September 30, 2019

negative-option-marketing
Negative Option Marketing and the FTC

On September 25, 2019, the Federal Trade Commission (“FTC” or “Commission”) published an Advance Notice of Proposed Rulemaking calling for public comment on the need to amend the current “Rule Concerning the Use of Prenotification Negative Option Plans” (the “Negative Option Rule” or “Rule”). Negative option marketing, where a consumer’s silence constitutes consent to an offer, can come in several different forms. According to the FTC, the current Rule fails to address: 1) all forms of negative option marketing; 2) across all types of media.

How Would the FTC Amend the Current Rule?

Current Legal Patchwork

There are four general categories of negative option marketing:

  • Prenotification plans – in which a seller sends periodic offers that consumers must decline to avoid charges (e.g., beer of the month clubs);
  • Continuity plans – in which a consumer agrees to receive and pay for periodic goods or services until the consumer cancels (e.g., razor blade deliveries);
  • Automatic renewals (e.g., magazine subscriptions); and
  • Free-to-pay or nominal-fee-to-pay plans – in which consumers receive goods or services for free (or at a nominal fee) during a trial period before the applicable seller increases the fee.

As presently drafted, the FTC’s Negative Option Rule requires sellers to clearly and conspicuously disclose material terms, such as minimum purchase obligations and how to cancel. However, the Rule only covers prenotification plans. While several other statutes and regulations supplement the Rule, they are also limited. For example, the Telemarketing Sales Rule only applies to negative option offers made over the phone and the Restore Online Shoppers’ Confidence Act only applies to Internet sales.

The Request for Negative Option Marketing Rule Comments

In the notice of proposed rulemaking, the FTC notes that the current framework does not provide clarity on how to properly engage in negative option marketing, and that “evidence strongly suggests that negative option marketing continues to harm consumers.” For example, the Commission receives thousands of complaints each year related to negative option marketing. Consequently, the FTC and state attorneys general frequently bring enforcement actions against advertisers challenging a variety of deceptive or unfair negative option practices.

The FTC last considered new negative option rulemaking in 2014. While research at the time found that unfair and deceptive negative option marketing caused significant consumer injury, the Commission concluded that amendments to the Negative Option Rule were not needed at the time. Instead, the FTC hoped that the other rules and statutes discussed above would adequately address the problem. The FTC now appears to believe that those enforcement mechanisms have been insufficient. Due to the perceived inadequacies of the current framework, the Commission is seeking comment on whether it should use its rulemaking authority under the FTC Act to expand the scope of the Negative Option Rule. In addition to considering new or stronger enforcement mechanisms, the FTC also seeks comment on alternative approaches, such as publishing educational materials for businesses and consumers.

As we have previously blogged, companies increasingly face large penalties for allegedly unfair and/or deceptive negative option marketing practices. As the current patchwork of laws and regulations in this area continues to change, companies should ensure that their negative option marketing practices do not expose them to liability. If you need to review your marketing practices or are facing an FTC investigation, please e-mail us at info@kleinmoynihan.com, or call us at (212) 246-0900.

The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney. Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.

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