On July 8, 2025, the U.S. Court of Appeals for the Eighth Circuit vacated the Federal Trade Commission’s (the FTC or Commission) Negative Option Rule (the Rule) on procedural grounds.
As discussed in an
earlier alert, the FTC finalized the Rule last October. The Rule would have dramatically heightened the standards governing products offered on a negative option basis (e.g., automatically renewing subscriptions or free trials that automatically convert to a paid subscription). The Rule’s requirements related to disclosures, consent, and cancellation were initially set to take effect on May 14, 2025, but the FTC delayed the effective date to July 14, 2025, to give businesses more time to comply.
Companies and trade organizations challenged the Rule on two substantive grounds: first, that the FTC exceeded its authority in issuing the Rule because it is not sufficiently specific and does not target “prevalent” practices, as required under the FTC Act, and second, that the Rule was arbitrary and capricious because it applied across the economy and created overbroad and impractical standards. The petitioners also raised a third argument challenging the rulemaking process itself, arguing that the FTC’s failure to conduct a preliminary regulatory analysis of the Rule, as required under the FTC Act for rules with an estimated economic impact of over $100 million, prejudiced their members and warranted the Rule’s vacatur.
Deficiencies in the rulemaking process alone led the Eighth Circuit court to conclude that vacatur of the Rule was appropriate under provisions of the Administrative Procedure Act that are incorporated into the FTC Act. The court found that when an Administrative Law Judge (ALJ) determined that the FTC’s initial economic impact estimate was low and the Rule’s economic impact would exceed $100 million, the FTC should have conducted the preliminary regulatory analysis at that time. The court wrote that the FTC was not “statutorily prohibited” from conducting the preliminary analysis following the ALJ’s ruling, nor is the FTC excused “from having to prepare the analysis in the event that its initial economic estimate is later deemed inaccurate.” The court also determined that this failure deprived the petitioners of “a notable opportunity to dissuade the FTC from adopting the Rule as proposed” and therefore was not harmless error.
Given the procedural deficiencies of the rulemaking process and resulting harm to petitioners, the court held that the Rule must be vacated in its entirety. Holding otherwise, the court wrote, “could open the door to future manipulation of the rulemaking process,” where the Commission might furnish “an initially unrealistically low estimate of the economic impacts of a proposed rule” to take “a procedural shortcut that limits the need for additional public engagement and more substantive analysis of the potential effects of the rule on the front end.”
Although the Eighth Circuit’s ruling represents a significant victory for businesses that offer products on a negative option basis, existing federal and state laws that also regulate subscriptions and free trials remain in place. In particular, the Restore Online Shoppers’ Confidence Act
(also known as “ROSCA”) contains the same requirements that the Rule would have imposed for clear and conspicuous disclosures, express informed consent, and simple cancellation mechanisms for negative options. Likewise, many states have their own laws that regulate subscription and free trial practices, such as the California Automatic Renewal Act
(known colloquially as “CARL”), which incorporates many of the Rule’s requirements, as discussed in this
earlier alert.
The FTC has 90 days to petition the Supreme Court for review of the Eighth Circuit’s decision.
