Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—8th Cir.: FTC’s Negative Option Rule struck down, (Jul 10, 2025)

By Martin A. Steinberg, J.D.

The Rule required all negative-option marketing to offer an “equal-dignities” cancellation mechanism that is at least as easy as enrollment.

The Eighth Circuit has held that the FTC’s 2024 Negative Option Rule was promulgated “without observance of procedure required by law.” An Administrative Law Judge found the Rule’s annual economic impact would easily top the $100 million threshold, the Commission still refused to prepare the statutorily mandated preliminary regulatory analysis under the FTC Act. That omission deprived commenters of a meaningful chance to critique costs, alternatives, and necessity, and was therefore prejudicial, not harmless. Because § 18 of the FTC Act directs courts to “hold unlawful and set aside” rules adopted in violation of required procedure, the panel vacated the Rule in its entirety and, having provided complete relief on the procedural ground, expressly declined to reach the petitions’ substantive challenges that the Rule exceeded the FTC’s authority or was arbitrary and capricious (Custom Communications, Inc. v. FTC, No. 24-3137 (8th Cir. July 7, 2025)).

Background. Whenever a notice of proposed rulemaking anticipates a rule whose annual economic impact will exceed $100 million, § 22 of the FTC Act obligates the FTC to prepare and publish, with the notice, a preliminary regulatory analysis detailing (1) the rule’s purpose, (2) its estimated costs and benefits, and (3) significant alternatives. The agency must then solicit public comment and, before issuing any final rule, address those comments in a final regulatory analysis. Although § 22 generally limits court challenges to the substance of an analysis, that jurisdictional bar vanishes when the Commission fails to prepare the preliminary analysis, permitting courts to set the rule aside for non compliance. The statute also contemplates that, if new information reveals the $100 million threshold has been met after the initial notice, the FTC must issue a supplemental notice with the missing preliminary analysis, allowing commenters to evaluate costs and alternatives on a fully informed record.

The FTC’s April 2023 Notice of Proposed Rulemaking (NPRM) aimed to modernize and expand the 1973 Rule to cover all forms of negative option marketing, including continuity plans, automatic renewals, and free-to-play trials, across all media. The Commission justified the rule by citing evidence of widespread deceptive practices, including consumer complaints, surveys, and enforcement actions. The NPRM included enhanced requirements for disclosure, affirmative consent, and cancellation, and asserted that the amendments would not trigger the statutory $100 million threshold that would require a preliminary regulatory analysis under § 22 of the FTC Act.

To test that economic impact assumption, the FTC held informal hearings before an ALJ in early 2024. Five industry participants and the Bureau of Consumer Protection submitted evidence and expert reports. The ALJ concluded that, given the FTC’s estimate that over 100,000 businesses would be affected and the labor hours needed for compliance, total costs would easily exceed $100 million. For example, major cable operators estimated $12—25 million in compliance costs each. The ALJ concluded that the economic impact threshold under § 22 was clearly met.

Despite that finding, the Commission declined to issue a preliminary regulatory analysis and instead proceeded to finalize the Rule in November 2024 by a 3—2 vote. The final Rule imposed four major requirements: (1) a ban on misrepresentation of any material fact related to the product, price, or negative option terms; (2) clear and conspicuous disclosure of all material terms next to the consent mechanism; (3) unambiguous affirmative consent to the negative option feature, separately from the rest of the transaction; and (4) an “equal dignities” cancellation mechanism that is at least as simple as the method used to enroll. The Commission issued a final regulatory analysis with the rule, but not the required preliminary version. Commissioners Holyoak and Ferguson dissented, criticizing the rule as overbroad, unsupported by industry-specific evidence, and likely to deter beneficial subscription models.

Petitioners included Custom Communications, Inc., The Chamber of Commerce of the United States of America, The Georgia Chamber of Commerce, Michigan Press Association, National Federation of Independent Business, Inc., Electronic Security Association, Interactive Advertising Bureau, and NCTA-The Internet & Television Association. They challenged the Rule on three main grounds: (1) the FTC exceeded its statutory authority; (2) it failed to conduct a preliminary regulatory analysis as required by § 22; and (3) the Rule was arbitrary and capricious under the APA. They emphasized that once the ALJ found that the $100 million threshold had been exceeded, the Commission was statutorily obligated to issue a preliminary analysis and re-notice the NPRM. Without it, commenters lacked an opportunity to address alternatives, burdens, and justification in a timely manner.

The preliminary regulatory analysis requirement. The statutory text of § 22(b)(1)(B) mandates that the FTC “shall issue” a preliminary regulatory analysis whenever it publishes a notice of proposed rulemaking (NPRM) and the rule’s annual economic impact exceeds $100 million. This analysis must cover: (1) the rule’s purpose and need, (2) a description of anticipated benefits and costs, and (3) a discussion of significant alternatives. These elements are designed to inform the public’s comments, facilitating a meaningful dialogue about the rule’s economic effects and potential less burdensome alternatives.

Although the FTC argued that it did not need to issue a preliminary analysis late in the rulemaking process (after the ALJ’s cost finding), the court rejected that claim. It explained that § 22 expressly allows supplemental notices if new information arises after the initial NPRM. Therefore, once the ALJ found the economic threshold was met, the FTC had a statutory obligation to issue a supplemental notice with the missing preliminary analysis. Failing to do so short-circuited the process Congress designed to ensure public accountability.

The court also highlighted § 22’s requirement that the final regulatory analysis must summarize and respond to comments received on the preliminary analysis, something the FTC could not do because no preliminary analysis was ever issued. This structural flaw undermined the legitimacy of the final analysis, rendering the rule procedurally defective.

Harmless error. The court concluded that the FTC’s error was not harmless because it constituted a clear violation of the law that significantly impacted the rulemaking process. Therefore, under both § 22 and the APA’s harmless-error standard (5 U.S.C. § 706), the Rule must be vacated in full. The FTC argued that its failure to issue a preliminary regulatory analysis, even if technically improper, did not warrant vacatur because it caused no real harm. The court rejected this defense, holding that the omission was both prejudicial and legally significant under § 22 of the FTC Act and the Administrative Procedure Act (APA).

The FTC contended that stakeholders still had ample opportunity to comment on the rule through the NPRM, the informal hearing before the ALJ, and the final regulatory analysis. It also argued that the NPRM discussed costs and alternatives, which it claimed functioned as a substitute for the missing preliminary analysis. The court stated that these piecemeal disclosures were no substitute for a properly issued preliminary analysis, which must be published with the NPRM or in a supplemental notice and designed to elicit informed public comment on costs, benefits, and alternatives.

Prejudice is presumed when an agency fails to observe mandatory procedures, especially when the process is designed to protect the public’s ability to shape regulatory outcomes. Because § 22 explicitly requires the FTC to issue a preliminary regulatory analysis when the $100 million economic threshold is met—and because that step was never taken—the omission deprived stakeholders of a legally guaranteed opportunity to challenge assumptions, suggest alternatives, and influence the rule’s final form.

Supporting its position, the court cited precedents like Citizens Telecomms. Co. of Minn., LLC v. FCC, 901 F.3d 991, 1001 (8th Cir. 2018), where failure to follow statutorily mandated rulemaking procedures warranted vacatur. The final regulatory analysis, which was issued only after the rule was finalized, failed to correct the procedural failure because it did not address comments on a preliminary analysis that never existed.

The court concluded that § 22’s procedural framework is not optional and that its violation stripped the final rule of legal validity. It invokes the statutory remedy in § 18(e)(3)(A), which requires courts to “hold unlawful and set aside” any FTC rule adopted without observance of the required procedure. Because the procedural defect was clear and prejudicial, the court vacated the Rule without reaching the petitioners’ other substantive challenges.

Remedy. The court addressed the appropriate consequence for the FTC’s failure to issue a preliminary regulatory analysis as required by § 22 of the FTC Act, holding that this procedural violation mandated vacatur of the Negative Option Rule in its entirety. The court cited § 18(e)(3)(A) of the FTC Act, which directs courts to “hold unlawful and set aside” any trade regulation rule adopted “without observance of procedure required by law.” Because the FTC entirely omitted the preliminary analysis—an essential, non-optional step under § 22—the court finds that the statutory remedy is not discretionary; vacatur is required. This outcome aligns with standard Administrative Procedure Act (APA) practice under § 706(2)(D), which authorizes courts to invalidate agency rules adopted “without observance of procedure required by law.” The court stressed that permitting the FTC to bypass this step without consequence would undermine both the statutory framework and public participation.

Finally, because vacating the rule fully resolves the case on procedural grounds, the court declined to reach the petitioners’ remaining arguments, namely, that the Rule exceeded the FTC’s statutory authority or was arbitrary and capricious.

The Case is No. 24-3137.

Judge: Per curiam.

Attorneys: Michael P. Corcoran (Gibson, Dunn & Crutcher LLP) for Custom Communications, Inc. Benjamin Aiken for the FTC.

Companies: Custom Communications, Inc.

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