Eighth Circuit Vacates FTC's Negative Option Rule Just Before It Takes Effect
The Bottom Line
- The FTC's Rule Is Off — But Not Obsolete: The Eighth Circuit's decision may come as welcome news for businesses in the subscription industry, but companies should remember that a federal framework for enforcement still exists and that compliance with the Rule's spirit, which prioritizes consumer choice and transparency, may be essential to avoid a challenge.
- Federal Enforcement Tools Remain: Even without the Rule, the FTC can continue to regulate unfair or deceptive practices under Section 5 of the FTC Act, ROSCA and the TSR.
- State Laws Still Apply — and May Be Tougher: State-level automatic renewal laws remain enforceable and may impose stricter or different requirements than the now-vacated federal Rule. Businesses must return to a keen awareness of state-by-state variations in compliance requirements to manage the risk of Attorneys General action and consumer class actions.
Just days before the Federal Trade Commission's Rule Concerning Subscriptions and Other Negative Option Plans (the “Rule”) was set to take effect on July 14, the U.S. Court of Appeals for the Eighth Circuit issued a significant decision vacating the Rule in its entirety. The decision leaves businesses with a changed compliance landscape — at least for now.
Why the Rule Was Vacated
The court's ruling did not touch on the substance of the Rule itself, but instead focused on the FTC's failure to promulgate the Rule in accordance with necessary rulemaking procedures. Specifically, the FTC had preliminarily concluded that the Rule would not have an economic impact exceeding $100 million annually. This determination exempted the agency from conducting a more thorough preliminary regulatory analysis under the FTC Act, which would have required exploring reasonable alternatives and providing an analysis of the benefits and effects of the proposed Rule.
The Eighth Circuit found that this shortcoming deprived stakeholders (particularly businesses offering subscription-based products and services) of the opportunity to meaningfully participate in the rulemaking process. As a result, the court held that the Rule must be set aside in its entirety.
What Happens Now
While the FTC can appeal the decision to the Supreme Court, it is unlikely that the current FTC will devote resources to reviving the Rule. It is also unlikely that the FTC will engage in new rulemaking, as Chairman Andrew Ferguson and Commissioner Melissa Holyoak have made clear that they favor targeted enforcement over industry-wide rules. In fact, both Ferguson and Holyoak dissented from issuance of the Rule, noting that “instead of pursuing targeted enforcement efforts… the Commission has used its limited resources to promulgate a broader regulation that may not survive legal challenge.”
It is important to remember that the FTC retains other enforcement tools against players in the subscription industry. The FTC can:
- Bring enforcement actions for deceptive practices under Section 5 of the FTC Act. It is entirely possible that the FTC may still consider a company's failure to comply with key elements of the Rule a “deceptive practice.”
- Seek civil penalties of over $53,000 (adjusted annually for inflation) for violations of the Restore Online Shoppers' Confidence Act (ROSCA), which applies to online subscription services, and the Telemarketing Sales Rule (TSR), which applies to subscription offers made over the phone. Note that the FTC has historically construed these laws broadly to impose many of the same requirements that were included in the Rule.
While legal challenges to the Rule were pending, the FTC aggressively brought actions against companies for deceptive subscription practices through alternative enforcement tools. For example, the FTC filed a lawsuit against Uber for charging consumers for a subscription service without their consent, and for making it difficult to cancel the service. The FTC's action against Cleo AI similarly challenges practices that make it difficult for consumers to cancel subscriptions.
Ensure Compliance with State Laws
State laws governing automatic renewal remain fully in effect — and in many cases, impose requirements that match or go beyond what the FTC proposed in the Rule. In recent months, states including New York, California, Minnesota and Massachusetts have passed or amended auto-renewal laws, signaling continued scrutiny at the state level. Attorneys General and the class action bar are likely to ramp up their activity in this space.
Many state laws mirror core elements of the vacated Rule, including:
- Upfront, prominent disclosure of automatic renewal terms
- Affirmative consent from the consumer to those renewal terms
- Post-purchase acknowledgments detailing the auto-renewal terms and cancellation mechanism
- Timely reminder notices and notifications about material changes
- Easy-to-use, low-friction cancellation methods
Some states also add unique requirements, such as:
- Requiring the cancellation mechanism to match the original enrollment method
- More frequent or additional fee change or reminder notices, which may need to include a link to the cancellation method
- Limits on presenting discounts or incentives designed to dissuade cancellation
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
