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A Closer Look at the FTC’s Latest Rules for Negative Option Offers

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FTC, negative option offers, negative options

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Donata Stroink-Skillrud

Co-founder and President of Termageddon

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The Federal Trade Commission (FTC) has recently updated its rules for negative option offers.

Negative option offers are offers that allow sellers to assume that if a customer is silent or inactive, they are accepting the offer. There are four main categories of negative option offers:

  1. Prenotification plans – consumers take no action so sellers send the goods and charge them. Example: Joining a book club that sends you monthly books (even though you never agreed to it)
  2. Continuity plans – consumers automatically receive periodic shipments of goods or services unless they actively take steps to cancel. Example: Joining a food subscription service that assumes you want monthly deliveries unless you actively cancel.
  3. Automatically renewing subscriptions – subscriptions that will automatically renew even if the consumer hasn’t agreed to it. Example: A streaming service that renews monthly/yearly by default unless the consumer actively cancels on their account. 
  4. Free trial conversion offers – A free trial automatically turns into a paid subscription. Example: Signing up for an app that requires a credit card to join their free trial. When the trial ends, you are automatically billed without being asked if you’d like to continue. 

In this blog, we will take a look at what updates the FTC has when it comes to these negative option offers and break each one down individually. So keep reading to find out what you may need to change if your website offers subscription services or other negative options.

The updates:

  1. Prohibit the misrepresentation of any material fact made while marketing negative option features; 
  2. Require sellers to provide important information prior to obtaining the consumers’ billing information and charging consumers;
  3. Require sellers to obtain consumers’ unambiguously affirmative consent to the negative option feature prior to charging them;
  4. Require sellers to provide consumers with simple cancellation mechanisms to immediately halt all recurring charges.

*Failure to adhere to the above will be deemed as unfair and deceptive under Section 5 of the FTC Act.

Prohibit the misrepresentation of any material fact made while marketing negative option features

What does it mean by ‘marketing’?

This new rule from the FTC is designed to cover all negative option offers no matter how it is marketed. This includes the internet, telephone, in-person, or printed material.

What is considered “material fact misrepresentations?”

The FTC defines this as any misrepresentation related to:

  • Costs
  • Product efficacy
  • Free trial claims
  • Processing fees
  • Shipping fees
  • Billing information use
  • Deadlines
  • Consumer authorization
  • Refunds
  • Cancellation 

Require sellers to provide important information prior to obtaining the consumers’ billing information and charging consumers

It is up to the seller to ensure that they are providing all the necessary information consumers need regarding how their billing information will be used, what the charges will look like, and how refunds and cancellations will be handled.

This is typically done via website documents like a Privacy Policy and Terms & Conditions.

Privacy Policy:

Your business’ Privacy Policy must accurately represent how the business uses billing information. For example, if it states that billing information will not be shared, but it actually is being shared with a third party (such as a payment processor), that would be considered a material fact misrepresentation by the FTC.

Review your Privacy Policy, make sure it’s up to date, and provide both accurate and clear information on how a customer’s billing information is being collected, stored, and used.

Terms & Conditions:

Information on refunds and cancellations is usually handled within a website’s Terms & Conditions (also called Terms of Service). Like your Privacy Policy, it’s important to review your Terms & Conditions regularly to make sure everything is still accurate and true. For example, a common error that would be considered material fact misrepresentation is for a website to claim in its Terms & Conditions that it offers refunds when it doesn’t.

According to the FTCs latest rules, sellers must provide the following information to consumers prior to obtaining their billing information and prior to charging them:

  1. That the customers’ payments will be recurring, if applicable;
  2. Each deadline (by date or frequency) by which consumers must act to stop all charges; 
  3. The amount or ranges of costs (or reasonable approximation) consumers may incur; and 
  4. Information on where to find the mechanism consumers may use to cancel their recurring payments.

Require sellers to obtain consumers’ unambiguously affirmative consent to the negative option feature prior to charging them

Not only must sellers provide the above information, but they must also place it in a spot that’s clear and conspicuous to the consumer. According to the FTC, the information directly related to the negative option feature must appear immediately adjacent to the means of recording the consumers’ consent.

This means that disclosures should be practically unavoidable for the consumer by not hiding them behind certain design elements or requiring consumers to click any additional links to see them. So, while a Terms of Service will likely need to contain this information as well, the disclosures shouldn’t be only located inside a Terms of Service.

Even still, the FTC says a seller can’t gather a consumer’s payment details until:

A) These disclosures are clearly presented in the ways mentioned above; and

B) Consumers are provided with a separate box (unselected by default) that they must check to give their consent. 

Note: The customer can still be required to accept the Terms of Service – it would just be done in a separate box.

Require sellers to provide consumers with simple cancellation mechanisms to immediately halt all recurring charges.

According to the FTC, negative option sellers are required to provide a cancellation mechanism that:

  1. Immediately halts recurring charges; 
  2. Is as simple to use as the mechanism the consumer used to consent to the negative option feature; 
  3. Is readily accessible through the same medium the consumer used to provide consent for purchasing the negative option feature (e.g. Internet, phone, in person).

Online cancellation must be easy to find. This means a user shouldn’t have to click through multiple links to find the option for cancellation.

Effective dates and penalties

Most of the provisions of the FTC’s new Rule will go into effect 180 days after publication in the Federal Register. Businesses must comply with the prohibition on misrepresentations within 60 days of publication in the Federal Register.

Failure to do so will result in a hefty fine. According to the FTC businesses that fail to follow these rules can be fined up to $51,744 per violation.

If you need help with your website policies like your Privacy Policy or Terms of Service, Termageddon’s Privacy Policy Generator and Terms of Service Generator. Our policies take into account FTC’s latest rules.

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About the Author
Donata Stroink-Skillrud

Donata is the Co-founder and President of Termageddon and a licensed attorney and Certified Information Privacy Professional. She serves as the Vice-Chair of the American Bar Association's ePrivacy Committee and the Chair of the Chicago Chapter of the International Association of Privacy Professionals.

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