The Federal Trade Commission recently finalized its “Click-To-Cancel” or
“Negative Option” rule. Commission Chair Lina M. Khan stated that “[t]oo often businesses make people jump through endless hoops just to cancel a subscription. The FTC’s rule will end these tricks and traps . . . [n]obody should be stuck paying for a service they no longer want.” If you are a health IT vendor who sells to small businesses and/or patients, this rule may apply to you, and will be effective six months from its publication date in the Federal Register. The FTC announced the Rule’s finalization on October 16, 2024. The basic gist of the rule is that if you can easily subscribe online, you should be able to easily unsubscribe online too. So, should this rule be on your roadmap?
If your immediate response is that “I only sell to businesses,” I want to start with “yes, but.” If you also have applications to which patients or individuals otherwise subscribe to for “personal use,” then it probably applies to you. If you sell to solo practitioners or small provider shops (e.g. independent physician practices, mental health practices, physical therapy shops, or charitable organizations like a ‘Baptist Hospital’), then this rule very well might apply to you.
I qualify the statement with “might” because it is not entirely clear if the FTC Act’s prohibition against unfair or deceptive practices, the statutory authority under which this regulation is promulgated, applies to small businesses consuming software or subscription services that are for commercial use. There is some federal case law that holds the answer is “yes,” but for reasons discussed below, their holdings are subject to challenge. To start, in FTC v. IFC Credit Corp., the United States District Court for the Norther District of Illinois reasoned the FTC Act applied to small businesses, reasoning that:
“In 1938, Congress enacted the Wheeler-Lee Amendment to § 5 of the Act, which added the phrase, ‘unfair or deceptive acts or practices,‘ to the section’s original ban on ‘unfair methods of competition.‘ See 15 U.S.C. §45(a). One of the primary purposes of the Amendment was to expand the powers of the FTC over unfair methods of competition by extending its jurisdiction to cover deceptive acts or practices, thereby granting “the Commission authority to protect consumers as well as competitors.” American Financial Services Ass’n, 767 F.2d at 966. See Sperry & Hutchinson Co., 405 U.S. at 243-244. “‘In other words, the [Wheeler-Lee Amendment] makes the consumer who may be injured by an unfair trade practice, of equal concern, before the law, with the merchant or manufacturer injured by the unfair methods of a dishonest competitor.'” American Financial Services Ass’n, 767 F.2d at 966-967. Nothing in the purpose or text of the Amendment supports the thesis that Congress intended that only individuals purchasing goods or services normally used for personal or household purposes were within the FTCA’s protective ambit, as IFC contends.
The Act did not define “consumer.” By contrast, Magnuson-Moss, which dealt with warranties on household goods and which was not part of the FTCA, defined “consumer” as a “buyer (other than for purposes of resale) of any consumer product, any person to whom such product is transferred during the duration of [a]…warranty, and any other person who is entitled by the terms of such warranty… or under applicable State law to enforce against the warrantor…the obligations of the warranty. . . .” 15 U.S.C. §2301(3)(parenthesis in original). In turn, the term, “consumer product,” was defined as “any tangible personal property which is distributed in commerce and which is normally used for personal, family, or household purposes. . . .” 15 U.S.C. §2301.
Restrictions on the FTC’s authority stem not from a narrow definition of consumer, but from the definition of consumer product. Thus, businesses are not outside the protection of Magnuson-Moss so long as the purchased product is the type normally used for personal, family or household purposes. See Waypoint Aviation Services, Inc. v. Sandel Avionics, Inc., 469 F.3d 1071, 1072 (7th Cir. 2006)(Easterbrook, C.J.); Stoebner Motors v. Automobili Lamborghini S.P.A., 459 F.Supp.2d 1028, 1033-34 (D.Hawaii 2006); Najran Co. for General Contracting and Trading v. Fleetwood Enterprises, Inc., 659 F.Supp. 1081, 1099 (S.D.Ga. 1986). See 16 C.F.R. §700.1(a)(2008). And it follows that the sophistication of the buyer is not a factor in determining the applicability of the Act. See Karshan v. Mattituck Inlet Marina & Shipyard, Inc., 785 F.Supp. 363, 366 (E.D.N.Y. 1992).
When Congress wants to limit consumer protection, it does so explicitly as it did in Magnuson-Moss and in the Electronic Signature in Global and National Commerce Act, 15 U.S.C. § 7006 (2005). There, Congress defined consumer as “an individual who obtains, through a transaction, products or services which are used primarily for personal, family, or household purposes….” It would not have been a difficult feat of draftsmanship for Congress in subsection (n) to have restricted the operation of the FTCA to those unfair practices that affect individuals purchasing household goods for personal use Cf., Sperry & Hutchinson Co., 405 U.S. at 243-244. See also Young v. Community Nutrition Institute, 476 U.S. 974, 981, 106 S. Ct. 2360, 90 L. Ed. 2d 959 (1986)(had Congress intended a certain meaning, it certainly could have been “more precise or more prescient” than it was). The text and the legislative history of the 1994 Amendment to the FTCA demonstrate that Congress’s intent was to limit the Commission’s authority to proscribe unfair acts and practices not through a restrictive definition of “consumer,” but rather through subsection (n)’s requirement that an unfair practice must cause substantial harm that is not reasonably avoidable or outweighed by countervailing benefits to consumers or competition.
The absence of contrary Congressional intent, it is assumed that statutory language carries its ordinary or common meaning. Pioneer Investment Srvs. Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 388, 113 S. Ct. 1489, 123 L. Ed. 2d 74 (1993). See also Engine Mfrs. Ass’n, 541 U.S. at 252; United States v. Alvarez-Sanchez, 511 U.S. 350, 357, 114 S. Ct. 1599, 128 L. Ed. 2d 319 (1994); Firstar Bank, N.A. v. Faul, 253 F.3d 982, 987 (7th Cir. 2001). 6 One need not resort to Justice Frankfurter’s oft-repeated dictum that “[t]he notion that because the words of a statute are plain, its meaning is also plain, is merely pernicious oversimplification,” United States v. Monia, 317 U.S. 424, 431, 63 S. Ct. 409, 87 L. Ed. 376 (1943) (dissenting opinion), to conclude that the common use and understanding of the term, “consumer,” is not that proposed by IFC. IFC’s definition is supported by Black’s Law Dictionary, which defines “consumer” as: “A person who buys goods or services for personal, family, or household use, with no intention of resale; a natural person who uses products for personal rather than business purposes.” Black’s Law Dictionary (8th ed. 2004).
In contrast to what is an undeniably specialized dictionary, there is Merriam-Webster Collegiate Dictionary’s definition of consumer: “one that consumes: as a.: one that utilizes economic goods.” (Eleventh Ed. 2003). The Oxford English Dictionary defines consumer as: “He or that which consumes, wastes, squanders, or destroys. One who uses up an article produced, thereby exhausting its exchangeable value; One who purchases goods or pays for services; a customer, purchaser.” (2nd ed. 1984). The American Heritage Dictionary defines consumer as: “One that consumes; especially one that acquires goods or services for direct use or ownership rather than for resale or use in production and manufacturing.” (4th ed. 2000). What emerges from this sampling is a refutation of IFC’s position that the commonly understood meaning of “consumer” is that found in Magnuson-Moss.
Congress has entrusted to the FTC the power to determine whether a particular act or practice is unfair. Consistent with its Congressional mandate, the FTC has concluded that small businesses and religious and other not-for-profit organizations are consumers and are entitled to protection from deceptive and unfair acts and practices. That is the end of the matter so long as that judgment is reasonable. Federal Express Corp. v. Holowecki, 128 S.Ct. 1147, 170 L. Ed. 2d 10 (2008); Bob Evans Farms, Inc. v. NLRB, 163 F.3d 1012, 1018 (7th Cir. 1998); Batanic v. I.N.S., 12 F.3d 662, 665-666 (7th Cir. 1993).“
The Eastern District of Pennsylvania agreed with the IFC decision, and in FTC v. Am. Future Systems, it reasoned that the “FTCA clearly prohibits “unfair or deceptive acts or practices” in commercial activities involving small businesses and other organizations like those in the transactions at issue. See F.T.C. v. IFC Credit Corp., 543 F. Supp. 2d 925, 941 (N.D. Ill. 2008).” The Southern District of New York also has indirectly weighed in on the issue without confronting it outright, and as recently as September 27, 2023 held an individual could be liable under the FTCA for unfair practices directed at small businesses. FTC v. RCG Advances, LLC, 695 F. Supp. 3d 368 (S.D.N.Y. 2023).
However, both the Am. Future Systems and IFC cases both relied in part on Chevron doctrine, by which the courts give deference to agency interpretations of statutes within their jurisdiction to enforce. This doctrine was overturned by the Supreme Court on June 28, 2024, in its rulings in Relentless v. Department of Commerce, and Loper Bright Enterprises v. Raimondo. This leaves those holdings subject to challenge: now the courts will likely rely on textualism, originalism, and standard statutory canons of interpretation to define what the plain language definition of “consumer” means. The FTC Act itself does not define the term, and the issue has not been before the Supreme Court. Different laws, states, and courts have come to different conclusions. For example, in the IFC case the court noted the Magnuson-MossAct, by definition, only applied to items intended for personal and household use. Other statutes, such as Florida’s Deceptive and Unfair Trade Practices Act defines a consumer as a “person,” which Florida and federal courts have interpreted to include businesses.
The FTC took a position that this rule applies to small businesses. It stated that the “Commission also declines to limit the scope of the final Rule by excluding business-to-business transactions. As explained in Section VII.B.1, the Commission has a long history of protecting businesses, particularly small business, in their role as consumers; the practices and harms described here impact these consumers, as well.“
In short, it’s an open question. The rule has already been challenged twice based on arguments that the rule itself is arbitrary and capricious, however, whether they result in it being struck down is anybody’s guess. If either petition is granted, then the FTC will not be able to enforce the rule until the applicable cases wind towards their conclusion at the Supreme Court, or by agency capitulation. However, if a petition is not granted before the rule’s effective date, (which doesn’t necessarily foreclose future legal action), it becomes a riskier proposition. With a 180-day timeline from publication in the Federal Register, if your organization requires development resources for online contracting and subscription agreements, then it may be time to start writing a requirements document in case you need it.
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