The Federal Trade Commission’s (FTC) new “Click-to-cancel” rule will become effective January 14, 2025, leaving business owners until May 14, 2025, to comply with its new requirements. The FTC finalized its “Click-to-Cancel” rule on October 16, 2024, with the intention of making cancelling recurring subscriptions and memberships easier for consumers.
Retailers, gyms, and online platforms across the board must take notice of the new rule and prepare to comply by the deadline. Here’s what business owners and consumers need to know about the rule.
What Is the “Click-to-Cancel” Rule?
The principle behind the “Click-to-Cancel” rule is to require businesses to make the cancellation process as simple as the sign-up process. The rule applies to “negative option” programs, which are the typical subscription services that automatically renew unless the consumer cancels them and free trial conversion offers (free-to-pay or nominal-fee-to-pay). This includes any recurring payment arrangements, such as those for online services, streaming services, and gym memberships, to list a few. The new rule tackles deceptive practices like commonly used obstacles to cancellation and other deceptive marketing practices.
As outlined in the rule’s Statement of Basis and Purpose (SBP), unfair and deceptive negative option practices have long been a source of harm to consumers, leading to tens of thousands of upset consumer complaints each year. As a result, the FTC created its new rule to prohibit businesses from making cancellations unnecessarily difficult or impossible for consumers. The objective is to require adequate disclosures that properly inform consumers of all the relevant terms of the program. Starting on May 14, the new rule requires that businesses comply with the following:
Honest Marketing and Disclosures
- The new rule prohibits false statements in the marketing of negative option features by requiring businesses to disclose—at least—the existence of the negative option, its total cost, and instructions on how to cancel. Businesses must disclose these important terms prior to obtaining the consumer’s billing information.
Informed Consent
- Businesses must make sure that consumers explicitly agree to the subscription’s terms by making disclosure clear and conspicuous before customers agree to purchase and before any charges are made on their accounts.
Simple Cancellations
- The cancellation process must be as simple as the signing-up process. If you sign up for a service online, for example, its cancellation procedure must also be possible online with no extra hurdles for consumers to jump through.
Pause on Charges
- Once cancellation has been initiated by the consumer, businesses must stop billing immediately. The FTC wants to make sure that consumers are not hit with any unexpected charges.
Some Considerations for Business Owners
Business owners are justifiably worried about the new rule and the potential legal repercussions it may bring. A violation of the rule will be considered an unfair and deceptive act or practice under Section 5 of the FTC Act. Violations can subject businesses to penalties of up to $51,744 per violation (amount for 2024), not to mention that it exposes businesses to civil liability and class action lawsuits. But the good news is that you can take proactive steps to comply with the rule:
- Consult with legal counsel and have them review the methods you use to obtain consumer consent.
- Disclose all relevant information, like subscription fees, renewal terms, and any additional charges, clearly and upfront.
- Simplify your cancellation processes to allow consumers to cancel subscriptions easily, whether it’s online, in person, or over the phone. Cancellation mechanisms must be as easy as the method consumers used to sign up for the subscription.
- Understand when you can obtain a consumer’s billing information and when you can charge for the services provided—after consent is obtained.
Legal Challenges and Uncertain Future
Section 5(a) of the FTC Act is the core consumer protection statute enforced by the FTC. The statute broadly prohibits “unfair or deceptive acts or practices,” but it did not specifically address negative option programs or their marketing. The new rule has and will continue to face challenges from its critics, who claim that it oversteps the FTC’s authority and imposes overly burdensome requirements on businesses. Commissioner Melissa Holyoak dissented, citing her concerns over the rule’s lack of specificity.
Furthermore, the FTC has stated that it will continue to modify the rule as it receives more recommendations, leaving these issues open for debate and future adjustments. Some lawmakers and industry interest groups are also pushing for the rule’s reversal. But businesses should not wait to prepare for the rule to be in force. Existing laws, such as the Restore Online Shoppers Confidence Act and state autorenewal laws, already impose similar requirements to those of the new rule.
Conclusion
The FTC’s “Click-to-Cancel” will likely cause significant shifts in subscription and membership industry practices. It will require businesses to focus on improving the transparency and simplicity of their services for the benefit of the consumers. By acting early to ensure that your business is in compliance with the rule’s requirements, business owners can avoid legal risks and stay ahead in an increasingly consumer-focused regulatory environment.
For more information on compliance strategies or how this rule may affect your business, consult with an experienced legal professional.
