Su Young Lee, MJLST Staffer
Online subscription services are increasingly prevalent in society – prevalent enough to catch the attention of the Federal Trade Commission (FTC). On June 17, 2024, the FTC filed a lawsuit against Adobe Inc for the violation of the FTC Act Section 5 and Section 4 of the Restore Online Shoppers’ Confidence Act (ROSCA).[i] These two laws introduce a general legal framework governing online commerce and negative option marketing.[ii] The ROSCA Section 4 prohibits online sellers from conducting a transaction through “negative option feature” unless the seller “clearly and conspicuously discloses all material terms of the transaction” to the consumer.[iii] While the ROSCA is a distinctive law to the FTC Act, the violation of the ROSCA Section 4 is treated as an “unfair or deceptive acts or practices” so constitutes the violation of the FTC Act Section 5.[iv] Furthermore, as it is treated as an “unfair or deceptive acts or practices,”[v] the violation of the ROSCA Section 4 also triggers the FTC Act Section 19, which allows the FTC to “commence a civil action” against the one who violated subjected law.[vi]
In this case, the FTC argues that Adobe did not “clearly and conspicuously” disclose the early cancellation fee during the subscription process, which, therefore, “constitutes an unfair or deceptive act or practice in or affecting commerce.”[vii] Last year, the FTC filed a similar complaint against Amazon concerning the cancellation of Prime memberships; the case is still ongoing.[viii]
The FTC’s action against online subscription policies, specifically their marketing strategy called ‘negative option marketing,’ or ‘dark pattern,’[ix] are not new. Negative option marketing is “a term or condition under which the seller may interpret a consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement as acceptance or continuing acceptance of the offer.”[x] Examples include automatic renewals, continuity plans, free-to-pay or fee-to-pay conversions, and prenotification plans.[xi] The FTC reports negative option marketing to be a “persistent source of consumer harm” by “saddling shoppers with recurring payments for products and services they did not intend to purchase or did not want to continue to purchase.”[xii]
The FTC has pursued action against negative option marketing, especially its use in online subscription services, in recent years. As with Amazon and Adobe, using ROSCA and/or the FTC Act as a legal basis, the FTC has sued numerous online commercial companies with subscription services such as Wealthpress and MoviePass.[xiii] They also published a staff report and policy statement warning of the danger of negative option marketing.[xiv] On April 24, 2023, the FTC even exercised their rulemaking authority and proposed a rule amending 16 C.F.R. part 425 to specifically target the regulation of negative option marketing.[xv] While the proposed rule does not limit the type of applicable media,[xvi] the FTC added the definition of the terms that particularly apply to online subscription services, such as “simple cancellation” and “annual reminders.”[xvii]
Despite their persistence, the effectiveness of the FTC’s efforts is still in question. First, not everyone welcomes the proposed rule. Former Commissioner Christine S. Wilson states that the proposed rule’s scope of negative option marketing is overly broad because it applies to any misrepresentations, even to those irrelevant to negative option terms or policies.[xviii] She also points out that the proposed rule gives the FTC the authority to seek civil penalties under the FTC Act Section 5, which the Supreme Court limited in AMG Cap. Mgmt., LLC v. Fed. Trade Comm’n.[xix] Commissioner Wilson expresses concern that such overreach would put marketers at risk of being liable for monetary penalties even when they fully disclose negative option terms.[xx]
Luckily for those not fond of the proposed rule, the FTC has not yet prevailed in putting the regulation into effect. Even if it becomes effective one day, this new rule will have to survive the unclarified yet heightened standard the recent overruling of Chevron created. The Section 6(a) of the FTC Act, governing the agency’s rulemaking authority, grants the FTC to make a rule that addresses “unfair or deceptive acts or practices.”[xxi] The proposed rule manifests its relation to such authority, as many of its provisions trigger the violation of the FTC Act Section 5, which states that “unfair or deceptive acts or practices” are unlawful.[xxii] On the other hand, no one is sure at this moment whether such manifestations are the sufficient address of ‘unfair or deceptive acts or practices’ under the new rulemaking standard.
No matter where the proposed rule currently lies, as the ongoing lawsuits against Adobe and Amazon reflect, it seems like the FTC has not given up on regulating negative option marketing within online subscription services. If the current proposed rule does not end up being effective and fails to become the FTC’s resolution, could lawsuits be their alternate pathway? Based on their past lawsuits against Wealthpress and MoviePass, which ended with the agreement in the proposed court order (“Agreement”) and settlement, it may be reasonable to anticipate that the ongoing cases will reach a similar outcome.[xxiii] The settlement and Agreement, which involved specific restriction and monetary agreement,[xxiv] from Wealthpress and MoviePass cases focused on refraining from the alleged type of conduct of an alleged company. These could discourage alleged tech companies like Wealthpress and MoviePass from using the alleged type of negative option marketing in their future subscription policies. However, since neither settlement nor Agreement has precedential authority, it is questionable whether the history of lawsuits filled with settlements and Agreement could prevent other tech companies from applying similar negative option marketing to their subscription policies.
Notes
[i] Complaint for Permanent Injunction, Monetary Judgment, Civil Penalty Judgment, and Other Relief at 25, United States v. Adobe Inc., No. 5:24-cv-03630-BLF (N.D. Cal. June 17, 2024).
[ii] Id. at ¶ 10.
[iii] 15 U.S.C. § 8403.
[iv] 15 U.S.C. 45(a)(1) (“Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.”) (emphasis added). See also Complaint for Permanent Injunction, supra note i, at ¶ 22.
[v] 15 U.S.C. § 8404(a).
[vi] 15 U.S.C. § 57(b)(1) (“If any person, partnership, or corporation violates any rule under this subchapter respecting unfair or deceptive acts or practices…then the Commission may commence a civil action against such person.”) (emphasis added).
[vii] Complaint for Permanent Injunction, supra note i, at ¶ 121-25.
[viii] See Fed. Trade Comm’n v. Amazon.com, Inc., No. 2:23-CV-00932-JHC, 2024 WL 2723812 at 1 (W.D. Wash. May 28, 2024) (showing that the FTC is using the same legal basis).
[ix] FTC uses two terms (negative option marketing and dark pattern) interchangebly. See FED. TRADE COMM’N, Bringing Dark Patterns to Light : Staff Report (2022).
[x] FED. TRADE COMM’N, ENFORCEMENT POLICY STATEMENT REGARDING NEGATIVE OPTION MARKETING 60822 (2021).
[xi] Id.
[xii] Id. at 60823.
[xiii] See FTC Suit Requires Investment Advice Company WealthPress to Pay $1.7 Million for Deceiving Consumers, Fed. Trade Comm’n (Jan. 13, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-suit-requires-investment-advice-company-wealthpress-pay-17-million-deceiving-consumers and Operators of MoviePass Subscription Service Agree to Settle FTC Allegations that They Limited Usage, Failed to Secure User Data Fed. Trade Comm’n (June. 7, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/06/operators-moviepass-subscription-service-agree-settle-ftc-allegations-they-limited-usage-failed.
[xiv] See FED. TRADE COMM’N, Bringing Dark Patterns to Light, supra note ix and FED. TRADE COMM’N, ENFORCEMENT POLICY STATEMENT, supra note x.
[xv] Negative Option Rule, 88 FR 24716 (proposed April 24, 2023) (to be codified at 16 C.F.R. pt. 425)
[xvi] Id. at 24734 (“This Rule contains requirements related to any form of negative option plan in any media, including, but not limited to, the internet, telephone, inprint, and in-person transactions.”).
[xvii] Id.
[xviii] Christine S. Wilson, Dissenting Statement of Commissioner Christine S. Wilson, Notice of Proposed Rulemaking, Negative Option Rule 2 (Sept. 2021), https://www.ftc.gov/system/files/ftc_gov/pdf/p064202_commissioner_wilson_dissent_negative_option_rule_finalrevd_0.pdf.
[xix] Id. See also AMG Cap. Mgmt., LLC v. Fed. Trade Comm’n, 593 U.S. 67, 141 S. Ct. 1341, 209 L. Ed. 2d 361 (2021) (finding that the FTC cannot seek monetary relief based on the FTC § 13(b), which triggers permanent injunction when the § 5 is found to be violated)
[xx] Christine S. Wilson, Dissenting Statement, supra note xviii, at 2.
[xxi] 15 U.S.C. § 46(g). See also A Brief Overview of the Federal Trade Commission’s Investigative, Law Enforcement, and Rulemaking Authority, Fed. Trade Comm’n (May, 2021), https://www.ftc.gov/about-ftc/mission/enforcement-authority.
[xxii] 15 U.S.C. 45(a)(1). E.g. Negative Option Rule, 88 FR at 24735 (“In connection with promoting or offering for sale any good or service with a negative option feature, it is a violation of this Rule and an unfair or deceptive act or practice in violation of Section 5 of the FTC Act.”).
[xxiii] supra note xiii.
[xxiv] Id.