Today’s digital world makes it easier than ever for customers to purchase products and services in the form of recurring, automatically renewing subscriptions. Signing up is fast and simple, but canceling resembles something out of the “Hotel California” where “you can check out any time you like, but you can never leave.”
But it’s now harder for companies to fly under the radar and confuse customers by obscuring options to withdraw from products and services. The Federal Trade Commission’s final “click-to-cancel” rule attempts to address this issue by imposing new requirements on companies offering subscription-based products and services on an auto-renewal basis.
Companies are already taking issue with the rule. Several trade associations have filed suit in the Fifth Circuit Court of Appeals to block the rule, alleging that it’s “arbitrary, capricious, and an abuse of discretion.” There is no private right of action under the rule; only the FTC or state attorneys general can take legal action, and violations of the rule are subject to civil penalties of up to $51,744 per violation.
The rule will go into effect in April 2025, and applies across industries to transactions occurring online, in person, or over the phone, and to both business-to-business and business-to-consumer relationships.
A company’s terms of service have long been the vehicle for disclosure of the terms and conditions for use of a service, including auto-renewal and recurring payment provisions.
Once the rule becomes effective, it will no longer be sufficient for companies to present these disclosures only within the terms of service. Under the rule, services offering auto-renew subscriptions, including memberships and recurring payment obligations, must present certain disclosures governing the recurring commitment conspicuously, and separate from other terms, and provide for recorded consent mechanisms and ease of cancellation.
The rule aligns with many state laws, such as in California and Florida, that were enacted to impose legal guardrails around the “silence is deemed acceptance” aspect of auto-renew services. It’s also in sync with broader laws addressing the principle of transparency, which has become a generally accepted standard in other policy areas governing the provision of services to consumers.
The rule doesn’t preempt state laws that afford consumers even greater protection than under the rule, so businesses will need to comply with not only the federal rule but also any applicable state laws.
The key compliance requirements under the rule include:
Disclosures. Prior to obtaining a consumer’s billing information for any auto-renewal, service providers must clearly and conspicuously disclose the fee for the service or membership, the timeline for the recurring charge, when cancellation must occur to prevent or stop charges, and how to cancel.
Consent. Service providers must obtain the consumer’s consent. The consent request must relate only to acceptance of the auto-renewal and be clearly worded. Under the rule, adhering to this requirement can protect service providers from potential liability or penalties for noncompliance with the rule. The consent mechanism must appear adjacent to the disclosures and after the placement of the disclosures. Consent records must also be retained for at least three years.
Cancellation. Service providers must provide an easy-to-execute cancellation method that stops the consumer from being charged (or being charged a higher amount) and immediately stops any recurring charges. The cancellation mechanism must be easy as the consent mechanism and be provided through the same medium used to obtain consent.
Canceling must be as simple as subscribing or enrolling is and be unencumbered by survey questions regarding the reason for cancellation. It’s important to note that chatbots may not be used for cancellation unless they were used for the initial enrollment.
Although most elements of the rule don’t take effect until April 2025, businesses should review their terms and conditions now and address any areas of noncompliance.
Reproduced with permission. Published November 20, 2024. Copyright 2024 Bloomberg Industry Group 800-372-1033. For further use, please visit https://www.bloombergindustry.com/copyright-and-usage-guidelines-copyright/.
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