When it comes to negative options, the CFPB has strong opinions. As demonstrated in its new circular, these opinions generally align with those of the Federal Trade Commission (FTC), which has repeatedly targeted trial offers, subscription sales, and other programs involving recurring charges for enforcement. The circular reaffirms the CFPB’s focus—shared with the FTC—on combating digital dark patterns used to engage in unfair, deceptive, or abusive acts or practices, especially when those techniques are combined with negative option marketing.

In an upcoming webinar on March 1, 2023 (RSVP here), Venable will be presenting an in-depth analysis of the CFPB’s circular, as well as CFPB and FTC enforcement actions and private litigation based on purportedly unlawful negative option marketing. For those who can’t wait, we’ve summarized the highlights of the circular below.

What’s the Motivation Behind the Circular?

The circular reflects the CFPB’s penchant for seeking to regulate areas Congress has charged other agencies with supervising and enforcing. Although the CFPB’s scrutiny of negative option marketing is well documented, the new circular is part of the CFPB’s broader effort to police terms and conditions. This initiative was recently illustrated by the CFPB’s proposed rule that would require nonbanks subject to the CFPB’s jurisdiction to register “information about their use of certain terms and conditions in form contracts.”

By concluding that certain negative option practices could violate the Consumer Financial Protection Act (CFPA), the CFPB is buttressing its reasons for requiring sellers to file their terms in the proposed registry. Not surprisingly, the CFPB cites negative option offers in the summary of the proposed rule as potentially “not present[ing] a meaningful choice” to consumers.

What’s Covered by the Circular?

As used in the CFPB circular, “‘negative option’ refers to a term or condition under which a seller may interpret a consumer’s silence, failure to take an affirmative action to reject a product or service, or failure to cancel an agreement as acceptance or continued acceptance of the offer.” These include consumer subscriptions that automatically renew or trial programs that charge a recurring fee once the trial period ends unless the consumer cancels. This definition is substantively identical to the definition the FTC used in its October 2021 policy statement, and similar to the definitions set forth in the FTC’s Telemarketing Sales Rule (TSR)

When Is Negative Option Marketing a UDAAP Violation?

The primary question addressed by the circular: “Can persons that engage in negative option marketing practices violate the prohibition on unfair, deceptive, or abusive acts or practices [UDAAP] in the Consumer Financial Protection Act (CFPA)?” It should come as no surprise, given the CFPB’s currently expansive interpretation of its enforcement powers, that the answer is yes. According to the CFPB:

Negative option marketing practices may violate [the Consumer Financial Protection Act’s prohibition on unfair, deceptive or abusive acts or practices] where a seller (1) misrepresents or fails to clearly and conspicuously disclose the material terms of a negative option program; (2) fails to obtain consumers’ informed consent; 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.

Although the CFPB divides its analysis into three categories (disclosure, consent, cancellation), all share a common theme, which is that businesses offering negative option programs should ensure that consumers have all the material facts necessary to make an informed decision as to whether to enroll and that consumers have an unobstructed path to cancellation.

A large part of this responsibility is making sure that the relevant information is presented to the consumers in a clear manner that is easy to read and understand. For example, the bulletin states that disclosures should not be hidden in low-contrast fine print; a business should not tell consumers they are receiving information about a product and then charge the consumers for the product as if it were purchased; and a promise of “immediate” and “no questions asked” cancellation should mean just that, not a high-pressure negotiation.

To the extent anyone might think these questions are merely academic, the circular cites a number of enforcement actions that the FTC has brought challenging negative option practices, primarily under the Restore Online Shoppers’ Confidence Act (ROSCA) and the TSR, both of which require the same three elements: clear disclosure, informed consent, and easy cancellation. (We’ve previously written about the FTC’s application of ROSCA and the TSR to negative option offers in its November 2021 policy statement.) The circular also lists similar enforcement actions brought by the CFPB under the CFPA, the Electronic Fund Transfer Act, Regulation E, and the TSR.

Although CFPB circulars are policy statements, not formal rules or adjudications, they provide insight into the agency’s enforcement trends and are intended to guide other agencies that enforce consumer financial protection law. The message here is clear: businesses that engage in negative option marketing should be vigilant about how their offers are presented and how consumers can opt out.

We hope you’ll join us for a detailed discussion of the legal landscape for negative option programs on March 1, 2023.