Proposed FTC Rule May Impact Digital Subscriptions and Memberships
Those who use subscription or membership models involving recurring fees should follow this rulemaking closely.
On March 23, the Federal Trade Commission (“FTC”) announced a proposed rulemaking to amend its “Negative Option Rule” (the “Proposed Rule”). This rulemaking has the potential to cause conflicts with the way digital products and services are currently designed and presented by many companies. Any company that uses a subscription or membership model involving recurring fees will want to follow this rulemaking closely and consider submitting comments.
The rule is still in the proposal phase, so it is not yet effective. The public has an opportunity to comment on the Proposed Rule to potentially influence the final, effective version the FTC promulgates.
Scope. The Proposed Rule broadly applies to “negative option features,” which includes subscriptions and memberships that automatically renew or free trial periods that automatically transition to ongoing charges unless the customer affirmatively cancels.
Simple Cancellation (“Click to Cancel”). The method for cancelling must be at least as easy as the method used to initiate the transaction. The FTC refers to this requirement as “click to cancel.” The Proposed Rule also prohibits making additional offers, modifications, and other “saves” during a cancellation attempt without first obtaining the consumer’s affirmative consent.
Annual Notices. The Proposed Rule requires sellers to provide an annual notice in connection with services subscriptions to remind them that they are subscribed.
Prohibited Misrepresentations. The Proposed Rule prohibits misrepresenting any material fact regarding the underlying goods or services.
Required Disclosures; Informed Consent. The Proposed Rule mandates certain disclosure and informed consent requirements. Many of these are consistent with the FTC’s enforcement of similar requirements under the Restore Online Shoppers' Confidence Act (ROSCA).
Civil Money Penalties. Violations of the Proposed Rule are subject to civil monetary penalties.
State Law Preemption. State laws are preempted only to the extent of an inconsistency with the Proposed Rule, and the Proposed Rule does not preempt state laws that are more protective of consumers.
Public Comment. Public comments can be made within 60 days of the Proposed Rule’s publication in the Federal Register.
This proposal stands to impose a greater level of rigidity around how digital products and services are designed and presented to customers, adding additional obligations that would require engineering solutions. For example, a fully digital onboarding process may require a corresponding, self-service cancellation process. New controls would need to be implemented to provide annual notices, and companies would need to plan for increased churn among its customer base as a result of the notices. Marketing, mobile application content, and other user-facing materials may need to be updated according to more stringent disclosure requirements.
Given the widespread use of subscription and membership models among fintechs, it will be important to watch how this rulemaking develops and consider whether to submit comments to try and shape how the final rule is written.
For questions please do not hesitate to contact Chris Kushmider or Chris Napier.
About The Author
Chris Kushmider is a Senior Associate at Mitchell Sandler. His practice focuses on transactional and corporate matters for a wide range of bank and non-bank clients in financial services, including mortgage companies and fintech lenders. He is experienced in M&A and securities transactions as well as a wide variety of contract types: master services and supplier agreements, loan purchase and servicing agreements, bank partnership arrangements, credit agreements, and CRA qualifying investments and including EQ2s. Chris has also advised on regulatory matters related to making, brokering, and servicing commercial loans, consumer loans, and retail installment sales contracts. Learn more about Chris Kushmider
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