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A new FTC “Click to Cancel” Rule would amend the FTC’s existing Negative Option Rule to specifically apply to subscriptions and memberships. A copy of the FTC notice of proposal is linked here. If enacted, SaaS companies with a consumer-facing customer base are likely to find themselves subject to more FTC scrutiny on the issue of whether their subscription contracts comply with federal law.
What is the FTC’s Negative Option Rule?
The Negative Option Rule was adopted by the FTC in 1973, to address “negative option offers,” which the FTC defines as offers containing “a term or condition that allows a seller to interpret a customer’s silence, or failure to take an affirmative action, as acceptance of an offer.”
According to the FTC, negative option marketing utilizes four types of offers: prenotification plans, continuity plans, automatic renewals, and free trial conversion offers.
However, the FTC’s original Negative Option Rule only pertained to prenotification plans, excluding the continuity plans, automatic renewals and free trial offers that have become commonplace in 2024. Also, in the case of the original Negative Option Rule, prenotification plans were limited to the sale of goods, where sellers provided periodic notices to participating customers and then sent and charged for those goods only if the consumers took no action to cancel and decline the offer (i.e. the example of a wine club).
Also, the Negative Option Rule required clear and conspicuous disclosure of certain terms before a subscription agreement was reached. According to the FTC, those terms were as follows:
- how subscribers must notify the seller if they do not wish to purchase the selection;
- any minimum purchase obligations;
- the subscribers’ right to cancel;
- whether billing charges include postage and handling;
- that subscribers have at least ten days to reject a selection;
- that if any subscriber is not given ten days to reject a selection, the seller will credit the return of the selection and postage to return the selection, along with shipping and handling; and
- the frequency with which announcements and forms will be sent.’
Finally, under the existing Negative Option Rule, sellers were required to define particular periods for sending merchandise, to give consumers a defined period to respond, to provide instructions for rejecting merchandise, and to promptly honor written cancellation requests.
What is “Click to Cancel’?
What would change with the FTC’s newly proposed “Click to Cancel” update?
Under the FTC’s proposed “Click to Cancel” rule change, the scope of the Negative Option Rule would be increased to make it apply to not only prenotification plans but also to continuity plans, automatic renewals, and free trial conversion offers. Also, the proposed “Click to Cancel” rule provisions would mandate the following:
- Businesses would be required to make cancelling a subscription or membership at least as easy as it was to start it;
- Businesses would have to ask consumers if they want to hear new offers when they ask to cancel before they would be able to pitch new offers;
- Businesses would be required to provide an annual reminder if enrolled in a negative option program involving anything other than physical goods, before they are automatically renewed.
Another “Click to Cancel” change is that the under the new provisions any misrepresentation of a material fact related to any of the four negative option offers, whether expressly or by implication, would constitute a violation of not only the Negative Option Rule but also an unfair or deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act.
What is the Potential significance of “Click to Cancel” to the SaaS Industry?
The potential significance of the “Click to Cancel” change to the SaaS industry is that, if this proposed rule is adopted, SaaS companies who sell to consumers will need to update consumer contracts and terms of service to confirm that they are compliant with the requirements of the Negative Option Rule, as amended. It is likely that most of the FTC’s enforcement efforts will be directed towards enforcement on SaaS companies, so SaaS companies should make compliance with any new rule a priority.
The SaaS Contracts Law Blog will keep you posted as to the status of the FTC’s proposed rule. If your software or SaaS company is concerned compliance with the Negative Option Rule or Click to Cancel, please schedule a consultation with me to discuss today.
