Late last year, the Federal Trade Commission (FTC) approved a revision to 16 CFR Part 425, the rule concerning recurring subscriptions and other negative option plans. The law becomes effective May 14, 2025 unless overturned or legally challenged. Over 99% of the auto-renewal contracts that we enforce for our clients are not compliant with the new regulations. That means we won’t be able to collect money from any business that objects to an auto-renewal and cite this new Federal law. Here are the key takeaways.
- It applies to B2B transactions in addition to B2C;
- It is nationwide, and supersedes the laws in the 20 states that have their own rules governing auto-renewals (state laws which are more stringent than the Federal law remain effective);
- The contract must have affirmative consent to the auto-renewal provision immediately following the clear explanation of those guidelines. This means a check box that must be check (can’t be prefilled), initials, or signature right next to the auto-renewal section of the contract.
- Auto-renewal provisions in linked terms and conditions are expressly defined as insufficient to be binding;
- Customers must be notified in advance of each renewal date with information describing the pending renewal, the last day to cancel if the customer does not want to renew, and a very simple cancellation mechanism;
- Important information must be clear and easy to find;
- The FTC can impose penalties for violations of the law;
- Historical auto-renewal agreements still in force must be updated to remain binding.
Affirmative Consent
The law states that the seller must “Obtain the consumer’s unambiguously affirmative consent to the negative option feature separately from any other portion of the transaction”. ‘Negative option’ refers to the contract continuing if the customer is silent, and applies to automatic renewal subscriptions, free or reduced-price trials that convert to paid subscriptions, and continuity plans. We see separate affirmative consent language in less than 1% of the thousands of SAAS and other auto-renewal contracts we have enforced over the last 15 years.
Going forward, the contract must have a place immediately adjacent to or after the auto-renewal (negative option) language where the signer checks a box, initials, or provides a full signature acknowledging that provision. Most state laws do not require separate affirmative consent, so this is a new requirement for virtually all vendors who have auto-renewal provisions.
The law says businesses have 60 days to comply with misrepresentation provisions in the new regulations and 180 days to comply with disclosure, consent and click-to-cancel provisions. That means the auto-renewal provision in any existing SAAS contract that is not amended by November 15, 2025 to be in compliance will no longer be legally enforceable if the customer objects after a cancellation deadline.
Renewal Notification
Many states have laws requiring that customers receive a notice in advance of the renewal cancellation date. Typically, the notice must be sent 30 to 60 days prior. But some states require it 15 to 30 days prior or 30 to 45 days prior. The new Federal law does not specify when the notice is sent but makes it mandatory for any auto-renewal to be enforceable, a notice must have been sent giving people the easy option to cancel.
Approximately half of our clients with auto-renewal provisions do not send advance notice. Since over 80% of states didn’t have this requirement for B2B contracts, this wasn’t a huge risk. But not sending notices now means that anyone who objects to the renewal and is aware of the Federal law will not have to pay for the renewal term if they no longer want the service.
Ease of Cancellation
Vendors must make cancellation easy and include a method similar to how the customer originally signed up. If the contract was executed on-line, then a simple on-line ‘click to cancel’ method must be made available. You can’t force them to call in to cancel. If they signed up by phone, then phone must be one of the options available for cancellation as well as ‘click to cancel’ if you send the renewal notice via email. The method of cancellation must be clearly disclosed and easily implemented with the renewal notice.
Disclosure and Data Retention
All important information about the product or service, pricing, contract terms, auto-renewals, must be clear, easy to find, truthful, and presented before the customer signs up. There can be no misrepresentation of any material fact related to the auto-renewal or the purpose and efficacy of the product or service. Vendors must retain proof of the customers’ affirmative consent for 3 years.
Existing Agreements Must Be Updated
If you did not get affirmative consent for the auto-renewal provision when your contract with your client was initially executed, you must get it now. This means creating an amendment specifically for the auto-renewal provision. If you add any other changes, the auto-renewal provision must have separate affirmative consent in the amendment.
Implications If You Are Not In Compliance
While the FTC has the right to fine for violations, we expect that enforcement will primarily be targeted towards B2C contracts where advance notice is not provided or simple ‘click to cancel’ is not made available. For B2B vendors, the biggest risk is that customers can cancel at any time once the initial term has expired if the contract and notices are not in compliance. Essentially, your customer can argue that the contract did not renew for an annual (or longer) term. If they stopped using your service, then they won’t be liable for any cost past the last usage date. And they can cancel at any time going forward.
Resources
A full copy of the new regulation can be found here. In depth information on various state laws and regulations, some of which exceed Federal requirements, is provided in this report on our website that we published a few years back.
While you are updating your contract to be in compliance with the new regulations, we encourage you to consider other terms and conditions which could be a big benefit to you if you ever have collection problems. Key terms that help are 1) interest and finance charges if they are late in paying, 2) accelerated payment if they default, 3) responsible for collection and attorney fees if these are required to collect, 4) venue, jurisdiction and law provisions that do not dramatically increase the cost of legal collection, and 5) not requiring arbitration for collection matters (which, for all practical purposes, makes legal enforcement cost prohibitive in most situations). We explain all of these issues and provide sample language in our free downloadable Six Critical Terms to Enable Higher Collections ebook.
Disputes
We are experts at resolving disputes with SAAS customers, whether they pertain to auto-renewals, alleged service breaches, or payment defaults. We specialize in larger matters. We have an 85% success rate on large viable claims with contingency rates from 10% to 25%. We know all the relevant laws, which maximizes the likelihood of resolving a dispute in our client’s favor. Please reach out if you have questions or an unresolved dispute.
