The Federal Trade Commission (FTC) Act has long provided a flexible consumer protection framework. The law generally empowers the FTC to challenge net-harmful conduct while giving trade practices that benefit consumers the green light. In tech markets, this tends to fit well because it typically stops the Commission from outlawing newer products and services before their benefits or risks are fully understood. However, regardless of the party in power, the FTC occasionally gets unhelpfully creative with the levers at its disposal to achieve outcomes Congress intended to be out of reach. For example, one common criticism points to the FTC’s use of its vague authority, non-binding policy statements, and wide-ranging investigative powers to force companies into settlements even for conduct Congress did not intend to outlaw and where liability is a long shot. Most recently, the FTC took some steps that raise these same concerns in order to reach its $2.5 billion settlement with Amazon over Prime subscriptions. We’ve previously pointed out how the FTC’s attack on subscription models hurts small businesses, and this is the latest iteration of the problem.
The Liability Long Shots. The FTC presses two problematic claims, among others, in its complaint challenging the design of the Prime subscription cancellation “flow.” First, it alleges that the cancellation process is an “unfair act or practice,” which the FTC Act prohibits. In order to successfully allege this count, the FTC must show that the Prime cancellation process “causes or is likely to cause substantial injury to consumers that consumers cannot reasonably avoid themselves and that is not outweighed by countervailing benefits to consumers or competition.” Here, the Commission did not perform this balancing test at all in its complaint and only described the cancellation process, alleging that it did not constitute informed consent. Thus, even in its complaint, the FTC did not try and establish liability under the “unfairness” prong of the FTC Act. An FTC that is empowered to bring claims without carefully establishing liability is especially harmful for small businesses. One of the most important governance principles for small tech is that they must be able to understand clearly what kinds of conduct are legal and where regulators and enforcers draw the line on what is illegal. Smaller competitors iterate relatively more quickly and take different kinds of risks to bring novel products and services to their customers and clients. If the FTC is playing fast and loose with liability, smaller competitors will shy away from the kinds of nimble and bold activity that gives them their advantage over larger, less agile rivals.
Second, the FTC also alleged that the cancellation flow violates the Restore Online Shoppers’ Confidence Act (ROSCA). Relevantly, ROSCA prohibits charging consumers through a “negative option” (subscription) unless the seller “clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information; b) obtains the consumer’s express informed consent before making the charge; and c) provides simple mechanisms to stop recurring charges.” In describing Amazon’s current cancellation flow, the FTC shows screenshots where Amazon appears to obtain express informed consent before enrolling Prime subscribers and clearly and conspicuously displays all material terms via links. However, the FTC spent more time describing Amazon’s longer cancellation flow employed before the complaint was filed. Even though all of this is irrelevant in a complaint, the FTC used a common “dark pattern” practice known as “misdirection” to draw readers’ eyes away from the current practice and toward facts that are irrelevant for liability purposes, but helpful for the FTC’s case. Here again, this blurring of the lines in order to force a settlement sends a signal to small firms that subscriptions are now potentially illegal. A significant proportion of small businesses in the app economy use subscription models, and chilling these offerings when they are often better for clients and consumers defeats the FTC’s purpose of enhancing consumer outcomes.
The Executive Cudgel. In part, the Commission was able to bluster through some dubious liability claims by proposing to hold executives individually liable. This is a rather concerning prospect from a precedent standpoint. Amazon is likely able to cover the costs of fighting claims of individual liability for their executives, but for small businesses, it could be a far more difficult undertaking, as they simultaneously fight corporate liability. Accordingly, it is an attractive lever for the FTC because it could help force settlements even in cases where the facts are really not in place to support the claims in the FTC’s initial complaint. For small businesses, this lever goes well beyond encouraging fair practices and instead discourages the hard work of iterating on subscription and related revenue model details. This is especially true given their relative inability to cover for their executives, especially for the high percentage of our members with one or just a few employees (and therefore, all of them are executives). Decision-makers at small firms must be able to engage in often difficult decision-making processes. We pointed this out when the Securities and Exchange Commission (SEC) sought to hold chief information security officers (CISOs) individually liable for threat notification activities. Internal deliberations at small businesses suffer greatly when employees know their communications might subject them to individual liability in FTC or trial attorney actions that are inspired by the FTC’s newly carved avenues for liability.
While the reporting on this settlement has focused on the total dollar figure and on the nuts and bolts of how Prime subscribers can obtain their share of the settlement, these subtle but significant precedential factors are being overlooked. For their part, small business innovators should be hopeful that the FTC does not lean into its fresh success with individual executive liability as a fast-track to improper settlements.