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24 January 20235 minute read

CFPB issues circular on unlawful “negative option” marketing practices

The Consumer Financial Protection Bureau (CFPB) has issued a circular clarifying that “covered persons” and “service providers” under the Consumer Financial Protection Act (CFPA) may violate UDAAP prohibitions in connection with marketing “negative option” services – for example, plans under which consumers agree in advance to continue to receive a product or service unless affirmatively cancelled, such as free trial marketing periods that later convert into fee-based subscriptions.

According to the CFPB, negative option services may violate UDAAP (prohibition against unfair, deceptive, or abusive acts or practices) where the seller (1) misrepresents or fails to clearly and conspicuously disclose the material terms of a negative option program (Disclosure Violations); (2) fails to obtain consumers’ informed consent (Consent Violations); or (3) misleads consumers who want to cancel, erects unreasonable barriers to cancellation, or fails to honor cancellation requests that comply with its promised cancellation procedures (Cancellation Violations).  These requirements largely mirror those contained in the Restore Online Shoppers' Confidence Act (ROSCA), a 2010 law principally aimed at curbing deceptive practices relating to negative options.

The circular contains analysis for each type of potential violation.

Disclosure Violations.  Material terms must be clearly and conspicuously disclosed.  UDAAP violations may be found where disclosures about a negative option product are displayed in fine print, in low contrast, or grouped with other disclosures in a less prominent location, such as the bottom of a web page.  The circular also states that the material terms of a negative option offer would typically include (1) that the customer is enrolling in and will be charged for the product or service; (2) the amount (or range of amounts) that the consumer will be charged); (3) that charges will be on a recurring basis unless the consumer takes affirmative steps to cancel the product or service; and (4) for trial marketing plans, that charges will be begin (or increase) after the trial period unless the consumer takes affirmative action.

Consent Violations.  Consent will not be considered as informed if the marketing material contains misleading or confusing descriptions of the product at the time of purchase.  For example, UDAAP violations may be found when a company misrepresents to consumers that they were agreeing to receive information on an add-on product, rather than purchasing the product, or offers a service where the only indication that the consumers would be agreeing to recurring charges was a reference to “worry-free annual billing.”

Cancellation Violations.  Companies must comply with representations in their marketing materials and not erect unreasonable barriers to cancellation. UDAAP violations may be found when a product is marketed as “no questions asked” cancellation, but then directed sales representatives to rebut requests to cancel, or companies engage in conduct such as placing customers who attempt to cancel services on hold for an unreasonably long time.

Raising awareness about subscription service practices

The circular is the latest step in a deliberate effort by consumer protection regulators to raise awareness about the harms that can arise with respect to subscription services.  In that regard, the CFPB emphasized that its approach is consistent with the FTC’s approach to negative option marketing under section 5 of the FTC Act and the FTC’s recent policy statement on enforcement, as well as the FTC’s report on “dark patterns” that deceive consumers. 

Together, the FTC’s policy statement and the CFPB’s circular address subscription services offered in nearly every industry, whether in financial services, retail, or otherwise.

Companies that offer subscription services – regardless of industry – are encouraged to review the CFPB’s circular and the FTC’s policy statement to determine risk in the current heightened enforcement environment.  Companies doing business in California should also assess their compliance with California’s Auto Renewal Statute (ARL).

The ARL generally has five major requirements: (1) clear and conspicuous offer terms; (2) affirmative consent to an automatic-renewal agreement; (3) a post-transaction acknowledgement; (4) an easy-to-use cancellation mechanism; and (5) a notice of material changes to offer terms. The ARL also requires that certain renewal notices be sent to consumers before the consumers are charged and requires online sellers of automatically renewing plans to provide an immediate online cancellation option.

California’s regulators have been proactive in enforcing the ARL through the California Autorenewal Task Force (CART), which is comprised of district and city attorneys. For more information about the ARL, see this alert.  

A handful of other states have also passed laws regulating autorenewal practices, and while California’s law is arguably the most stringent, businesses should monitor legislative developments in other states to ensure that their contracts and terms comply with the current ARL requirements in those jurisdictions where they conduct business.

Subscription services practices are also an area of potential class action risk. 

Find out more about this regulatory trend by contacting any of the authors or your usual DLA Piper attorney.