FTC Negative Option Rule
The Federal Trade Commission released updated guidelines for the various rules concerning negative option marketing and billing practices. This memo explains the laws that cover these activities and provides merchants with information about how to follow them correctly and avoid the consequences of failing to adhere to them.
Negative option billing can be an effective method for attracting customers and increasing sales, but it can also be a source of conflict with your customers. Misusing the negative option can result in disputes, chargebacks, and even legal penalties. What do merchants need to do in order to comply with the FTC's negative option rules?
- What is Negative Option Marketing?
- What are the Pros and Cons of Negative Option Marketing?
- Which Laws are the FTC Negative Option Rules Based On?
- How Should Merchants Comply with the FTC Negative Option Rule?
- Conclusion
Negative option offers have been around for a long time. They’re based on the old concept of letting a customer try something for free, and only charging them if they like it and want to keep using it. In theory, it’s a fair and reasonable system that allows consumers to evaluate products before they commit to spending any money. In practice, it doesn’t always shake out that way, because “negative option” means the customer will automatically be charged unless they take action to decline the offer.
The problem is twofold. There are consumers who sign up for negative option billing, use their free trial, and completely forget to follow up with the merchant to cancel future billings. Even though the merchant may have communicated the terms of the deal clearly, the consumer disregards their own obligation to cancel and takes umbrage at the merchant sending them a bill.
On the other hand, there are merchants who deliberately use vague or deceptive negative option marketing tactics to get consumers to sign up, and sometimes they make it difficult to cancel too. These merchants elicit huge numbers of consumer complaints and have put a lot of negative associations on the concept of negative option billing.
Several federal and state laws address negative option marketing and billing practices and provide guidelines for merchants to follow. In October 2021, the FTC issued a statement titled “Enforcement Policy Statement Regarding Negative Option Marketing” that explains in detail the agency’s approach toward enforcing these laws. The document is an important source of information for merchants seeking to offer lawful and effective negative option deals.
What is Negative Option Marketing?
Negative option marketing (and its associated billing practices) can come in a variety of forms. The common denominator is that the deal starts with a free or low-cost initial offer, and then regular billings automatically commence unless the customer explicitly opts out or cancels.
Mail-order book and record clubs based on this model used to be quite common—you might get several items for just one cent when you signed up, and then you would get another one sent to you every month, billed at standard prices.
Negative option offers have become widely used in e-commerce, where many subscription services will let customers sign up for free and then start billing them unless they submit a cancellation request. The negative option FTC statement lists the following types of offers as examples of negative option marketing:
- Automatic renewals
- Continuity plans
- Free-to-play/fee-to-pay conversions
- Prenotification plans
Negative option plans interpret silence or inaction from the customer as consent to continue billing them. These billings can recur indefinitely if the customer takes no action to stop them.
What are the Pros and Cons of Negative Option Marketing?
Despite the consternation they cause, merchants and consumers keep going back to negative option plans, and it’s not hard to understand why. They can offer genuinely significant savings to consumers, leading to higher conversion rates for merchants.
The rub is that the negative option depends on inertia to keep the customer paying, rather than active interest motivated by enthusiasm for the product.
Customers often forget about the negative option plans they’ve signed up for, and they get annoyed when they see it on their billing statement months later and realize they’ve been paying for something they stopped using.
It's not necessarily rational for customers to blame the merchant for this situation, but it happens anyway. It's also true that some merchants contribute to the problem by making it difficult or confusing to cancel an active recurring billing subscription.
Frustrated consumers react by complaining to the merchants, to regulatory agencies and consumer advocacy groups, and to their credit card issuers. Over the years, these complaints have led legislators and card networks to establish an extensive body of rules and regulations around negative option billing.
Negative option marketing can still be a good way for merchants to increase sales and add to their customer base, but if you don’t handle it properly, it can result in chargebacks and even get you in legal trouble. The FTC negative option rule statement was put together to help merchants ensure that their billing practices are safe and consumer-friendly.
Which Laws are the FTC Negative Option Rules Based On?
The FTC’s statement lays out their interpretation of the following laws, currently on the books, that address negative option marketing:
- Section 5 of the FTC Act (15 USC, Section 45(a))
- Restore Online Shoppers’ Confidence Act (15 USC, Sections 8401-8405)
- Telemarketing Sales Rule (16 CFR, Part 310)
- Rule on the Use of Prenotification Negative Option Plans (16 CFR, Part 425)
- Electronic Fund Transfer Act (15 USC, Sections 1693-1693r)
- Postal Reorganization Act (39 USC, Section 3009)
The statement does not address the rules the card networks set regarding negative option transactions, but it’s important for merchants to be aware of them. Failure to comply with the card network rules can leave you liable for costly chargebacks from disgruntled customers.
How Should Merchants Comply with the FTC Negative Option Rule?
The FTC negative option rule statement provides three core principles for complaint negative option marketing: disclosures, consent, and cancellation.
The general recommendations can be summarized as follows: Merchants must disclose the terms of the negative option deal, including its total cost and how it can be cancelled, in a clear and conspicuous manner.
This must be done before the purchase is completed, and the merchant must obtain the customer’s express informed consent to the terms. Merchants cannot make it unreasonably difficult to cancel the offer and must honor all cancellation requests.
Merchants should review the statement for the additional detailed advice it contains.
Conclusion
It’s not always easy convincing customers to sign up for a recurring billing plan, and negative option offers can be a valuable marketing tool for merchants. They just need to be used responsibly, with a goal of providing transparency and a good customer experience.
If you aren’t careful, negative option billing can be a source of customer complaints, chargebacks, and legal penalties.
However, even when merchants do everything right, some customers will still get angry or confused about recurring billing issues, and friendly fraud chargebacks can be the result. If you’re following the FTC guidance and best practices and still getting recurring billing disputes, it might be time to ask the chargeback experts to assess your situation and help you come up with a personalized solution.
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