The Federal Trade Commission announced on October 16 that it had finalized its “click-to-cancel” rule. This rule requires businesses to offer a simple and accessible way for consumers to cancel automatic subscription charges.
The finalization of this rule has been a long time in the making; the commission first considered a change as far back as 2019. Since then, the FTC has been reviewing the 1973 Negative Option Rule to reflect changes in commerce, business, and technology over the last 50 years. The rule, as it stands, is general and does not include many negative option marketing practices that are common in modern subscription-based businesses.
The FTC decided to review the rule after receiving thousands of complaints from consumers yearly. In 2024, they received more than 70 complaints per day.
The final rule’s provisions will become effective 180 days after publication in the Federal Register, with some becoming effective in 60 days.
What Does The “Click-to-Cancel” Rule Include?
The final “click-to-cancel” rule aims to establish a uniform framework by forbidding sellers from:
- Misrepresenting any significant facts during the promotion of goods or services with a negative option feature.
- Neglecting to clearly and prominently disclose essential terms before collecting a consumer’s billing information related to a negative option feature.
- Failing to secure a consumer’s explicit and informed consent to the negative option feature before any charges are applied.
- Not providing an easy way for consumers to cancel the negative option feature and stop charges immediately.
What is Negative Option Marketing?
Negative option marketing is a practice in which companies automatically charge customers for a product, service, or subscription unless the customer explicitly opts out.
The FTC defines “negative option marketing” broadly as a type of commercial transaction in which sellers consider a customer’s inaction—such as not rejecting an offer or canceling an agreement—as consent to be billed for products or services.
This practice is commonly seen in free trials of software, apps, and other digital services. Companies will offer a 7-day free trial, but automatically charge the consumer if they fail to manually opt out before the 7 days are over. This is also common in gym memberships, where gyms allow customers to subscribe easily online, then require them to undergo a much more difficult process to cancel their membership.
What Does This Mean For Businesses?
These new regulations mean that businesses that offer subscription or membership-based products or services must make changes to their business model to come into compliance with the FTC.
Negative option marketing will change significantly
Businesses that use negative option marketing within their business model will have to make changes that put them into compliance with the FTC. This may include changes to automatic renewals, free trial offers, where the offer appears, and continuity plans.
The new rule covers both business-to-business transactions and business-to-consumer transactions. If your business is enrolled in a negative option program with another business, you will also be protected and have the same “click-to-cancel” rights as a consumer.
Material misrepresentations are prohibited
The new rule also includes truth in advertising principles that are already well established. If you are using a negative option, you are required to be transparent about the essential aspects of your program, including terms, purpose, and anything else that pertains to your customers.
All material terms must be disclosed before sign-up
To protect the consumer, businesses are required to disclose all material terms upfront before the consumer is able to sign up. Material terms include any part of your offer that would influence a consumer’s decision on whether or not they should sign up. This includes how they can cancel their membership, when promotions end, how frequently they will be charged, etc. All terms pertaining to charges and cancellation must appear right where the consumer agrees to sign up.
Businesses must obtain proof of consent before charging
Businesses must now demonstrate that their customers fully understand what they are signing up for before they are charged. Companies must get proof of consent and maintain it for at least three years. Proof can be gathered in various ways, including a simple signature or a checkbox.
Must include a simple way to cancel
If your business allows consumers to sign up for your services on a subscription or membership basis, you must now allow them to cancel simply. This means consumers must be able to find your cancellation method easily, and it should be offered in the same medium as they signed up.
If your customers sign up online, you cannot require them to talk to a representative on the phone to cancel their membership. Likewise, if your customer signs up online, you cannot require them to cancel their membership in person. Businesses must allow consumers to cancel the same way they initially subscribed.
State rules may also apply
If your state has rules that require more consumer protection, they will still apply in addition to these new FTC rules. Businesses must do their due diligence to determine their local regulations and ensure compliance with all applicable laws.
What if Businesses Fail to Comply?
The new rules will be in full effect in April 2025, giving businesses time to make changes to their subscription and cancellation policies. If businesses are found to be violating the “click-to-cancel” rule, they may face civil penalties down the line.
Gordon Law has helped affiliate marketers, ecommerce businesses, and all manner of companies comply with FTC regulations for more than 10 years. Give us a call if you need help with marketing compliance!
