FTC Plan to Ban Auto-Renewal Extends Beyond Gym Memberships
If you’ve been charged for a gym membership that you forgot to cancel, the Federal Trade Commission has a new proposal with you in mind—one that has ramifications for sports.
On March 23, the FTC proposed a “click to cancel” provision that, if approved, would require sellers of memberships and subscriptions to make canceling as easy as signing up.
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The 83-page proposed rule addresses what is known as a “negative option,” wherein sellers interpret a customer’s silence, or their failure to affirmatively cancel, as acceptance of being charged.
Negative option offers are common with free trials and automatic renewals for computer security software, financial monitoring and numerous other products and services. They’re often seen in the sports industry, too. Streaming media, sporting goods and fitness clubs frequently rely on negative options to boost sales.
Some sports teams, such as the Seattle Seahawks and the Philadelphia Phillies, offer automatic renewal of season tickets. However, teams ordinarily require the fan to take affirmative steps to enroll in an automatic renewal. Fans who buy season tickets also seem unlikely to forget they have them.
Numerous consumers, the FTC finds, have experienced aggravation and incurred unwanted costs with negative options.
In a 2019 study, 59% of consumers recalled signing up for free trials that automatically converted into a recurring payment “against their will.” Another study found 42% of consumers reporting that companies try to make the cancellation process unnecessarily difficult or complicated. Some companies, for example, require a customer to make a phone call, then wait on hold for a long time before speaking with a customer service representative, who first makes multiple upsell offers before finally allowing the customer to cancel.
Although consumer protection laws prevent fraud and deception, enforcement of those laws has been challenging with negative options. Some businesses technically comply with the letter of the law despite violating its spirit and intent.
Current FTC regulations do not specifically cover negative options for automatic renewals or free trials. They instead address pre-notification plans, where, the FTC writes, the seller “provides periodic notices offering goods to participating consumers and then sends—and charges for—those goods only if the consumers take no action to decline the offer.” The FTC’s example of a pre-notification plan might seem antiquated—a book-of-the-month club. That’s because pre-notification plans are uncommon in the modern economy; in 2017, there were fewer than 100 such sellers.
The FTC’s proposal would apply to various types of negative options and mandate that sellers provide a “simple cancellation mechanism” via the same medium used to sign up. In other words, if a person signs up online, they must be able to cancel online, rather than having to call a phone number, write a letter on paper or visit an office.
A consumer must also grant the seller permission to pitch different prices or plans; if the consumer says no, the seller must allow for an immediate cancellation.
The proposal, approved by a 3-to-1 commissioners’ vote, also mandates that sellers must provide annual reminders to consumers when the plan doesn’t involve physical goods. That is because, the FTC finds, “many consumers may reasonably forget they enrolled in such plans and, as a result, incur perpetual charges for services they do not want or use.”
The FTC invites public comment on the proposal, which also contemplates the FTC having the ability to seek injunctions and monetary penalties against violating companies.
“The proposal would save consumers time and money, and businesses that continued to use subscription tricks and traps would be subject to stiff penalties,” FTC chair Lina Khan said in a statement.
The lone dissenting vote was by Christine Wilson, who stepped down as a commissioner on March 31. Wilson, who was appointed by President Trump, and Khan, appointed by President Biden, have an unusually contentious relationship. In February, Wilson publicly accused Khan of relying on “dishonesty and subterfuge to pursue her agenda” as part of an attempt to ban noncompetes. In her dissent on the click-to-cancel regulation, Wilson argued the proposal “attempts an end-run around” Supreme Court precedent and exceeds authority conferred by Congress.
