Negative Option Plans – Is Your Subscription Plan Compliant?

I. Overview of Negative Option Plans

A “negative option plan” is a transaction in which the buyer and seller agree in advance that one or more subsequent offers from the seller will be deemed to be accepted unless the buyer explicitly rejects the offer. See Federal Trade Commission, Negative Options: A Report by the Staff of the FTC’s Division of Enforcement (2009). The FTC has identified four types of plans that fall into this category:

• Pre-notification negative option plan: a plan in which consumers receive periodic notices offering goods and will receive the goods and incur a charge unless they specifically reject the offer.
• Continuity plan: a plan in which consumers agree in advance to receive periodic shipments of goods or provision of services until they take steps to cancel the agreement.
• Automatic Renewal: a plan in which sellers automatically renew contracts at the end of a fixed period unless consumers instruct otherwise
• Free to pay: a plan in which consumers receive a good or service for free (or at a nominal price) for an introductory period, following which period they incur a charge for future goods or services unless they take affirmative action to cancel, reject, or return the good or service before the end of the trial period.

Id. While negative option plans existed prior to the internet age (for example, in “wine of the month” clubs or magazine subscriptions), in recent years consumers have come to rely on subscription services for everything from their meals to their nightly entertainment, and these plans have become of particular interest to regulators and lawmakers. Accordingly, brand owners should carefully consider the federal and state law governing these plans prior to implementing a negative option plan in their business.

II. Federal Law

The primary federal statute addressing unfair marketing claims is Section 5 of the FTC Act, which gives the FTC the power to promote truth in advertising by prescribing rules, investigating claims, and handing down injunctions and fines. 15 U.S.C. § 45. Because the FTC is empowered to police negative option plans, a good place to for merchants to begin when considering a negative option plan is with the FTC’s 2009 report on negative options, which outlines five general principles developed by the FTC in order to guide merchants in complying with Section 5 when implementing a negative option plan:

• Merchants should disclose the material terms of the offer in an understandable manner.
• Merchants should make the appearance of disclosures clear and conspicuous.
• Merchants should disclose the offer’s material terms before consumers pay or incur a financial obligation.
• Merchants should obtain consumers’ affirmative consent to the offer (e.g. should require consumers to take an affirmative step, such as clicking “I agree”).
• Merchants should not impede the effective operation of promised cancellation procedures.

Federal Trade Commission, supra, at iv-v. In addition to these general principles, the FTC has also promulgated rules covering specific types of negative option plans and specific scenarios, including 16 C.F.R. § 310.1, which prohibits deceptive telemarketing acts including failure to disclose any material term of a negative option plan, and 16 C.F.R. § 425.1, which requires merchants offering a pre-notification negative option plan to disclose in a clear and conspicuous manner the material terms of any negative option plan in the promotional material for that plan. Under § 425.1, “material terms” includes any minimum purchase obligations assumed by the subscriber and the subscriber’s right to cancel his or her membership at any time, as well as other specifically outlined details of the plan. Section 425.1 also requires that merchants, prior to sending a selection purchased under a negative option plan, send certain information to the subscriber, including an identification of the selection and a form instructing the subscriber they will receive the selection unless they instruct the merchant otherwise.

In addition to FTC regulations, merchants considering negative option plans should also consider federal statutory law on the subject, namely, the Restore Online Shoppers’ Confidence Act (ROSCA) (15 U.S.C. § 8401 et seq.). ROSCA was enacted in 2010 and is the primary federal statute governing negative option plans.

Section 8402 of ROSCA contains general provisions that may apply to negative option plans; namely, ROSCA states that it is unlawful for any post-transaction third-party seller to charge any consumer’s financial account for goods or services sold in an online transaction unless they have clearly and conspicuously disclosed all of the transaction’s material terms prior to obtaining the consumer’s billing information and have received express informed consent for the charge by the consumer. 15 U.S.C. § 8402. “Material terms” under § 8402 include at least:

• a description of the goods or services being offered;
• the fact that the seller is not affiliated with the initial merchant; and
• the full cost of the goods or services. Id. “Express informed consent” must be obtained by obtaining from the consumer their name, address, and charge account number, and by requiring them to perform an additional affirmative action (e.g. clicking on an “I agree” button).

Id. Section 8403 of ROSCA pertains specifically to negative option marketing on the internet, and states that it is unlawful for any person to charge or attempt to charge a consumer for goods and services sold on the internet through a negative option feature unless such person:

• provides text that clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information;
• obtains a consumer’s express informed consent before charging the consumer’s credit card, debit card, bank account, or other financial account for products or services through such transaction; and
• provides simple mechanisms for a consumer to stop recurring charges from being placed on the consumer’s credit card, debit card, bank account, or other financial account.

15 U.S.C. § 8403. Merchants should be cognizant of these basic requirements and should err on the side of caution in complying with them, as the penalties for violation can be significant. A violation of ROSCA is treated as a violation of the FTC Act, and thus is enforced by the FTC, violators could be subject to sanctions including a fine of up to $16,000 per individual violation, injunctive relief, and, in certain circumstances, criminal enforcement. See 15 U.S.C. § 8404(a).

III. State Statutes

In addition to federal statutes and regulations, merchants implementing a negative option plan must be aware of the various state laws addressing the issue. A large number of states have enacted laws which prohibit unfair or deceptive acts in commerce, which are commonly applied to negative option plans. This is particularly key in the internet context, where a single negative option campaign is likely to implicate the law of multiple states.

As is the case with many issues implicating the law of multiple states, a good place to start here is with California. Cal Bus & Prof Code § 17602, which governs negative options in California is arguably the strictest in the nation, and states that a merchant offering a negative option plan must:

• Present the terms of the offer in a clear and conspicuous manner before the agreement is fulfilled in a way that is in visual proximity (or, if a verbal offer, temporal proximity) to the request for consent to the offer. The provision must also be made in a larger font than the surrounding text; in a type, font, and/or color that is in contrast to the surrounding text; and/or must be set off from the surrounding text in a way that makes the language clearly stand out.
• If the offer includes a free gift or trial, clearly and conspicuously explain the price that will be charged or the manner in which the subscription will change upon conclusion of the trial.
• Obtain affirmative consent to the offer terms, including the terms of an automatic renewal offer or continuous service offer that is made at a promotional price for a limited period of time, prior to charging the consumer.
• Include an acknowledgement that includes the cancellation policy, as well as information regarding how to cancel in a manner that is capable of being retained by the consumer. In the event of a free gift or trial, the consumer must be informed of how to cancel, and allowed to cancel, prior to being charged.

Cal Bus & Prof Code § 17602. See also, Hall v. Time, Inc., 2021 U.S. App. LEXIS 15368 (9th Cir. 2021). In addition to these requirements, the merchant must provide a cost-effective, timely, and easy to use mechanism for cancellation, and include a description of the same in the acknowledgement described above. If the offer is accepted online, the consumer must be allowed to cancel the offer online. Further, if the terms are materially changed, the consumer must be notified of the change and given information on how to cancel.

New York also recently enacted a new automatic renewal statute that generally tracks the California requirements, N.Y. Gen. Bus. Law §§ 527 and 527-a. Importantly, this statute only applies to business-to-consumer transactions, not business-to-business transactions. That said, businesses will still need to comply with New York’s prior automatic renewal law governing business-to-business transactions, N.Y. Gen. Oblig. Law § 5-903. Under the new New York law, businesses making the automatic renewal or continuous service offers must:

• Present the following information to the consumer clearly and conspicuously, prior to the consumer's acceptance of the offer:
  • that the subscription or purchasing agreement will continue until the consumer cancels;
  • the cancellation policy that applies to the offer;
  • the recurring charges that will be charged to the consumer's credit or debit card or payment account with a third party as part of the automatic renewal plan, and that the amount of the charge may change, if that is the case, and the amount to which the charge will change, if known;
  • the length of the automatic renewal term or that the service is continuous, unless the length of the term is chosen by the consumer; and
  • the minimum purchase obligation, if any.

The above information must be presented in a clear and conspicuous manner before the purchasing agreement is fulfilled and the business must obtain the consumer's affirmative consent to the agreement with the automatic renewal offer terms (including those made at a promotional or discounted price for a limited period of time) before charging the consumer's credit or debit card or third-party payment account. If the offer also includes a free gift or trial, the offer must include a clear and conspicuous explanation of the price that will be charged after the trial ends or the manner in which the subscription or purchasing agreement pricing will change on conclusion of the trial. Finally, the business must provide an acknowledgment, in a manner that is capable of being retained by the consumer, that includes: the automatic renewal offer terms; the cancellation policy; and the information regarding how to cancel. Like California, a consumer that accepts an automatic renewal offer online must to terminate exclusively online. Finally, businesses must provide the consumer notice of any material change to the terms of the automatic renewal that has been accepted by a consumer via a clear and conspicuous notice.

In addition to New York and California, several other states have statutes governing automatic renewals and negative options, but each state statute contains slight nuances.1 For example, Oregon’s OR Rev. Stat. § 646A.295, is similar to California’s statute with two noteworthy differences. First, Oregon does not require a merchant to disclose a free trial in a clear and conspicuous manner. Second, businesses do not have to provide consumers that accept a negative option plan online the option to terminate the plan online as well. Similarly, Virginia’s automatic renewal statute, VA Code Ann. § 59.1-207.45 et seq., has comparable requirements to California’s statute, but does not require merchants to provide online termination options for agreements entered into online by consumers .However, from a practical standpoint, giving consumers an online option to terminate the plan may be the most efficient method for a business to implement and track, especially given the requirements of the New York and California statutes.

While California’s statute is arguably the strictest in the nation, some other jurisdictions do include requirements separate from those outlined in the California statute. For instance, Washington D.C.’s statute, D.C. Code § 28A-201 et seq., includes basic requirements that automatic renewal provisions and cancellation procedures be clearly and conspicuously disclosed in the contract containing them, as well as the basic requirement that if a free trial is included, the offer shall clearly and conspicuously explain the price that will be charged upon conclusion of the trial. In addition to these fairly typical requirements, the D.C. statute includes two requirements not found in other statutes. The first applies only to contracts with an initial term of 12 months or more that will automatically renew for one month or more unless affirmatively cancelled, and requires that a merchant notify the consumer of the first renewal (with additional annual notifications as necessary) no fewer than 30 days and no more than 60 days before the cancellation deadline. The second requirement applies to contracts involving a free trial with a term of one month or more where the contract automatically renews at the end of the trial period, and requires notification at least 15 and no more than 30 days prior to the expiration of the free trial period. In addition, the D.C. statute requires, notwithstanding the consumer’s consent to the free trial, an additional affirmative consent by the consumer before the consumer is charged for the automatic renewal.

Similarly, Vermont’s automatic renewal statute, 9 V.S.A. § 2454a, applies only to contracts with an initial term of one year or longer with a renewal term that is longer than one month. In addition to requiring the terms of the automatic renewal to be stated clearly and conspicuously in plain language and in bold-faced type, the law requires that the consumer specifically opt in to the automatic renewal provision in addition to accepting the contract as a whole. The Vermont law also has similar requirements to California regarding termination procedures, including a requirement that online consumers be able to terminate the contract online.

As consumers continue to make an increasing amount of their purchases according to an online, subscription-based model, the amount of negative option plans in the marketplace is likely to continue to grow in coming years. While the five principles provided by the FTC provide an underlying rationale for both the federal and state law in this area, the numerous state laws with differing requirements leave a complex framework for businesses to navigate when incorporating a negative option plan into their business.