirmative consent and cancellation requirements to take effect on May 14, 2025.

Importantly, the Click-to-Cancel Rule follows closely on the heels of the recent amendment to the California Automatic Renewal Law, which both overlaps with the Click-to-Cancel Rule and imposes its own additional prescriptions on negative option marketers that will take effect July 1, 2025.

Thus, even if the Click-to-Cancel Rule is stayed, set aside or repealed, new scrutiny is just around the corner for negative option marketers, who will remain a favorite target of federal regulators and state AGs regardless of the imminent shakeup at the FTC.

Accordingly, now is the time to start reviewing and updating your subscription billing practices.

What are the four key components of the FTC’s new Click-to-Cancel Rule to keep in mind as you assess your business practices?

The FTC aims to protect consumers from deceptive marketing and business practices by establishing clear and enforceable requirements for all negative option features across all forms of media. Negative option programs vary but each contains a term or condition that allows a merchant to interpret a customer’s silence or failure to act as acceptance of an offer. Negative option programs generally fall into one of these categories: prenotification plans, continuity plans, automatic renewals, and free trial conversion offers.

The four pillars of the new Click-to-Cancel Rule are:

No Misrepresentation of Material Facts. You must not misrepresent any material fact in connection with promoting or offering any product or service with a subscription, including material facts about the recurring subscription and the underlying product or service.

Clear and Conspicuous Disclosures. You must be transparent in providing information about the terms of the subscription billing program. These terms should clearly explain pricing, frequency, and clear and easy to follow information on how to cancel. Any false or misleading statements about products or services may be considered a misrepresentation of material fact and violate the Rule.

Express Affirmative Consent. You must obtain the consumer’s “unambiguously affirmative consent” to the recurring subscription feature. This must be done separately from any other part of the transaction.

Ease of Cancellation: In a nutshell, you must make it as simple to cancel a subscription as it is to sign up for it.

How does the new FTC “Click-to-Cancel” Rule affect your business?

If the FTC’s new “Click-to-Cancel” rule survives the pending legal challenges and imminent shakeup at the FTC, merchants will be forced to adopt more stringent requirements with regard to their disclosure, consent, and cancellation practices.

What is prohibited under the new rule?

Misrepresentation of any material facts. It is worth noting here that the FTC is not limiting any misrepresentation of any material facts to terms of your negative option billing features. Instead, the FTC broadly includes misrepresentations about any material facts that would affect the consumer’s decision to purchase a good or service or enroll in your program.

Failure to provide clear disclosures of material terms before obtaining a consumer’s billing information. This may include terms regarding billing frequency, duration of free trials and when they end, renewal information, and easy cancellation instructions.

Failure to get express, affirmative consent to the negative option feature before charging the consumer. Under the new rule, you must get proof of consent and keep a record of it for three years.

Failure to provide a simple cancellation process that immediately stops subscription or auto-renewal payments. The FTC’s “as easy as” standard is meant to be a measure that ensures consumers have similar cancellation and enrollment experiences in terms of time, burden, expense, and ease of use. If a consumer opts to cancel their subscription, you should not force them to navigate through a series of additional offers to persuade them to stay. Although the FTC has not yet prohibited “save” attempts outright, it is worth keeping in mind the new ease of cancellation requirements when updating your business practices. Consider using California’s “one save” rule as a good rule of thumb.

Important things to note about the new rule:

• The rule covers business-to-business transactions as well as business-to-consumer.
• Your disclosures must be clear and conspicuous, placed right next to where the consumer’s consent is recorded, and be presented to the consumer before they are asked to enter any billing information.
• You must obtain proof of consent before charging a consumer for any product or service.
• For negative option offers handled telephonically, you must make sure you are also complying with the federal Telemarketing Sales Rule.
• The FTC rule does not override state laws. You must still research and comply with all state law requirements for the states in which you do business.
• The disclosure requirements are presently set to take effect on January 14, 2025, with the remaining requirements set to take effect on May 14, 2025.
• You may petition the FTC for a partial or full exemption from the final rule if you can demonstrate that the requirements set forth in the rule are not necessary for your practices.
• For written offers, you may obtain consent through a signature, a click of a checkbox or similar method. If you choose to do this, the consumer must affirmatively select or sign to accept terms.
• Notably, you must obtain separate consent for the negative option feature.

You can review a quick FTC fact sheet on the New Rule here or access more in-depth information here.

What do I need to know about ROSCA and the California Automatic Renewal Law?

In addition to the Click-to-Cancel Rule, negative option marketers must also ensure compliance with the Restore Online Shoppers Confidence Act (“ROSCA”) which is a federal statute that prohibits charging consumers for goods or services sold online through a negative option feature unless you meet certain requirements. These requirements include:

• clearly disclosing all material terms of the transaction before obtaining the consumer’s billing information;
• obtaining the consumer’s express informed consent before charging them;
• Making it simple for consumers to stop any recurring charges.

The new Click-to-Cancel Rule builds on existing FTC guidance regarding ROSCA.

While ROSCA is limited to only online transactions, the new Click-to-Cancel Rule applies to all marketing channels.

While ROSCA requires clear and conspicuous disclosures, the new Click-to-Cancel Rule both broadens the scope of the required disclosures and is more specific about content and placement.

While ROSCA requires a simple mechanism to stop recurring charges, the Click-to-Cancel Rule imposes much more specific requirements with respect to the cancellation mechanism: for online cancellation, the cancellation mechanism must be easy to find and cannot require an interaction with a live or virtual representative if the consumer did not have to interact with one to sign up initially; for phone-based cancellations, the seller must promptly handle the request within normal business hours and cannot make the cancellation phone call more costly than the initial sign up call; lastly, if the initial consent process was in person, you should offer a similar in-person cancellation process where practical but must also offer an alternative cancellation method, either by phone or online, that meets the standard requirements for those mediums.

What are the new requirements of the amended California Automatic Renewal Law?

On September 24, 2024, California’s Automatic Renewal Law was amended. Several of California’s new requirements are largely consistent with the new FTC requirements for merchants. However, there are important differences you need to understand to fully comply with both state and federal laws.

Some of the new requirements:

The new amendment expands the California Automatic Renewal Law to apply to all “free-to-pay” conversion subscriptions. When offering any initial free trial to a consumer, you must get affirmative consent to the terms of the paid subscription.

Additional affirmative consent to the continuous service or auto-renewal terms. You must obtain a customer’s “express affirmative consent” to the automatic renewal terms separate from consent to the general terms of service.

You may present the customer with a save offer during a cancellation attempt, but only if you a) first inform them that they may cancel anytime and b) prominently display an easy “click to cancel” button simultaneously.

Annual reminders and notifications to consumers. You must notify consumers if there is any price change to an existing automatic renewal or continuous service plan no less than 7 and no more than 30 days before the changes take effect. Additionally, you must send annual notices to consumers regardless of whether any changes have been made to the contract.

What if you are not in California? If you sell to California consumers, you should ensure compliance with California law. Moreover, California’s requirements are among the strictest of all state laws, and tend to represent the gold standard nationally when evaluating compliance and best practices for our merchant clients. The rule of thumb is: ‘If you’re in compliance with California law, you are probably also in compliance with all the other state laws.’

The new amendment to the California Automatic Renewal Law takes effect on July 1, 2025, so you have some time to ensure that your offers are in compliance.

What are the Visa and Mastercard Negative Option requirements?

Visa and Mastercard impose their own requirements on negative option merchants.

All subscription and continuity merchants are subject to registration in the Visa Integrity Risk Program. The Visa Rules for Free-Trial Subscription Merchants are embodied in Visa Rule 5.8.17 (Negative Option Merchants). These rules apply to merchants that offer free-to-pay conversions but also apply to those offering negative option billing without a free trial.

Here’s a quick overview of some of the Visa requirements:

Express consent during enrollment. You must get express consent for an ongoing subscription with recurring payments during enrollment.

Detailed transaction receipts & information. When a customer enrolls in a subscription service you must immediately send an electronic copy of the terms which include confirmation of consent, details of the goods or services, costs, billing frequency, effective start and end dates, and cancellation instructions.

Customer notification. You must notify the customer 7-days prior to the free trial ending. If the trial is less than 7-days, the end date must be included in the trial confirmation.

Enhanced dynamic descriptor. Enhanced dynamic descriptor indicating “trial, trial ended, or free trial” must be listed in the Merchant Name field of the clearing record.

Online subscription cancellation. You must provide an online opt-out link that ensures the customer’s online cancellation experience is as simple as clicking an “unsubscribe” link.

Visa Rules and Mastercard Negative Option Rules apply to both digital and physical goods and services. Mastercard Negative Option Rules impose similar requirements as the Visa Free-Trial Rules on negative option and subscription merchants providing an ongoing or recurring delivery of services or memberships. Read through the Mastercard Transaction Processing Rules (11 June 2024), Rules 5.4.1 (Subscription Billing Merchants) and 5.4.2 (Negative Option Billing Merchants).

Some changes you may need to consider to your billing practices to comply across card brands:

• Changes to the checkbox section and language of your billing disclaimer;
• Provide easy cancellations including a click-to-cancel button on transaction receipts and other communications;
• Change the timing and frequency of “save offers;”
• Send annual notices with all relevant information;
• Send transaction receipts each time you bill.

The Stakes Are High

Self-evidently, evaluating compliance with the foregoing requirements is a fact-intensive inquiry; and the devil is in the details. Moreover, “substantial compliance” is not a defense. Notably, the FTC may pursue civil penalties of $51,744 per violation of ROSCA or the Click-to- Cancel Rule. And, in addition to consumer protection claims brought by private plaintiffs, the California attorney general can bring enforcement actions, seeking civil penalties of up to $2,500 per violation of the California ARL. On top of this, violating these laws and/or the Visa and Mastercard rules for negative option merchants may land you on the MATCH list, thereby impairing your access to the payments system.

As in sports, so in life: your best defense is a good offense. I have over 20 years of experience focused on the payment processing industry and advising merchants with regard to FTC compliance issues. I regularly review negative option billing practices for compliance with card brand rules and applicable state and federal law for merchant clients. I can help you navigate these requirements, get ahead of any issues and respond to related regulatory investigations. Feel free to reach out to me directly at [email protected] to ask me a question or schedule a consultation.