Eighth Circuit Clicked To Cancel The FTC’s Negative Option Rule – Advertising, Marketing & Branding

Yesterday, the Eighth Circuit vacated the Federal Trade
Commission’s (FTC) Negative Option Rule (Click-to-Cancel Rule
or Rule) that was set to go into effect on July 14.

As a quick refresher, in October 2024, several trade
associations filed petitions for review in four circuit courts
challenging the validity of the Negative Option Rule. Custom
Communications, Inc. v. Federal Trade Commission, No. 24-3137
(8th Cir. Oct. 22, 2024). The litigation was consolidated in an
action in the Eighth Circuit, which denied the petitioners’
motion to stay the Rule while the litigation was pending. In other
words, businesses and consumers were under the impression until
today that the Rule would take effect on July 14.

Instead, the Eighth Circuit vacated (struck down) the Rule on
procedural grounds. Specifically, the court found that the FTC
failed to conduct a required “preliminary regulatory
analysis” after the administrative law judge found that the
Rule would have an annual effect on the economy surpassing the $100
million threshold. The court also rejected the FTC’s
argument that failure to conduct a preliminary regulatory analysis
was a “harmless error.” Notably, the court acknowledged
that while the Rule did contain a severability provision, vacating
the entire Rule was appropriate here because of the prejudice the
petitioners suffered due to the FTC’s procedural error. Because
the Eighth Circuit struck down the Rule on procedural grounds, it
ultimately declined to consider the petitioners’ substantive
arguments.

So, what happens next?

The FTC has a few different options it could explore:

1. The FTC could petition the Supreme Court for review.
   Considering the lack of deference to regulators’ rulemaking
   authority in recent cases, this option is less likely than it might
   have been in the past.




2. The FTC could reopen the rulemaking record. This would require
   the FTC to issue a Supplementary Notice of Proposed Rulemaking
   (SNPRM), which would include a detailed preliminary regulatory
   analysis. The FTC would also request comments from the public on
   the SNPRM. Following this request for comment, the FTC would likely
   issue a final Federal Register notice with a revised final
   regulatory analysis. While this option may seem to be the most
   straightforward path, it would be time intensive, and the final
   product may look different than the Rule that was struck down.
   While FTC Chairman Andrew Ferguson has been supportive of the Rule
   generally, he and the other Commissioners have been critical of
   certain provisions, such as the right to pursue any
   misrepresentation for a subscription under the Rule. This provision
   likely would not be in any new version of the Rule, and other
   changes could be made as well.




3. The FTC could also take no action on the Rule and continue to
   aggressively enforce the Restore Online Shoppers’ Confidence
   Act (ROSCA). There are several cases pending in federal court in
   which the FTC is enforcing ROSCA and Section 5 of the FTC Act,
   which do not rely on the FTC’s Click-to-Cancel Rule. The FTC
   has brought and likely will continue to bring many enforcement
   actions regarding ROSCA violations.

As we hint above, despite the court’s decision to vacate the
Rule, we expect to see significant ROSCA enforcement. During the
pendency of this action, the FTC filed a brief in which it fully
supported the Rule, which we discussed in our blog. This is particularly notable because
Commissioner Melissa Holyoak and then-Commissioner Ferguson voted
no on the final Rule, primarily due to the misrepresentation
provision referenced above. Reading the tea leaves, the brief
supporting the Rule and ongoing ROSCA cases signal that there is
continued support from the current Commission for enforcement in
this area. It’s unclear whether this will mean that the FTC
will attempt to revive the Rule, but either way, we expect to see
an active FTC on this issue.

And even without the Rule, subscription sellers continue to face
enforcement at the state level, including a
“click-to-cancel” requirement. California, New York and
several other states have added this requirement to their laws,
along with other, more novel requirements not found in the
FTC’s Rule. We recently wrote about state auto-renewal updates
here. Stay tuned for a Part II to this blog
that will have more detail on what this means for compliance at the
state and federal level.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.