Hi, everyone. I'm so glad to be joining you today. I'm Linda Goldstein. I'm a partner at Baker Hosetler in our New York office.
And I am a co leader of the advertising, marketing, and digital media group here.
And I'm here to share with you, some of the legal land mines that are now surrounding subscription marketing.
With some tips on how you can avoid them.
So let me just start by, you know, who's regulating this, who's looking at these types of offers.
The eight hundred pound gorilla is the Federal Trade Commission.
They have broad authority under section five of the Federal Trade Commission Act to regulate deceptive and misleading practices.
State attorneys general kind of have their own little FTC act, so it's very much the same. There have been a lot of consumer class actions in this space. And as many of you, I'm Shore Nobis and Mastercard, also have their own rules and regulations surrounding the billing for subscription programs.
Just briefly what's happening here, and and and I believe this is the reason we're currently asking me to speak to you today is that the regulations around subscription marketing and recurring billing are really getting tougher than ever. A lot of that activity is coming from the FTC, and we'll talk about some of the things they're doing, that are making this, type of marketing increasingly risk prone.
We continue to see state laws. There are now well over thirty states that have laws regulating subscription marketing, and, they they keep coming, and they're not all uniform. So that can sometimes make marketing to the lowest common denominator challenging. As I mentioned, there's continues to be an avalanche of class action lawsuits. I'm gonna talk about this more later, but wanna highlight that a lot of focus now is on cancellation processes or the back end, Oftentimes, in in the earlier days of enforcement, there was a lot of focus on making sure you disclose material terms and you got a firm consent, but a lot of the focus is now shifted to those back end processes. And I will also talk a little bit later about the fact that subscription marketing has actually been officially labeled a dark pattern. I'll explain what that is, but needless to say if it doesn't sound good.
So just for those of you to level set, who may be new to the area, for many years since two thousand and nine, the primary law that governed subscription marketing was the restore online shopper's confidence act, which is called ROSka.
ROSka applied only two online transactions, and it had three very simple requirements.
Disclosure the material terms and conditions of the program.
Get the consumer's consent to the recurring billing and give the consumer an easy method of cancellation.
Sounds simple. Right? Unfortunately, since that law was passed, there has been a lot of enforcement of Russia And the FTC in particular has kind of put its own gloss on what it thinks Raska should require.
There have been thirty two enforcement actions by the FTC.
And as a result of those enforcement actions, They have interpreted ROSka to require more rigorous disclosure requirements, more rigorous consent requirements, and a much stricter interpretation of what is an easy cancellation method. They have secured millions of dollars in penalties They have also sent, notice of penalty offense letters, which means they've sent out letters to companies saying here is the law we're making you aware of what the law requires. And now if you violate it in the future, we can go after you for penalties. And I've already mentioned the state laws and class actions.
But what's really happening now that is is is potentially a game changer for this industry is a new rule that the FTC has proposed for this type of marketing. They're actually retooling an old rule called the, Re notification negative option rule, which was really designed to regulate the old record clubs, the old CD clubs, but they have now proposed significant amendments to this rule that would really impact our industry. So I wanna say it's not yet law, but it certainly reflects the FTC's view of legal requirements. And we do expect it to become law. The final proposed rule is likely to be finalized probably by the end of twenty twenty four.
It will apply to all types of what the FTC calls negative option. Subscription programs, any recurring billing, continuity, free trials, they will all fall under this rule. And unlike ROSco, which was limited to the online channel, this will apply to transactions in all state channels. Unfortunately, it won't preempt those annoying state laws. And violations of this rule will carry penalties upwards of fifty thousand dollars per violation.
So let me get into some of the highlights of this rule, and why it's likely to have such a dramatic impact.
Here's an example actually of, a negative option program that If you look at it, you see it's a free trial. You see where the when the free trial ends, they, monthly membership fee is right there in the middle. They're telling you how to cancel.
The FTC highlighted this as an example, of disclosure and consent that would not meet the requirements of its new rule.
So what are some of those requirements?
First, they've expanded the list of the material terms that have to be closed. So now under this rule, you have to disclose not only the material terms of the subscription offer, but also the material terms related to the product or service that you're offering. And if you don't disclose all those terms, you can be held in violation of this rule.
They have also and and this applies to almost everything the FTC is doing. They've adopted a much more stringent definition of what is clear and conspicuous.
It used to be easily readable, understandable, The standard now is difficult to miss, unavoidable, which means no hyperlinks, no hovers, And by the same means as the ad, which suggests if you are presenting your offer in a television ad, you might have to do the disclosures in the audio and video.
And probably what is most prescriptive, again, if you think about the example I just showed you, is that they want those disclosures in a standalone paragraph right next to where the consumer gets their consent.
And without any other information. So you can't really sandwich those disclosures in between other information that doesn't have anything to do with the subscription program.
And it has to be, the the disclosures have to be given to the consumer before they enter their billing information, and we'll we'll talk about that a little bit more. They've also imposed some very strict requirements for how do you get consent?
They have not gone so far as to say you must use a checkbox or signature but they've strongly indicated that that is the preferred method. And if you don't use one of those methods, you're kind of doing that at your peril.
They've also said that the consent to the recurring billing has to be separate from the entire transaction. And I will, share with you that, for many of us in the industry, that makes no sense. Where the entire transaction is a sub subscription program.
We hope that the FTC is gonna address that in its final rule because currently that actually makes no sense.
And the consent has to be unambiguous.
And in other words, that the consumer is consenting to the recurring billing. So again, if you look at this example here, rush my sample if the consumer clicked on that button, that would not be considered unambiguous consent because maybe they're only consenting to the free sample. The FTC would say they're not actually consenting to the entire recurring billing program.
And there are new provisions on cancellation, and this is one of the most problematic elements of the new rule.
They they have gone well beyond an easy method of cancellation to say the method of cancellation has to be as easy as the method of enrollment.
It has to be through the same means or website. In other words, if the consumer signs up on a particular website, they have to be able to cancel on that same website.
And the most problematic part of this section is what the FTC has called one click to cancel. Meaning, they essentially want the consumer to be able to cancel with one click or one step. And they've specifically called out save a sales or up sells or down sells and said you cannot offer any of those without first asking the consumer's permission. So even if you have a better offer present to the consumer, you first have to ask their permission to present that offer to them. And there's been a lot of industry backlash to that as well.
And finally, as if this, were not enough, there's a game changer in this rule, which is that basically any false or misleading representation, even if it's unrelated to the subscription program can be considered a violation of this rule. That means even if you do everything right in terms of your disclosures, your consent, your cancellation.
If the ad itself makes claims about a product or service, that can't be substantiated, they can be held in violation of the rule. And what that means from a practical standpoint is that All offers or ads that have some sort of subscription or recurring billing arrangement are now at a heightened risk of being held in violation of this rule, even if you comply with all the requirements of the rule that I just went through.
I also wanna mention that free trials, remain a heightened risk.
This is an action the FTC brought against a company called ABC Mouse.
And basically, some of the, things to keep in mind here avoid an impression that the consumer is only consenting to the free trial.
Also be careful with your button language. For example, I, you know, where we said, send my free sample.
If the button only says start my free trial. Again, that's not gonna be considered consent to the entire program.
And the FTC for free trials does wanna see some disclosure that there's an automatic renewal, the length of the free trial, and the price after. The free trial.
So with that background, and again, I wanna stress this is not law yet, but it's likely to become law and And and, certainly, these are the positions we've seen the FTC take in the enforcement actions it's brought.
So now I'd like to just talk about some pick falls and and practice tips relating to these three elements, disclosure consent and cancellation.
On the disclosure side, We've often seen many clients use language like, so, we'll charge you four ninety nine a month unless you cancel. If you say something like that, that's fine, but you are locking yourself into that rate forever.
If you want to preserve the right to raise the price of the subscription, you might wanna say something like we will charge you four ninety nine today, and thereafter at the then prevailing rate or something like that. As I mentioned, you should always disclose the price after the free trial.
Make sure your disclosure doesn't have any extraneous information.
And it always has to be above and adjacent to the consent button. As I mentioned, another thing to be care about here is if there are other buttons before that con that disclosure that could take the consumer off the page, that's gonna be a problem because the FTC is gonna say you did not make the disclosure unavoidable.
And also because the obligation to disclose the material terms kicks in before the consumer has essentially made the decision to buy You should be careful of your button language. For example, if you haven't disclosed all the terms yet, but your button says, bye now, The FTC is gonna say the consumer just committed to buy. Even though they really didn't, they will say that basically the the consumer has emotionally committed, to the purchase. So I would suggest something like continue versus something like buy now, but the point being pay close attention to your button language.
In terms of consent, You should never use pre check boxes. As I mentioned, if you're gonna use other mechanisms besides a checkbox or signature, You can, but it's it's it's gonna give rise to greater scrutiny.
Again, you need to make sure that all the closures have been made before the consent is given and that the consent is to the entire recurring program and not just a single purchase or a free trial.
And in terms of cancellation, make sure, obviously, that the method of cancellation is disclosed. That should be in your material terms box.
You should use language that indicates that the consumer has an affirmative obligation to cancel. Often we see things like If you like it, do nothing, and we'll charge you x y z. We've had cases where the FTC has rejected that language and they prefer to see something like, unless you cancel.
Also, if you have a free trial, make sure the cancellation language applies to all the subsequent renewal. Sometimes we'll see language like after the free trial, we'll charge you four ninety nine. While that's only talking about a one time charge, you need to specifically reference an each month thereafter or on an annual basis. Or something like that. And again, now on your cancellation, multiple steps, even if they only take a few seconds, will be viewed as problematic by the FTC. They have a case pending right now against match dot com.
Where where they're the basis for the complaint is that match required people to enter their password for security purposes.
And just answer one question why they were canceling because with with something like match, people who cancel may have actually been successful on the program, and the FTC has considered that not to be an easy method of cancellation.
I do wanna mention one other thing which is I I said this earlier what the FTC is calling dark patterns.
This is a new theory of deception by the FTC.
It it refers not to the words on the page, but the user interface or the design elements that are intended to manipulate consumer behavior. And sometimes it's very hard to distinguish these from effective marketing, but the fact that the FTC has already labeled subscription programs, a dark pattern, gives you an idea of how they view them in general. And some of the things that they've, given as examples of dark patterns, things like, comfort shaming where you're kind of shaming the consumer into making the purchase.
The yes would be, I'd like the discount and the no would be, I like the full price. So, obviously, trying to embarrass people into saying no.
I'm sure we've all seen these.
Representations that an item is scarce or there's only a few left. This one is very relevant to subscription programming. Which is asymmetrical choices. If there's a yes or a no, they would like to see those given with equal prominence.
And finally, what they call nagging. In other words, their view is if the consumers made a decision, don't ask them again.
And again, these are all concepts, but these are things we're seeing the FTC due in its enforcement actions.
I'm not gonna go through all the states, in the interest of time, but remember that a lot of states have their own laws, the FTC laws will not preempt those. And so you need to make sure that you are complying with those laws as well, and they're not necessarily consistent with what the FTC is doing.
So what should you be doing now? Well, you certainly wanna review your current advertising and buy flow disclosures.
If they're more than a few months old, the likelihood is, you don't have everything that the FTC is now saying you would like to see.
And the the formatting may need to be changed again because what the FTC is envisioning is a standalone block of disclosure of the material terms right next to the consent mechanism.
And as I have mentioned before, check the language on your buttons to make sure you're not inadvertently having the consumer make a decision before they've gotten all of their information.
I think it's very important to review your back end and processes and procedures.
Most people have save a sale efforts or down sells or things like that. This is really a new concept coming out of the FTC. And so I think it's really important to review those processes and procedures, and make sure they're not unduly burdensome and not interfering with the consumer's ability to cancel.
And anytime the FTC is doing a rulemaking, like they are now with the negative option rule, they always, couple that with increased enforcement because they want to pro basically create a record for why the rule is needed. So we do expect in the next several months while this rulemaking is this pending to see increased enforcement, and in addition to the other steps I highlighted, I would check your current complaint levels. Your current complaint levels are often your best barometer as to whether there's some problem with your offers.
So that's a good way to sort of do your own self checkup.
And I would revisit risk assessment We all make risk assessments in deciding what disclosures are we gonna make? How prominent are they gonna be?
And it's probably a good idea to take a look at those and make sure those risks are enlightened in light of these new laws.
So with that, I wanna thank you all for joining us today.
And, I hope you enjoy the rest of the program. Thank you.
