The Federal Trade Commission (FTC) proposed a new easy-cancellation rule that would make it simpler for consumers to discontinue recurring subscriptions. Read more to understand how the rule is another step in the FTC’s efforts to protect consumers from deceptive practices. Then, download our comprehensive guide to negative option billing.
Rules Surrounding Negative Option Billing Began In 1973
Negative-option billing, also known as continuity marketing, is a type of recurring subscription in which the consumer’s failure to reject an offer or cancel an agreement is interpreted as confirmation that they want to be charged for goods and/or services.
In 1973, Congress enacted the Negative Option Rule — effectively finding “some negative option marketers committed unfair and deceptive practices that violated Section 5 of the Act, 15 U.S.C. 45.”
Later, in 2010, came the Restore Online Shoppers’ Confidence Act (ROSCA) followed by the Telemarketing Sales Rule (TSR), which, according to the FTC, “prohibits deceptive telemarketing acts or practices, including those involving negative option offers, and certain types of payment methods common in deceptive negative option marketing.”
In March 2023, the FTC proposed a new Negative Option Rule intended to protect consumers further from the various types of deceptive advertising practices used in modern-day that aren’t covered by the other acts and rulings.
Section 5 of the proposed 2023 Negative Option Rule states, “In addition, ROSCA and the TSR do not address negative option plans in all media — ROSCA’s general statutory prohibitions against deceptive negative option marketing only apply to Internet sales, and the TSR’s more specific provisions only apply to telemarketing.”
The New Rule Is Intended to Protect Consumers from Modern Deceptive Marketing Tactics
According to the FTC, “the existing patchwork of laws and regulations does not provide industry and consumers with a consistent legal framework across media and offers.” The new rule would make several specific changes to the laws surrounding negative option billing including:
- Simplified Cancellation Mechanism: If a consumer can’t easily unsubscribe or stop the program then the ruling argues negative option becomes a way to charge them for products they no longer want. The new rules require businesses to create an easy cancellation process once the program has started.
- Additional Offers Require New Rules: Sellers are able to pitch additional offers or modifications to the program under previous rules, but the FTC said that was often abused by companies who wouldn’t take “no” for an answer. Now, companies must first ask permission to pitch new offers in lieu of cancellation.
- Fair Rules Surrounding Reminder & Confirmation Notifications: The latest ruling requires sellers to provide annual reminders to consumers enrolled in negative option programs involving anything more than physical goods.
What Types of Negative Option Would This Rule Apply To?
Negative option marketing can take many forms, and all would be subject to the new rules proposed by the FTC. These methods include:
- A prenotification plan is when a seller provides periodic notices offering consumer goods. A seller sends and charges for those goods even if the consumer takes no action to decline the offer. In most cases, the shipments of the products continue indefinitely.
- A continuity plan gets the consumer to agree in advance to receive periodic shipments of goods or a provisional service (such as bottled water delivery). They continue to receive the shipments until the plan is canceled.
- With automatic renewals, a seller, for example, a credit monitoring service provider, will automatically renew a consumer’s subscription when it expires unless the consumer affirmatively cancels the subscription.
- And finally, free trial marketing describes when a consumer receives a good or service for a nominal fee during a trial period. After the trial period, sellers will automatically charge their (often times higher) fee unless the consumer cancels or returns the goods or services.
Want to Learn More about Negative Option Billing?
Negative-option billing is also known as continuity marketing. It’s a marketing tactic facing heightened regulatory scrutiny, and LegitScript identifies some marketers as a potential threat to the payments industry. Download this 11-page guide about negative-option billing types and you’ll learn:
- How negative-option billing works
- Negative-option red flags
- FTC actions against negative-option billing merchants
- New card brand rules around negative-option billing