Silicon Valley Business Lawyer Kristie Prinz recently addressed the FTC’s enforcement action against a software company over its annual-paid-monthly software subscription.
This video was recorded by Business Lawyer Kristie Prinz on July 9, 2024.
The FTC is seeking to amend its “Negative Option Rule” to add a new “Click to Cancel” provision, which would protect consumers from being forced to pay for unwanted subscriptions and memberships. A copy of the FTC notice of proposal is linked here.
Although adoption of “Click to Cancel” would obviously most affect technology and digital health businesses who are based on the subscription model, a “Click to Cancel” amendment would potentially affect any industry offering products or services on a subscription or membership basis.
What is the FTC’s Negative Option Rule?
The Negative Option Rule was adopted by the FTC in 1973, to address “negative option offers,” which the FTC defines as offers containing “a term or condition that allows a seller to interpret a customer’s silence, or failure to take an affirmative action, as acceptance of an offer.”
According to the FTC, negative option marketing utilizes four types of offers: prenotification plans, continuity plans, automatic renewals, and free trial conversion offers.
However, the FTC’s original Negative Option Rule only pertained to prenotification plans, excluding the continuity plans, automatic renewals and free trial offers that have become commonplace in 2024. Also, in the case of the original Negative Option Rule, prenotification plans were limited to the sale of goods, where sellers provided periodic notices to participating customers and then sent and charged for those goods only if the consumers took no action to cancel and decline the offer (i.e. the example of a wine club).
Also, the Negative Option Rule required clear and conspicuous disclosure of certain terms before a subscription agreement was reached. According to the FTC, those terms were as follows:
- how subscribers must notify the seller if they do not wish to purchase the selection;
- any minimum purchase obligations;
- the subscribers’ right to cancel;
- whether billing charges include postage and handling;
- that subscribers have at least ten days to reject a selection;
- that if any subscriber is not given ten days to reject a selection, the seller will credit the return of the selection and postage to return the selection, along with shipping and handling; and
- the frequency with which announcements and forms will be sent.’
Finally, under the existing Negative Option Rule, sellers were required to define particular periods for sending merchandise, to give consumers a defined period to respond, to provide instructions for rejecting merchandise, and to promptly honor written cancellation requests.
What is “Click to Cancel’?
What would change with the FTC’s newly proposed “Click to Cancel” amendment?
Under the FTC’s proposed “Click to Cancel” rule change, the scope of the Negative Option Rule would be increased to make it pertain to not only prenotification plans but also to continuity plans, automatic renewals, and free trial conversion offers. Also, the proposed “Click to Cancel” rule provisions would mandate the following:
- Businesses would be required to make cancelling a subscription or membership at least as easy as it was to start it;
- Businesses would have to ask consumers if they want to hear new offers when they ask to cancel before they would be able to pitch new offers;
- Businesses would be required to provide an annual reminder if enrolled in a negative option program involving anything other than physical goods, before they are automatically renewed.
Another “Click to Cancel” change would be that the under the new provisions any misrepresentation of a material fact related to any of the four negative option offers, whether expressly or by implication, would constitute a violation of not only the Negative Option Rule but also an unfair or deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act.
What is the Potential significance of “Click to Cancel” to the Silicon Valley and Bay Area businesses?
The potential significance of the “Click to Cancel” change to the average Silicon Valley and Bay Area business is that, if this proposed rule is adopted, companies who make available products and services on a subscription or membership basis to consumers will need to update their consumer contracts and terms of service to confirm that they are compliant with the requirements of the Negative Option Rule, as amended.
The Silicon Valley Business Law Blog will keep you posted as to the status of the FTC’s proposed rule. If your subscription or membership-based business is concerned about its compliance with “Click to Cancel” please schedule a consultation with me to discuss today.
The Prinz Law Office is pleased to announce the launch of a new subscription plan, which is intended to simplify the process of working with a lawyer for companies as well as individuals. The firm’s subscription plans have been been designed to uniquely enable clients to hire and communicate with counsel without the fear or worry of an accruing billable hour.
Subscriber clients will pay a flat monthly rate each month with the option of purchasing add-on services at an additional flat fee rate that they can easily estimate in advance of making a work request. Subscription prices will start at just $150 at the lowest bronze level.
To view the currently available subscription plans, please click here: Prinz Law Office Subscription Plans.
The new subscriptions are available to clients immediately.
Governor Newsom has just signed SB 54, which will require venture capital firms in the state of California to annually report the diversity of founders they are backing. According to Tech Crunch’s reporting, SB 54 will result in amendments to the Business and Professional Code and also will amend part of the Government Code pertaining to venture capital.
SB 54 goes into effect as of March 1, 2025, and requires the following aggregated information to be reported on all VC investments:
- The gender identity of each member of the founding team, including nonbinary and gender-fluid identities.
- The race of each member of the founding team.
- The ethnicity of each member of the founding team.
- The disability status of each member of the founding team.
- Whether any member of the founding team identifies as LGBTQ+.
- Whether any member of the founding team is a veteran or a disabled veteran.
- Whether any member of the founding team is a resident of California.
- Whether any member of the founding team declined to provide any of the information described above.
Failure to timely comply with the reporting requirement may result in the assessment of a penalty of One Hundred Thousand Dollars ($100,000.00) to be assessed against a “covered person.” SB 54 defines “covered person” as any person who does both of the following:
- Acts as an investment adviser to a venture capital company.
- Meets any of the following criteria: (i) Has a certificate from the Commissioner of Financial Protection and Innovation pursuant to Section 25231 of the Corporations Code. (ii) Has filed an annual notice with the Commissioner of Financial Protection and Innovation pursuant to subdivision (b) of Section 25230.1 of the Corporations Code. (iii) Is exempt from registration under the Investment Advisers Act of 1940 pursuant to subsection (l) of Section 80b-3 of Title 15 of the United States Code and has filed a report with the Commissioner of Financial Protection and Innovation pursuant to paragraph (2) of subdivision (b) of Section 260.204.9 of Title 10 of the California Code of Regulations.
SB 54 provides that reports will be due by March 1st of each year.
Tech Crunch reports that supporters of SB 54 have argued that this law will make venture capital more “transparent.” According to Tech Crunch, less than 3 % of all venture capital investments go to women or black founders.
Tech Crunch reported that SB 54 was opposed by the National Venture Capital Association and TechNet, though both organizations professed to support generally the concept of diversity in venture capital.
Although the impact of SB 54 will go beyond just the software industry, this new law is likely to have a significant impact on companies in Silicon Valley, particularly those having diverse founders, as mandated reporting will likely incentivize venture capital firms to further focus on considering diversity in investment. If your company has diverse founders, you will definitely want to keep this law on your radar screen going forward.
Silicon Valley Business Law Blog’s Kristie Prinz recently sat down for an interview with Beau Fernald, Fractional COO and Principal of Aware Insights LLC to discuss the topic of software implementation–a subject which is responsible for many business contract disputes across the software and digital health industries.
Why does software implementation cause so many business disputes?
One of the most common contract drafting mistakes businesses make in the software and digital health industries is failing to sufficiently define the parties’ mutual expectations for a software implementation. Most digital health and software contracts, in fact, are completely silent on the issue, regardless of the time, financial or other requirements of the implementation, which may be extensive. While Beau is not a business contracts lawyer and brings a different operational perspective to the issue of software implementation, he offers some additional insight on software implementation mistakes that SaaS, software, and digital health companies make, the consequences of those mistakes, and best practices on how to avoid them altogether. Beau strongly agrees the contention that software implementation understandings need to be articulated and memorialized in a writing to avoid subsequent misunderstandings that may result in a legal dispute.
For more information on Beau Fernald, you can view his professional profile at: https://www.linkedin.com/in/beaufernald/. The Aware Insights LLC website is at: https://awareinsights.com.
Kristie Prinz recently sat down for an interview with Fractional COO Beau Fernald on software implementation.
I am excited to announce that my firm is adopting a number of new options for working with our clients. We received feedback asking for new fixed rate and subscription packages for specific business scenarios, and in response to that feedback we have designed a variety of new packages designed around those requests. These options are available for viewing upon request. Existing clients who are working with us already under another billing arrangement will be able to switch to a new plan at any time upon request. I am confident that these new options will address new business needs of the technology and life sciences communities we serve. If you have an idea for a billing arrangement that the firm has not yet developed, we invite you to submit your ideas for consideration at kprinz@prinzlawoffice.com.
