FTC Warns Companies Offering Subscription Services to Avoid Using “Dark Patterns”
By: Tyler G. Newby , Jedediah Wakefield , Kimberly Culp , Justin A. Stacy
On October 28, 2021, the Federal Trade Commission issued a new Enforcement Policy Statement (the Statement) warning companies against using “dark patterns” in negative option marketing. “Dark patterns” is a broad term that refers to subverting consumer choice, often in connection with subscription services, such as requiring users to navigate confusing screens to avoid recurring charges. The Statement likely does not come as a surprise to many, as the FTC hosted a virtual workshop in the spring of 2021 addressing the topic of so-called dark patterns.
In a blog post announcing the Statement, the FTC notes that this enforcement policy comes in the wake of a rising number of complaints and reports from consumers of deceptive signup and subscription cancellation tactics, which the FTC says has caused financial harms such as unauthorized charges or ongoing subscription billing that is impossible or difficult to cancel.
The Statement precedes an agency ramp-up of enforcement actions against deceptive subscription enrollment practices and is intended to provide guidance to businesses and practitioners on the FTC’s interpretation of existing law as it applies to “negative option” marketing. While negative option marketing comes in a variety of forms, the FTC says that all forms share one feature:
“Each contains a term or condition under which the seller may interpret a consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement as acceptance or continuing acceptance of the offer.”
In other words, the practices generally involve an offer in which the marketer takes the position that a consumer provides consent to payment of future, recurring fees in the absence of additional action on the part of the consumer. These arrangements can include automatic renewals, continuity plans and free-to-pay conversions.
While the FTC acknowledges that negative option programs are widespread in the marketplace and can have substantial value both to consumers and sellers, the Statement posits that consumers suffer when deceptive and unfair practices are combined with such marketing. Specifically, the Statement points to deceptive or unfair practices such as inadequate disclosures of hidden charges in “free” offers and products/services, enrollment without consumer consent and inadequate or overly difficult cancellation and refund procedures. Both the FTC and state governments regularly bring cases addressing these problems, and the Statement cites the number of ongoing cases and high volume of consumer complaints as signs that the problem remains unabated within the marketplace.
There are a variety of relevant statutes and rules that the FTC draws upon to regulate negative option marketing. The FTC primarily relies on Section 5 of the FTC Act, the Restore Online Shoppers’ Confidence Act and the Telemarketing Sales Rule. However, the Rule on the Use of Prenotification Negative Option Plans (16 C.F.R. Part 425), the Electronic Fund Transfer Act and the Postal Reorganization Act also address various aspects of negative option marketing. Given the number of applicable statutes, the FTC focused its Statement on three particular areas that are commonly addressed by the Commission in its negative option cases: (1) disclosures; (2) consent; and (3) cancellation.
Marketers must clearly and conspicuously disclose the material terms of the transaction. Any express claim or deliberately implied claim is presumed material. Material terms include, but are not limited to, the cost of a product or service, the deadline by which one must act to stop further charges, the amount and frequency of charges, procedures for cancellation and information about the product or service itself that is needed to prevent undue confusion or deception as to the character of the product or service.
Generally, to be clear and conspicuous, the disclosure must be as prominent and understandable as the offer itself, and presented in the same medium as the offer. Of particular note, the Statement provides that any offer using an interactive electronic medium, such as the internet or software, should disclose the terms by an unavoidable means. A disclosure is not considered clear and conspicuous if the consumer needs to take action, such as clicking a link or hovering over an icon, to see the disclosure.
Marketers must obtain the consumer’s express informed consent prior to charging the consumer. To be considered express informed consent, the seller should obtain acceptance of the negative offer terms separately from the offer itself. The consent must be both unambiguously affirmative and verifiable.
Sellers must provide simple, reasonable means for consumers to cancel their contracts. To meet this standard, the method of cancellation should be at least as easy as the method used to initiate the negative option feature itself. The cancellation procedure should be provided through the same medium (such as a website or mobile app) that the consumer used to consent to the negative option.
Further, the procedure should not subject the consumer to new offers or attempts to save the negative option arrangement that impose unreasonable delays or inconvenience upon the consumer. If providing a procedure over the telephone, a number should be provided and answered during normal business hours, and the call should be just as short and no more burdensome than the call used to consent to such arrangements.
Finally, the procedures provided should be effective, and should not be impeded using misrepresentations or undue delay tactics.
As the online and digital marketplace continues to evolve, so will the types of transactions that consumers and businesses engage in. Negative option marketing is here to stay, as it provides both consumers and businesses alike with convenience and ease of continuing a transactional relationship. With dark patterns coming to the forefront of the FTC’s enforcement priorities, it is important for marketing, business and legal teams to work together to develop a process to ensure compliant marketing practices, including disclosures, informed and express consent and marketing agreements and practices that appropriately protect the autonomy, choice and decision-making of consumers.
It is also worth noting that many states, including California, have their own statutes which apply to “automatic renewals.” Therefore, businesses that engage in negative option marketing need to consider not just the FTC’s new Statement, but enforcement actions and consumer litigation under state consumer protection laws as well.
In light of this enforcement policy from the FTC, what should businesses who use or are considering using negative option marketing do now? At a minimum, they should:
Questions? Please reach out to Tyler G. Newby, Jed Wakefield, Kimberly Culp, or your Fenwick contact for further guidance.
Law clerk Justin Stacy contributed to the writing of this alert.