Are you tired of having to jump through hoops to cancel subscription services, like gym memberships, cable, and that software you wanted to try out? Well, good news for you then, the FTC announced the final “click to cancel” rule which aims to make it easy for consumers to cancel their subscription enrollments.
What are Negative Option Programs?
The defining feature of a negative option program is that a customer’s silence or failure to take an affirmative action is acceptance of an offer. Generally, these fall into four categories: prenotification plans, continuity plans, automatic renewals, and free trial conversion offers.
Prenotification plans are where companies offer periodic shipment of goods and then send and charge for goods if the consumer takes no action to decline the offer. These plans go on indefinitely, until the consumer cancels. Think: {goods} of the month club — the FTC used book of the month as their example.
Continuity plans are where consumers agree to receive periodic shipments of goods or services. Similar to the prenotification plans, these can go on indefinitely, until the consumer cancels. The FTC used bottled water delivery as their example here.
Automatic renewals are a little bit different; you have a set term (say one year), but the service will automatically renew at the end unless the consumer cancels in advance. The FTC used magazines and credit monitoring service as their examples. Other examples would include cable TV, many software subscriptions, and home utilities.
The final negative option program is the free trial conversion offer, where you receive the goods or services for free during the trial period and then the subscription fee kicks in automatically unless you affirmatively cancel the service or return the goods. This basically describes the majority of online software programs.
In other words, this is going to affect a lot of businesses.
Why Do Businesses Use These Programs?
Have you ever heard business people or financial talking heads (like me) talk about ARR or Annual Recurring Revenue? It’s the holy grail for some businesses, especially those looking for predictable growth and potential future exit. Basically, it’s the idea that we have a predictable revenue stream going forward – we love that and so do the potential buyers of our companies. Subscriptions do that.
Generally speaking, if a company can lock a customer into a recurring revenue model, then the lifetime value of the customer goes up.
Think about the classic example of the gym. If you charged a per visit fee, some people are going to be paying a lot – the gym rats. While other people are going to pay during January and will stop going as soon as their New Years Resolutions fall off. But if you can get all those January gym goers into a recurring membership fee, where they pay something every month — then revenue becomes more predictable. And often, the majority of users are not “power users” so the company makes really good margins on those customers.
Some users will even go months or years not visiting the gym even one time, meaning that the entire recurring membership fee is pure profit for the gym.
Why Does the FTC Care About These Business Models?
Well, honestly, because a lot of businesses have abused the system.
Using our example of the gym, they know that those customers that pay the membership fee but then never use the gym are pure profit. That’s like gold to them. So they want to keep those customers paying. And the gym owners don’t want to give them up. (Insert Rick Roll here)
The gym owners made it hard to cancel. When I wanted to cancel my LA Fitness membership during the pandemic because I was going to be spending my time in an area with no LA Fitness gyms, I had to send them a letter! Even though I had an online membership account, where I could update my billing information and reserve classes, I had to send them a letter via US mail! Like WTF?
And for most, I got lucky. They got the letter on the first try and canceled it, without me having to fight them for months on end.
I’m not just picking on gyms here either. A lot of companies and industries are notorious for this. Many software/SaaS companies are really bad about this as well, with people downgrading to the free plans and still being charged renewal fees. Spend any time in a content creator group, and you’ll see at least weekly, if not daily, complaints about this. Those {goods} of the month clubs are also notoriously bad.
It’s also not just cancellation processes that are a problem here. Disclosures are often lacking, enrollment without consent was rampant, and refund processes were broken.
The FTC got tons of complaints about these. So they decided it was time to make some changes to the regulations that govern these programs. They issued a Proposed Rule to update the click-to-cancel rules all the way back in May 2023. Today, they issued the Final Rule.
The New Click to Cancel Final Rule
Under the amended FTC Negative Option Rule:
- Important information must be truthful, clear, and easy to find
- Consumers must know what they are agreeing to BEFORE they sign up
- Sellers must be able to show that consumers knew what they agreed to
- There must be a way for consumers to cancel that is at least as easy as it was to sign up.
The last point about cancellations is where the “click to cancel” name comes from — if a consumer signed up online, then they need to be able to cancel online. If they signed up in person, the consumer should be able to cancel online or over the phone.
No more sending US mail letters to cancel that gym membership!
The FTC estimates that the new Click to Cancel and Negative Option Rule will provide in excess of $5.3 billion over 10 years. They also mention that the savings could be as much as $49.2 billion over the same 10 years.
The Rule will take effect 180 days from publishing in the Federal Register, which should happen soon. This means that it will be effective in mid-to-late April 2025.
Does the Rule Apply to B2B Transactions?
Yes, the Final Rule applies to B2B transactions. There was some discussion that these transactions should be excluded, but the Final Rule kept these transactions in.
While some large businesses are sophisticated and may not need the additional protection, most businesses are small businesses and don’t have the same level of sophistication. Moreover, the negative option programs, especially the cancellation provisions, are as damaging to companies as they are to consumers.
Sophisticated businesses in a B2B transaction are free to negotiate terms, including cancellation mechanisms.
What Changed from the Proposed Rule?
The biggest changes from the proposed rule to the final rule is that the FTC dropped a requirement that businesses send annual reminders about their negative option programs — that they were up for renewal or that the subscription would continue.
The FTC also dropped from the proposed rule a requirement that businesses would not be able to try to convince consumers to stay on or different available plans, perhaps at lower costs or with more benefits. So you’ll still have to sit through a sales pitch to be able to cancel.
What Does My Business Need to Do Now?
The first thing that businesses need to do is to take a look at their current processes.
In particular, how can consumers cancel their service with you? Do you provide an online portal, especially for billing information? If so, that portal should have an easy to find way for people to cancel their service. You have just over 180 days to have this feature rolled out if you don’t already have one.
The second thing to take a look at will be how people sign up. Are you properly disclosing all the terms and conditions? Are the terms easy to understand or are they full of technical or legal jargon? Are you keeping a record of what you disclosed to consumers?
Will This Hold Up in Court?
Like all regulations, it’s a big “it depends.”
This rule doesn’t have the same public outcry from business organizations like the non-compete rule did. But the same organizing group that attacked that rule has made public statements against the Click to Cancel Rule. When the non-compete rule was even proposed, we knew that companies were going to sue to block it. We don’t have that same energy, but that doesn’t mean it won’t happen.
Update 10/28/2024: Spoiler alert: it happened. The NCTA, a trade group of internet and television providers, as well as the Electronic Security Association and the Interactive Advertising Bureau, have sued in the 5th Circuit to block the FTC Negative Option Rule (aka the Click to Cancel Rule). It’s basically the same arguments for any final rule these days — they argue that the FTC didn’t have the authority to make the rule and that it is arbitrary and capricious.
In case you were wondering what the big companies thought about making it easy for consumers to cancel subscriptions… they don’t like it.
Final Thoughts
Much of the rule is still about putting into regulation best practices in any case.
We should be clearly and conspicuously disclosing all the important terms of our services to our customers. That will avoid so many customer service issues if done right.
Secondly, and I know I may be the odd person out here, but for many of our companies, we should make exiting much easier. Those that are seeking to cancel are not our ideal customers. We should be focusing on ideal customers, and by having an online cancellation option, we can spend our time focusing on the ones that want to be there with us. Providing a good experience for exit will make them more likely to refer customers that are our ideal customers. And not trash us on social media and online forums.
And as much as this Rule may hurt us dealing with our customers, remember that you are also a customer — personally and as a business. You want these benefits when you are on that side of the transaction as well.
Want to talk more about how you can prepare for the Click to Cancel Rule? Contact Springboard Legal for legal counsel.