On January 14, 2025, the first part of the Federal Trade Commission’s (“FTC”) update to the Negative Option Rule went into effect. Negative options are contract terms that allow a seller to interpret a customer’s silence or failure to affirmatively cancel an agreement as a tacit acceptance of a renewal option—thereby creating automatically renewing contracts. While auto-renewing contracts are often intended to make subscriptions to goods and services easier and more efficient, the FTC’s stated position has been that consumers and other businesses can become “trapped” in contracts that they did not intend to renew and cannot easily cancel.

The previous FTC rule governing these contracts was the 1973 Negative Option Rule, which only applied to negative option programs known as “prenotification plans.” Under these plans, sellers provide periodic notices offering goods to participating customers and then send those goods if the customers do not decline (such as book-of-the-month clubs). The original Negative Option Rule required those sellers to make the material terms of the plan, including how to decline the selection and minimum purchase obligations, clear to customers before they can subscribe. However, negative option plans have expanded since 1973. In response to the new negative option market, the FTC announced last year the final version of its amendment to the original 1973 rule. The new rule not only extends the 1973 “informed consent” requirement to three other forms of negative option contracts, but it also requires sellers to make cancellation of the negative option feature easier for customers, known as the “Click to Cancel Rule” (the “Rule”).

The four different forms of negative option programs covered by the new Rule now include:

1. The aforementioned prenotification plans;
2. Continuity plans, pursuant to which customers agree in advance to periodic deliveries until they cancel;
3. Free trials, pursuant to which customers receive goods/services for free or a nominal fee for a trial period, after which the seller charges a higher fee automatically; and
4. Automatic renewals, pursuant to which sellers automatically renew subscriptions when they expire.

The Rule, like all FTC regulations, does not apply to institutions outside the FTC’s jurisdiction like banks and credit unions, though it will apply to bank holding companies; however, the passage of the Rule may still be of interest to non-jurisdictional entities as it may inform the procedures of subsidiaries and partners that are involved in negative option contracts.

What are the requirements for compliance, and when are they effective?

The Rule has a two-pronged scheme for when it becomes effective.

1. Effective January 14, 2025, only a provision of the Rule regarding misrepresentations during contract formation will be enforced.
   • When offering any of these programs, it will be a violation of Section 425.3 of the Rule for any seller to engage in unfair or deceptive practices by misrepresenting, explicitly or implicitly, material facts regarding the negative option feature, the contract itself, or the product or service underlying the contract.
   • A violation of this section may expose a company to civil penalties; however, the FTC cannot seek penalties for first-time violators. This provision of the Rule is a major expansion of the FTC’s power to regulate activities as deceptive practices; several groups have already challenged it on the basis of its overbreadth.
2. Effective May 14, 2025, the new Rule will require sellers to get express permission from customers before enrolling them in automatic renewal programs. It will also require sellers to make it just as easy for customers to cancel the auto-renew program in their contract(s) as it is to enter into the program in the first place.
   • Negative option sign-ups and cancellations must be similar in terms of time, burden, expense, and ease of use—no matter whether the contract was made over the Internet, by telephone, or in person. However, customers may still have to verify their identity or confirm their intent to cancel.
   • Customers must be able to cancel the negative option feature using the same medium as when they signed up. Customers cannot be forced to interact with a live agent or a chat bot unless they did so when signing up.
   • “Saves,” in which sellers offer additional perks or terms to convince a customer not to cancel, are not banned by the Rule—but they cannot be used to complicate the cancellation method such as by forcing customers to wait through sales pitches or to repeatedly decline special offers simply to cancel.
   • Sellers must obtain customers’ express consent to the auto-renewing feature of their contracts separately from any other portion of the contract.
   • Before obtaining customers’ consent or their billing information, all of the material terms of the auto-renewing feature must be clearly displayed adjacent to the checkbox, signature line, or other method used to record their consent. These material terms must include:
     • Whether customers will be charged for the goods, if the charge will be recurring, and if those charges will increase after the applicable trial period ends;
     • Each deadline by which a customers must act to prevent or stop the charges;
     • The amount (or range if an exact figure is impossible until billing information can be obtained) and frequency of charges the customers will incur unless they take steps to cancel; and
     • How customers can find the simple cancellation mechanism.
   • This consent is also needed for any customers that are currently in auto-renewing contracts. If customers have previously provided their billing information and have allowed a seller to store that information, the seller will need to make these disclosures and obtain their consent before using that saved information.
   • Going forward, sellers must also keep records of consumer consent for at least three years from when consent was given. These records can be through any documentation method that would show that the customer gave consent to the negative option. In telephone transactions, the seller must make the required disclosures immediately before requesting and recording the customer’s consent.
     • However, if the seller can show by a preponderance of the evidence that its processes ensure that no consumer could technologically complete the transaction without consenting to the negative option feature (for example, if they had to click through a screen wherein they provide consent), then these records do not have to be maintained.
   • As with violations of the misrepresentation rule, violations of these provisions may result in civil penalties unless the company is a first-time violator.

To whom does the Rule apply?

The Rule applies to all sellers of any good or service, including those using third-party services for sales. The Rule extends to both B2C (business-to-consumer) and B2B (business-to-business) contracts, unlike many state laws regulating auto-renewing contracts. However, the FTC has stated that it will enforce the Rule in the same way in which it enforces the rest of the FTC Act—i.e., by not typically exercising its consumer protection authority in large individually negotiated B2B transactions. In our view, we anticipate that sophisticated B2B parties, given their greater ability to engage in arm’s-length contract negotiation, can still negotiate their own individualized negative option contracts with customized cancellation methods.

The Rule also applies to all negative option contracts regardless of the medium over which the contract was formed—over the Internet, phone, in print, or in person. However, some businesses are mostly or entirely outside the FTC’s jurisdiction and therefore do not need to follow the new Rule. These include most depository institutions such as banks and credit unions, common carriers for transportation and communications, insurers, and non-profits (although FTC jurisdiction does extend to non-profits that provide economic benefits to for-profits members, such as professional associations). The Rule does, however, apply to bank holding companies, though these companies are not generally engaged in negative option contracts themselves.

Are there any exemptions from compliance?

• Installment contracts, in which the consumer or business has an obligation to pay for the entire contract value over the entire period of the contract, are specifically excepted from the Negative Option Rule. Installment contracts have a set payment schedule and terms that are established at the original point of contract formation. Because these contracts do not interpret customer silence as permission to renew the contract, compliance with the Rule is unnecessary. Retail installment contracts, installment contracts for services, and contracts for deed are thus unaffected by the new Rule.

• Advertising companies, web designers, and entities in the supply chain for products that are sold through negative option plans do not have to display the terms of the negative option plan since they do not have an active role in the negative option feature itself. However, companies that do sell such plans through their websites will still be covered by the Rule and must have their websites designed accordingly. Furthermore, if any advertiser or promoter of a product takes on a further role in selling the product with a negative option feature, then they will be subject to the Rule.

• While the FTC did not adopt a status-based exemption for payment intermediaries, the Rule does not cover intermediaries that merely effect the transfer of funds from the consumer to the seller. The FTC has not taken enforcement actions against payment intermediaries solely for their conduct in effecting fund transfers, and the FTC continues that principle to this Rule.

• Furthermore, parties may apply to the FTC for partial or full exemptions from the Rule. The FTC may also, on its own initiative, grant exemptions from compliance to certain industries. However, the FTC may instead condition exemption from the Rule on compliance with alternative standards.

What is a sophisticated B2B party?

The FTC has not provided a definition of what it means by “sophisticated companies” with regard to B2B contracts, but it has stated that it does not hold all business customers to a heightened standard of sophistication and that it considers protecting “small businesses” a priority. The FTC is currently seeking comment on a new petition asking for clarification of unclear terms used in the current version of the Rule; it is likely that such clarification would further define the limits of the Rule’s application.

For now, the FTC draws a stronger delineation between B2B agreements that are offered on a take-it-or-leave-it basis and B2B agreements with individually negotiated terms. The Rule requires that it be as easy to cancel the auto-renewal feature as it was to agree to the feature in the first place; if the agreement itself was the subject of intensive negotiation, then cancellation can consequently require more effort than would typically be permissible under the Rule. However, the FTC typically does not enforce its rules to protect large businesses, even if the contract is a result of a take-it-or-leave-it basis or if a company has the capability to individually negotiate agreement but simply declines to do so.

Practically speaking, we do not think that the new Rule is going to change how B2B contracts are negotiated and renewed in a significant way. We expect that two businesses individually negotiating a contract, not on a take-it-or-leave-it basis, should not be subject to FTC enforcement with regard to negative options. Consideration should still be given to the kind of party being contracted with, e.g., startups and small businesses; however, even in these circumstances, the practical application of the Rule in the B2B context is likely limited. Further, we would also note that, historically, the FTC has limited its enforcement actions in the B2B context. Nonetheless, the individual facts and circumstances of the contracts at hand and the nature of the relationship between the parties should be given consideration.

What is the likelihood of the Rule remaining in effect?

It remains to be seen whether the Rule will survive judicial challenge. Many organizations have challenged the Rule’s breadth and have already mounted cases against the FTC, which have been consolidated in the Eighth Circuit. The Rule will also be subject to the Congressional Review Act, which gives Congress the power to review and overrule new federal regulations. Furthermore, the new chairman of the FTC voted against the Rule when it was first promulgated, further putting the viability of the Rule into question. However, for now the Rule remains in effect and businesses will need to comply. In addition, no matter how the Rule fares in the courts or under the new administration, state regulations are not preempted by the Negative Option Rule and will remain in effect.

What should my company do to comply?

Your company’s action items for compliance include:

1. Reviewing its contracts for auto-renewal features;
2. Noting whether the contracts involve end consumers or small businesses;
3. Reviewing all auxiliary services provided to customers that may include subscription charges (such as mobile apps and service contracts, but excluding insurance);
4. Reviewing your company’s sales procedures to make sure that no misrepresentations are made regarding those contracts or the underlying product or service; and
5. By May 14, 2025, for those auto-renewal contracts and auxiliary services involving end consumers or small businesses, either seeking a separate agreement with your company’s customers to the terms of the negative option feature or allowing the auto-renewal period to lapse without renewing the contract and then recontract with your customers.

In addition, your review should include examining state regulations on auto-renewing contracts, which may still be in effect.

To view the full text of the regulation, click here.

If you have any questions regarding the topics discussed in this article, contact Daniel C. McKay at dmckay@vedderprice.com, Jennifer Durham King at jking@vedderprice.com, James W. Morrissey at jmorrissey@vedderprice.com, Kelly L. Miller at klmiller@vedderprice.com, Daniel P. Jackson at djackson@vedderprice.com, Mark C. Svalina at msvalina@vedderprice.com, Christopher R. Rodenbaugh at crodenbaugh@vedderprice.com, Nicholas S. Zlevor at nzlevor@vedderprice.com, or any Vedder Price attorney with whom you have worked.