Custom Communications, Inc. v. Federal Trade Commission
Published PC Opinion — Document #00805299737, Attachment #3
Court of Appeals for the Eighth Circuit
Description
PER CURIAM OPINION FILED - THE COURT: James B. Loken, Ralph R. Erickson and Jonathan A. Kobes (PUBLISHED) [5534686] [24-3137, 24-3388, 24-3415, 24-3442, 24-3469] (CRJ) [Entered: 07/08/2025 11:42 AM]
United States Court of Appeals
For the Eighth Circuit
___________________________
No. 24-3137
___________________________
Custom Communications, Inc., doing business as Custom Alarm
lllllllllllllllllllllPetitioner
v.
Federal Trade Commission
lllllllllllllllllllllRespondent
------------------------------
American Property Casualty Insurance Association; Consumer Credit Industry
Association; Health & Fitness Association; International Franchise Association;
National Association of Spa Franchises; Service Contract Industry Council
lllllllllllllllllllllAmici on Behalf of Petitioner
Internet and Consumer Law Professors; Main Street Alliance; Truth in
Advertising, Inc.; Consumer Law and Economic Justice; Consumer Federation of
America; Consumer Action; National Consumers League; National Consumer
Law Center; National Association of Consumer Advocates
lllllllllllllllllllllAmici on Behalf of Respondent
___________________________
No. 24-3388
___________________________
The Chamber of Commerce of the United States of America; The Georgia
Chamber of Commerce
lllllllllllllllllllllPetitioners
Appellate Case: 24-3137 Page: 1 Date Filed: 07/08/2025 Entry ID: 5534686
v.
Federal Trade Commission
lllllllllllllllllllllRespondent
------------------------------
American Property Casualty Insurance Association; Consumer Credit Industry
Association; Health & Fitness Association; International Franchise Association;
National Association of Spa Franchises; Service Contract Industry Council
lllllllllllllllllllllAmici on Behalf of Petitioner
Internet and Consumer Law Professors; Main Street Alliance; Truth in
Advertising, Inc.; Consumer Law and Economic Justice; Consumer Federation of
America; Consumer Action; National Consumers League; National Consumer
Law Center; National Association of Consumer Advocates
lllllllllllllllllllllAmici on Behalf of Respondent
___________________________
No. 24-3415
___________________________
Michigan Press Association; National Federation of Independent Business, Inc.
lllllllllllllllllllllPetitioners
v.
Federal Trade Commission
lllllllllllllllllllllRespondent
------------------------------
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American Property Casualty Insurance Association; Consumer Credit Industry
Association; Health & Fitness Association; International Franchise Association;
National Association of Spa Franchises; Service Contract Industry Council
lllllllllllllllllllllAmici on Behalf of Petitioner
Internet and Consumer Law Professors; Main Street Alliance; Truth in
Advertising, Inc.; Consumer Law and Economic Justice; Consumer Federation of
America; Consumer Action; National Consumers League; National Consumer
Law Center; National Association of Consumer Advocates
lllllllllllllllllllllAmici on Behalf of Respondent
___________________________
No. 24-3442
___________________________
Electronic Security Association; Interactive Advertising Bureau; NCTA-The
Internet & Television Association
lllllllllllllllllllllPetitioners
v.
Federal Trade Commission
lllllllllllllllllllllRespondent
------------------------------
American Property Casualty Insurance Association; Consumer Credit Industry
Association; Health & Fitness Association; International Franchise Association;
National Association of Spa Franchises; Service Contract Industry Council
lllllllllllllllllllllAmici on Behalf of Petitioner
-3-
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Internet and Consumer Law Professors; Main Street Alliance; Truth in
Advertising, Inc.; Consumer Law and Economic Justice; Consumer Federation of
America; Consumer Action; National Consumers League; National Consumer
Law Center; National Association of Consumer Advocates
lllllllllllllllllllllAmici on Behalf of Respondent
___________________________
No. 24-3469
___________________________
Custom Communications, Inc., doing business as Custom Alarm; Electronic
Security Association; Interactive Advertising Bureau; NCTA-The Internet &
Television Association; Michigan Press Association; National Federation of
Independent Business, Inc.; The Chamber of Commerce of the United States of
America; The Georgia Chamber of Commerce
lllllllllllllllllllllPetitioners
v.
Federal Trade Commission
lllllllllllllllllllllRespondent
------------------------------
American Property Casualty Insurance Association; Consumer Credit Industry
Association; Health & Fitness Association; International Franchise Association;
National Association of Spa Franchises; Service Contract Industry Council
lllllllllllllllllllllAmici on Behalf of Petitioner
Internet and Consumer Law Professors; Main Street Alliance; Truth in
Advertising, Inc.; Consumer Law and Economic Justice; Consumer Federation of
America; Consumer Action; National Consumers League; National Consumer
Law Center; National Association of Consumer Advocates
lllllllllllllllllllllAmici on Behalf of Respondent
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____________
Petitions for Review of an Order of the
Federal Trade Commission
____________
Submitted: June 10, 2025
Filed: July 8, 2025
[Published]
____________
Before LOKEN, ERICKSON, and KOBES, Circuit Judges.
____________
PER CURIAM.
Many American consumers have found themselves unwittingly enrolled in
recurring subscription plans, continuing to pay for unwanted products or services
because they neglected to cancel their subscriptions. These so-called “negative
option” programs take various forms but generally share the key feature of a term or
condition allowing sellers to interpret a customer’s silence, or failure to take any
affirmative action, as acceptance of an offer.
Given the proliferation of negative option plans across economic sectors, the
Federal Trade Commission (“FTC” or “Commission”) set out to modernize its
original negative option rule, promulgated in 1973, which covered only one form of
negative option plan. See Regulations Pertaining to the Use of Negative Option
Plans, 38 Fed. Reg. 4896 (Feb. 22, 1973) (to be codified at 16 C.F.R. pt. 425) (the
“1973 Rule”). In 2023, the Commission proposed extending the scope of the 1973
Rule to cover “all forms of negative option marketing in all media.” Negative Option
Rule, 88 Fed. Reg. 24716, 24716 (proposed Apr. 24, 2023) (to be codified at
16 C.F.R. pt. 425). In October 2024, the FTC amended the 1973 Rule by a 3-2 vote,
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adding provisions that bar sellers from misrepresenting material facts and require
disclosure of material terms, express consumer consent, and a simple cancellation
mechanism. 16 C.F.R. § 425 (the “Rule” or “final Rule”).
Various industry associations and individual businesses (“Petitioners”) sought
review of the Rule in four federal circuit courts on the grounds that the FTC exceeded
the scope of its statutory authority in promulgating the Rule, failed to satisfy a
procedural requirement by declining to conduct a preliminary regulatory analysis
during the rulemaking process, and acted arbitrarily and capriciously under the
Administrative Procedure Act (“APA”) in issuing a rule of this scope. The Judicial
Panel on Multidistrict Litigation consolidated the petitions for review in this court.
Concluding that the Commission failed to follow procedural requirements under § 22
of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. § 57b-3(b)(1). We
grant the petitions for review and vacate the Rule.
I. Background
A. Statutory Framework. We begin by reviewing the relevant provisions of
the FTC Act. Section 5 empowers the Commission to “prevent . . . unfair or
deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a). The
Commission carries out this mandate through its own administrative proceedings,
litigation in federal district courts, and rulemaking. Section 5 lays out the process for
enforcement through administrative proceedings. If the Commission has “reason to
believe” a party “has been or is using any unfair method of competition or unfair or
deceptive act or practice,” it can initiate a proceeding before an Administrative Law
Judge (“ALJ”), who after a hearing can order a party to cease and desist from its
unlawful conduct. Id. § 45(b). The party ordered to cease and desist can seek review
before the Commission and then a court of appeals. Id. § 45(b)-(c). Section 5(l)
authorizes district courts to award civil penalties to the United States for violations
of cease-and-desist orders, and district courts can “grant mandatory injunctions and
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such other and further equitable relief as they deem appropriate in the enforcement
of such final orders of the Commission.” Id. § 45(l). Alternatively, before a cease-
and-desist order is issued, the Commission can go directly to a district court to obtain
a temporary restraining order or preliminary injunction, and “in proper cases,” a
permanent injunction. Id. § 53(b).
The Commission’s formal rulemaking authority is found in § 18 of the FTC
Act. Section 18 authorizes the Commission to adopt “rules which define with
specificity acts or practices which are unfair or deceptive acts or practices in or
affecting commerce” within the meaning of § 5, as well as “requirements prescribed
for the purpose of preventing such acts or practices.” 15 U.S.C. § 57a(a)(1)(B)
(emphasis added). Once a rule is promulgated, the Commission can enforce it
directly against a regulated party by commencing an action in district court seeking
civil penalties. Id. § 45(m)(1)(A). The FTC can also seek injunctive relief pursuant
to § 53(b) and monetary redress for injured consumers. See id. § 57b(a)-(b). In
addition to the “specificity” requirement, § 18 provides that the Commission can issue
proposed rules “only where it has reason to believe that the unfair or deceptive acts
or practices which are the subject of the proposed rulemaking are prevalent.” Id.
§ 57a(b)(3) (emphasis added).
Besides the specificity and prevalence requirements, § 18 requires a number
of procedural steps, some of which go beyond those required for APA notice-and-
comment rulemaking. The FTC must first publish an “advance notice of proposed
rulemaking” containing “a brief description of the area of inquiry under
consideration, the objectives which the Commission seeks to achieve, and possible
regulatory alternatives under consideration.” 15 U.S.C. § 57a(b)(2)(A). Also
required is a notice of proposed rulemaking “stating with particularity the text of the
rule, including any alternatives, which the Commission proposes to promulgate, and
the reason for the proposed rule.” Id. § 57a(b)(1)(A). Interested parties must be
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afforded the opportunity for “an informal hearing” and to “to submit written data,
views, and arguments” on the proposed rule. Id. § 57a(b)(1)(B)-(C), (c).
Congress further required the Commission to conduct regulatory analyses of
proposed and final rules, or amendments to rules, at two stages of the rulemaking
process. First, when the Commission publishes a notice of proposed rulemaking, it
also must issue a “preliminary regulatory analysis” containing “a description of any
reasonable alternatives to the proposed rule which may accomplish the stated
objective of the rule” and for the proposed rule and each alternative, “a preliminary
analysis of the projected benefits and any adverse economic effects and any other
effects, and of the effectiveness of the proposed rule and each alternative in meeting
the stated objectives of the proposed rule.” 15 U.S.C. § 57b-3(b)(1)(B)-(C).
Second, the Commission must issue a “final regulatory analysis” when it
promulgates a final rule. 15 U.S.C. § 57b-3(b)(2). Similar to the preliminary
regulatory analysis, the final regulatory analysis must include a description of
alternatives considered by the Commission and an analysis of projected benefits and
adverse economic and other effects. The Commission must also provide “an
explanation of the reasons for the determination of the Commission that the final rule
will attain its objectives” and a “summary of any significant issues raised by the
comments submitted . . . in response to the preliminary regulatory analysis.” Id.
§ 57b-3(b)(2)(B)-(E). Importantly, the preliminary and final regulatory analysis
requirements do not apply to “any amendment to a rule” unless the FTC estimates that
the amendment “will have an annual effect on the national economy of $100,000,000
or more.” Id. § 57b-3(a)(1)(A).
B. The Rulemaking Process. The 1973 Rule covered only one type of
negative option strategy, so-called prenotification plans, through which sellers
provide periodic notices offering goods to consumers and then send and charge for
those goods if the consumer does not decline the offer. The periodic notices and
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shipments can continue indefinitely. Once popular book-of-the-month clubs typify
this type of negative option plan. Negative Option Rule, 89 Fed. Reg. 90476, 90476-
77 (Nov. 15, 2024) (to be codified at 16 C.F.R. pt. 425). The 1973 Rule required
sellers to clearly and conspicuously disclose seven categories of material terms:
(i) how subscribers must notify the seller to indicate they do not want to make a
purchase; (ii) any minimum purchase obligations; (iii) the subscriber’s right to cancel;
(iv) whether billing charges include postage and handling; (v) disclosure confirming
subscribers have ten days to mail a rejection; (vi) disclosure that the seller will credit
the return of the selection if the subscriber did not have ten day to reject the selection;
and (vii) the frequency with which announcements and forms would be sent.
16 C.F.R. § 425.1(a)(1)(i)-(vii) (1974). Sellers were also required to disclose the
specific periods during which they would send introductory merchandise, provide
instructions for rejecting merchandise, and promptly honor cancellation requests. Id.
§ 425.1(a)(2)-(3), (b).
The Commission’s effort to modernize the 1973 Rule began in 2019 with an
advance notice of proposed rulemaking (the “ANPRM”), which posed a series of
general questions about the 1973 Rule and current negative option practices. These
included whether there was “a continuing need for the [1973] Rule as currently
promulgated,” what modifications the Commission should make to increase benefits
to consumers, and whether there are “potentially unfair or deceptive practices
concerning the marketing of negative option plans, not covered by the [1973] Rule,
occurring in the marketplace.” Rule Concerning the Use of Prenotification Negative
Option Plans, 84 Fed. Reg. 52393, 52397 (Oct. 2, 2019).
The ANPRM identified three other variants of negative option programs not
covered by the 1973 Rule. The first is continuity plans, under which consumers agree
in advance to periodic shipments of goods or provision of services, to continue until
the consumer cancels the agreement. A bottled water delivery service exemplifies
this type of agreement. The second is automatic renewal plans. As the name
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suggests, sellers, like magazine publishers, automatically renew customers’
subscriptions when they expire unless the customer takes the affirmative step of
cancelling the subscription. The third is free-to-pay plans, in which consumers
receive free goods or services (or pay only a nominal fee), typically for a free trial
period, and are automatically charged a fee at the end of that period unless they
affirmatively cancel or return the goods to the seller. Rule Concerning the Use of
Prenotification Negative Option Plans, 84 Fed. Reg at 52394. Because the 1973 Rule
“does not reach most modern negative option marketing” and “[t]he existing
patchwork of laws and regulations does not provide industry and consumers with a
consistent legal framework across different media and types of plans,” the
Commission sought public comment on how to improve the existing regulatory
framework. Id. at 52394, 52396.
The Commission received only seventeen comments in response to the
ANPRM. After reviewing public comments, the Commission published an
enforcement policy statement reiterating various principles from FTC guidance and
case law, as well as statutes addressing recurring subscriptions, like the Restore
Online Shoppers’ Confidence Act of 2010, 15 U.S.C. § 8403. The policy statement
emphasized the importance of clear and conspicuous disclosure of material terms
before purchase, obtaining consumers’ express, informed consent, and marketers’
honoring cancellation requests and not “erect[ing] unreasonable barriers to
cancellation.” Enforcement Policy Statement Regarding Negative Option Marketing,
86 Fed. Reg. 60822, 60823 (Nov. 4, 2021).
Over three years after the publication of the ANPRM, the Commission issued
a notice of proposed rulemaking in April 2023 (the “NPRM”) with proposed
requirements that “would be applicable to all forms of negative option marketing in
all media.” Negative Option Rule, 88 Fed. Reg. at 24716. Based on evidence
received in response to the ANPRM, including “complaint data, studies, survey
results, and law enforcement actions,” the Commission determined that deceptive
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negative option marketing practices had become prevalent across industries. Id. at
24725. The NPRM proposed a number of amendments to the 1973 Rule that would
broaden its scope and introduce new requirements regarding disclosures, advance
consent, and cancellation mechanisms. Id. at 24726-30.
As for the preliminary regulatory analysis, the NPRM explained that the
Commission had “preliminarily determined” that the proposed amendments to the
1973 Rule would not have the requisite $100 million effect on the national economy
that would trigger the requirement for that analysis. Compliance with the proposed
requirements “should not create any substantial added burden” on sellers because
most already provide some forms of disclosures, consent procedures, and cancellation
mechanisms to consumers. In addition, the Commission had “sought to minimize
prescriptive requirements and provide flexibility to sellers.” It therefore declined to
provide a preliminary regulatory analysis. Negative Option Rule, 88 Fed. Reg. at
24731.
In January and February 2024, the Commission held informal hearing sessions
before an ALJ to resolve disputed issues of material fact about costs of the proposed
rule. Five interested parties and the FTC Bureau of Consumer Protection appeared
at the hearing sessions and offered submissions and experts reports on the costs of the
proposed rule. Based on the FTC’s estimate that 106,000 entities currently offer
negative option features and estimated average hourly rates for professionals such as
lawyers, website developers, and data scientists whose services would be required by
many businesses to comply with the new requirements, the ALJ observed that unless
each business used fewer than twenty-three hours of professional services at the
lowest end of the spectrum of estimated hourly rates, the Rule’s compliance costs
would exceed $100 million. Such an estimate was “clearly unrealistically low
inasmuch as there are several new requirements proposed that would require changes
in existing practices and/or disclosure forms.” The Internet and Television
Association, which appeared before the ALJ, submitted an estimate that achieving
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compliance with the proposed rule would cost major cable operators alone between
$12 and $25 million per company. Negative Option Rule, Project No. P064202 (Apr.
12, 2024) (Recommended Decision).
Weighing the estimated costs and benefits to consumers, the ALJ found that
the proposed rule would have an annual effect on the national economy surpassing
the $100 million threshold. The ALJ noted that even though it was “conceivable that
the practices of almost all businesses that would be affected by the proposed Negative
Option Rule amendments already comply with the proposal, this would be
inconsistent with the widespread problems and abuses that the NPRM describes.” Id.
After the ALJ’s decision, the Commission did not issue a preliminary regulatory
analysis. Instead, it proceeded to finalize the Rule.
The Commission issued the final Rule by a 3-2 vote on November 15, 2024,
imposing new requirements “related to any form of negative option program in any
media.” 16 C.F.R. § 425.1. First, the Rule bars sellers from misrepresenting “any
[m]aterial fact,” including but not limited to cost, negative option feature terms, and
other information about the underlying good or service. Id. § 425.3. Second, the
Rule requires “[c]lear and [c]onspicuous” disclosure, “immediately adjacent” to the
means of recording the consumer’s consent to the recurring subscription, of all
material terms, “regardless of whether those terms directly relate to the Negative
Option Feature.” Id. § 425.4(a), (b)(1)-(2). Third, the Rule requires sellers to obtain
the consumer’s “unambiguously affirmative consent to the Negative Option Feature
separately from any other portion of the transaction.” Id. § 425.5(a)(1). Fourth, the
Rule introduces an “equal dignities” requirement for cancellation of negative option
contracts. Sellers must provide “a simple mechanism” for cancellation that allows
consumers to immediately stop all recurring charges and is “at least as easy to use as
the mechanism the consumer used to consent” to the subscription initially. Id.
§ 425.6(a)-(b). Acknowledging the ALJ’s finding that the Rule would have an annual
effect on the national economy of $100 million or more, the Commission issued a
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final regulatory analysis in conjunction with the final Rule as required by § 22 of the
FTC Act, 15 U.S.C. § 57b-3(b)(2). Negative Option Rule, 89 Fed. Reg. at 90517-34.
FTC Commissioner Holyoak and now-Chairman Ferguson dissented.
Questioning the majority’s “race to cross the finish line,” Commissioner Holyoak
argued that the Rule was much broader than the “area of inquiry” proposed by the
ANPRM; it failed to satisfy § 18’s specificity requirement by “improperly
generalizing from narrow industry-specific complaints and evidence to the entire
American economy”; and the Commission did not demonstrate that unfair or
deceptive negative option practices are actually “prevalent.” She also warned that the
breadth of the Rule “incentivizes companies to avoid negative option features that
honest businesses and consumers find valuable” and characterized the Rule as “a
missed opportunity to make useful amendments to the preexisting negative option
rule within the scope of the Commission’s authority.” Negative Option Rule, 89 Fed.
Reg. at 90540.
C. Petitioners’ Challenges. Petitioners filed petitions for review shortly after
the Rule was issued in four circuit courts of appeals, which have jurisdiction to
review FTC rules pursuant to 15 U.S.C. § 57a(e)(1)(A). The Commission transmitted
the petitions to the Judicial Panel on Multidistrict Litigation, which, by means of
random selection, designated this court as the one in which to consolidate the
petitions. 28 U.S.C. § 2112(a).
Petitioners challenge the Rule on three grounds and request that the court
vacate the Rule in its entirety. First, they argue the Rule exceeds the scope of the
FTC’s statutory authority under § 18 of the FTC Act because it does not satisfy the
specificity and prevalence requirements. In Petitioners’ view, this “one-size-fits-all
regulation of all recurring subscriptions everywhere” using general requirements such
as disclosure of “any [m]aterial fact” and “easy” cancellation mechanisms is far from
specific. And the Commission did not provide sufficient evidence regarding the
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existence of unfair or deceptive recurring subscriptions practices across industries to
demonstrate prevalence. Congress would also not have authorized a Rule of this
breadth when it already has passed legislation addressing specific recurring
subscription practices and classes in specific industries. The Commission responds
that the Rule satisfies the specificity requirement because it targets clearly defined
types of contracts and particular unfair or deceptive acts or practices. In addition,
nothing in § 18 precludes the Commission from regulating across industries; the FTC
can reach conduct “in or affecting commerce.” 15 U.S.C. § 57a(a)(1)(B). As for the
prevalence requirement, the Commission states that the Rule is based on “copious
evidence” of unfair and deceptive negative options practices, including dozens of
enforcement actions, consumer complaints, economic studies, and comments from
industry and consumer groups.
Second, Petitioners contend the Rule must be set aside because the
Commission never issued the statutorily required preliminary regulatory analysis, and
reviewing courts “may set aside such rule if the Commission has failed entirely to
prepare a regulatory analysis.” 15 U.S.C. § 57b-3(c)(1). The Commission responds
that it was not required to prepare that analysis because its initial estimate of the
annual economic impact did not surpass the statutory threshold of $100 million, and
the FTC Act did not require the Commission to conduct the preliminary regulatory
analysis later in the rulemaking process after the informal hearing. In addition, any
alleged error was harmless because the NPRM addressed alternatives to the proposed
amendments to the 1973 Rule and analyzed recordkeeping and compliance costs.
Third, Petitioners argue that the Rule is arbitrary and capricious under the
APA, see 15 U.S.C. § 57a(e)(3) (incorporating 5 U.S.C. § 706(2)), because it is
overbroad and creates unworkable, sometimes impossible-to-meet standards for
sellers by treating all recurring subscriptions the same. The Commission takes the
position that the Rule was appropriately tailored to prevent specific unfair and
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deceptive practices, and the need for its chosen approach was supported by
substantial evidence.
The Commission originally set a compliance date of May 14, 2025, for all
regulated entities. This court denied Petitioners’ motion for a stay of the Rule
pending judicial review. On May 9, the Commission opted to defer the compliance
deadline until July 14, 2025, exercising its “enforcement discretion” to “ensure ample
time for companies to conform their conduct to the Rule.” FTC, Statement of the
Commission Regarding the Negative Option Rule, Matter No. P064202 (May 9,
2025).
II. Discussion
Section 18 of the FTC Act provides that reviewing courts “shall hold unlawful
and set aside the rule on any ground specified in subparagraphs (A), (B), (C), or (D)
of section 706(2) of [the APA].” 15 U.S.C. § 57a(e)(3). Those incorporated
provisions of APA § 706(2) authorize courts to set aside agency action that is
“arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with
law”; “contrary to constitutional right, power, privilege, or immunity”; “in excess of
statutory jurisdiction, authority, or limitations, or short of statutory right”; or “without
observance of procedure required by law.” 5 U.S.C. § 706(2)(A)-(D). “If a petitioner
challenges the agency’s compliance with the [APA’s] procedural requirements, then
de novo review is required because compliance is not a matter that Congress has
committed to the agency’s discretion.” Citizens Telecomms. Co. of Minn., LLC v.
FCC, 901 F.3d 991, 1001 (8th Cir. 2018) (quotation omitted). We begin with
Petitioners’ procedural challenge based on the Commission’s failure to provide a
preliminary regulatory analysis.
A. The Preliminary Regulatory Analysis Requirement. In issuing the Rule,
the Commission acknowledged the ALJ’s finding that the Rule’s annual effect on the
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national economy would exceed $100 million: “Although the Commission
preliminarily determined the proposed amendments to the Rule would not have such
effects on the national economy . . . [u]ltimately, the presiding officer determined . . .
the proposed amendments would have such effect.” Negative Option Rule, 89 Fed.
Reg. at 90517. Rather than conducting the preliminary regulatory analysis, the
Commission proceeded to issue only the final regulatory analysis alongside the final
Rule.
The plain text of the FTC Act explains when a regulatory analysis is required
and to what extent it is subject to judicial review. Section 22 states that “[i]n any case
in which the Commission publishes notice of a proposed rulemaking, the Commission
shall issue a preliminary regulatory analysis relating to the proposed rule involved.”
15 U.S.C. § 57b-3(b)(1). As previously noted, the scope of this requirement is limited
by the exclusion from the definition of “rule” amendments with an estimated annual
economic effect under $100 million. Id. § 57b-3(a)(1)(A). In addition, § 22 limits
the scope of judicial review of the substance of the preliminary and final regulatory
analyses when they are required: “The contents and adequacy of any regulatory
analysis prepared or issued by the Commission under this section, including the
adequacy of any procedure involved in such preparation or issuance, shall not be
subject to any judicial review in any court.” Id. § 57b-3(c)(1). This circumscribed
judicial review provision, however, contains an exception -- “a court . . . may set
aside such rule if the Commission has failed entirely to prepare a regulatory analysis.”
Id.
Despite this exception and the Commission’s acknowledged failure to prepare
a preliminary regulatory analysis, the FTC argues on appeal that “nothing in the FTC
Act requires a preliminary regulatory analysis at that late stage” of rulemaking. The
Commission points out that the ALJ issued her decision on the costs of the Rule one
year after the NPRM, contending that the statute did not require the Commission to
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conduct a preliminary analysis just six months before the Rule was ultimately
promulgated to account for its initial underestimate.
But the statutory language, “shall issue,” mandates a separate preliminary
analysis for public review and comment “in any case” where the Commission issues
a notice of proposed rulemaking and the $100 million threshold is surpassed.
15 U.S.C. § 57b-3(b)(1). We do not read § 22 to require the Commission to issue the
preliminary regulatory analysis contemporaneously with the notice of proposed
rulemaking. While that is the typical order of operations, deviating from this
sequence of events is not statutorily prohibited. Likewise, § 22 does not excuse the
Commission from having to prepare the analysis in the event that its initial economic
estimate is later deemed inaccurate. After the ALJ’s decision, the Commission could
have reissued the NPRM with the required preliminary analysis. It is not uncommon
for administrative agencies, including the FTC, to issue supplemental notices of
proposed rulemaking as the scope of a proposed rule changes in response to
comments or to ensure statutory compliance. See, e.g., Business Opportunity Rule,
76 Fed. Reg. 76816, 76818-19 (Dec. 8, 2011) (to be codified at 16 C.F.R. pt. 437);
Regulations Under the Fur Products Labeling Act, 79 Fed. Reg. 30445, 30447 (May
28, 2014) (to be codified at 16 C.F.R. pt. 301).
The final regulatory analysis provision also supports Petitioners’ view that the
Commission was not excused from issuing the preliminary regulatory analysis.
Section 22 requires, as a component of the final regulatory analysis, “a summary of
any significant issues raised by the comments submitted during the public comment
period in response to the preliminary regulatory analysis, and a summary of the
assessment by the Commission of such issues.” 15 U.S.C. § 57b-3(b)(2)(E). The fact
that Congress requires the Commission to consider issues raised in the preliminary
analysis at this later stage of rulemaking suggests that a preliminary analysis would
still have been required, even if well after the NPRM. Without it, the Commission
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cannot provide any responses to comments on its earlier analysis in the final
regulatory analysis.
The Commission emphasizes that § 22 directs it to address comments from “the
public comment period” responding to the preliminary regulatory analysis and that
the only statutorily required public comment periods follow the advance notice of
proposed rulemaking and notice of proposed rulemaking. But § 22’s reference to
“public comment period” is not specifically tied to or limited by any procedural
requirements of § 18 or the APA. And if no preliminary regulatory analysis is issued,
it is impossible for interested parties to submit comments “in response to the
preliminary regulatory analysis.” The Commission’s interpretation allows it to
sidestep the requirement that the final regulatory analysis respond to comments
responding to the preliminary regulatory analysis by simply not publishing a
preliminary analysis and cutting off the ability of regulated parties to respond to the
preliminary analysis in the first place. We conclude that § 22 required the
Commission to issue a preliminary regulatory analysis after the ALJ found the Rule
would meet the $100 million economic impact threshold, even though the
Commission initially estimated it would not.
B. Harmless Error. Even if a preliminary regulatory analysis was required,
the Commission responds that any procedural error committed in not preparing one
was ultimately harmless. The APA instructs reviewing courts to take “due
account . . . of the rule of prejudicial error.” 5 U.S.C. § 706. Section 18 of the FTC
Act incorporates this APA provision. 15 U.S.C. § 57a(e)(3). APA § 706 creates “the
same kind of ‘harmless-error’ rule that courts ordinarily apply in civil cases” and
“seeks to prevent appellate courts from becoming impregnable citadels of
technicality.” Shinseki v. Sanders, 556 U.S. 396, 406-07 (2009) (quotation omitted).
“[T]he burden of showing that an error is harmful normally falls upon the party
attacking the agency’s determination.” Id. at 409. Petitioners have met that burden.
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When required, a preliminary regulatory analysis must include a description of
reasonable alternatives to the proposed rule, a cost-benefit analysis of each
alternative, and an assessment of the effectiveness of the proposed rule and each
alternative in achieving the Commission’s stated objectives in promulgating the rule.
15 U.S.C. § 57b-3(b). Petitioners claim that they suffered prejudice because the
Commission never provided this analysis of alternatives to the Rule or addressed
comments explaining how less burdensome alternatives could provide comparable
benefits. Petitioners could have attempted to show the Commission that their
industries do not engage in the allegedly prevalent unfair and deceptive practices the
Rule sought to root out.
The Commission suggests that Petitioners actually did have the opportunities
for comment they claim to have been deprived of. The NPRM sought comment on
“several alternatives” and analyzed recordkeeping and compliance costs associated
with the proposed rule. Negative Option Rule, 88 Fed. Reg. at 24732-34. And during
the informal hearing process before the ALJ, interested parties submitted their own
briefs and expert reports addressing the Rule’s costs and benefits, which the
Commission considered in promulgating the final Rule. In the Commission’s view,
“tweaks to the cost-benefit analysis would not have made any difference when the
low-end assessment of the Rule’s benefits is seven times greater than the high-end
assessment of its costs,” citing the Commission’s final regulatory analysis estimates.
See Negative Option Rule, 89 Fed. Reg. at 90519.
In Citizens Telecommunications, we considered the Federal Communications
Commission’s (“FCC”) failure to provide adequate notice that it was completely
ending ex ante regulation of one type of communications line, despite stating in its
notice of proposed rulemaking that it sought to regulate both types of services at issue
the same way. The FCC never proposed “complete deregulation” or requested public
comment on treating the two services differently, which “did not allow for informed
participation by interested parties in that portion of the rulemaking.” Citizens
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Telecomms., 901 F.3d at 1004-05. The early release of a draft of the final rule three
weeks before it was adopted was insufficient to cure the harm from inadequate notice.
Id. at 1005. In addition, even though commenters in prior submissions to the
administrative record may have already addressed “everything that needed to be said”
regarding the regulated transport services, in assessing whether the regulated entities
challenging the final rule had suffered prejudice, we explained that “the law regarding
prejudice under the APA ensures procedural integrity. Losing the opportunity to
dissuade an agency from adopting a particular rule is prejudicial.” Id. at 1006.
Citizens Telecommunications does not authorize us to presume prejudice based
on the loss of any opportunity to respond to an agency’s rulemaking process, as
Petitioners suggested at oral argument; the APA’s harmless error provision would be
rendered meaningless otherwise. But Petitioners “do not have a high burden in
demonstrating prejudice in notice-and-comment cases. In general, an utter failure to
comply with notice and comment cannot be considered harmless if there is any
uncertainty at all as to the effect of that failure.” Am. Pub. Gas Ass’n v. United States
Dep’t of Energy, 72 F.4th 1324, 1338 (D.C. Cir. 2023) (quotations and citation
omitted).
Applying these principles, we agree with Petitioners that they lost a notable
opportunity to dissuade the FTC from adopting the Rule as proposed in the NPRM.
The NPRM’s discussion of “significant alternatives,” which the Commission argues
provided Petitioners an opportunity to convince the FTC to change course, referenced
only “provisions related to consent requirements (additional consent for free trials)
and reminder requirements (narrowing the scope of product types requiring
reminders).” Negative Option Rule, 88 Fed. Reg. at 24732-33. Neither the informal
hearing nor the final regulatory analysis made up for the lack of discussion of
alternatives and Petitioners’ inability to engage with the Commission’s cost-benefit
estimates at an earlier stage of rulemaking.
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The informal hearing addressed the Rule’s annual effect on the national
economy and the Rule’s recordkeeping and disclosure costs but not the costs and
benefits of any alternatives. By the time the final regulatory analysis was issued,
Petitioners still did not have the opportunity to assess the Commission’s cost-benefit
analysis of alternatives, an element of the preliminary regulatory analysis not required
in the final analysis. See 15 U.S.C. § 57b-3(b)(1)-(2). And the Commission’s
discussion of alternatives in the final regulatory analysis was perfunctory. It briefly
mentioned two alternatives to the final Rule, either terminating the rulemaking
altogether and continuing to rely on the existing regulatory framework or limiting the
Rule’s scope to negative option plans marketed in-person or through the mail.
Negative Option Rule, 89 Fed. Reg. at 90518. While the Commission’s decision to
bypass the preliminary regulatory analysis requirement was certainly not made in bad
faith or an “outright dodge of APA procedures,” Petitioners have raised “enough
uncertainty whether [their] comments would have had some effect if they had been
considered,” especially in the context of a closely divided Commission vote that
elicited a lengthy dissenting statement. Chamber of Com. of U.S. v. SEC, 443 F.3d
890, 904 (D.C. Cir. 2006) (cleaned up).
The Fifth Circuit’s recent decision in National Automobile Dealers Ass’n v.
FTC provides additional support for Petitioners’ claim of prejudice. 127 F.4th 549
(5th Cir. 2025). There, automobile dealers associations sought review of the
Commission’s rule, Combating Auto Retail Scams Trade Regulation, targeting dealer
misrepresentations like “bait-and-switch tactics” and “hidden or junk fees.” Id. at
554. Invoking a provision of the Dodd-Frank Act that relaxes the required statutory
procedures for FTC rulemaking, the Commission promulgated the rule without first
issuing an advance notice of proposed rulemaking. The court vacated the rule,
concluding that the Commission’s rulemaking authority actually derived from
§ 18(a)(1)(B) of the FTC Act and its failure to publish an advance notice of proposed
rulemaking, required under that section, was sufficiently prejudicial. Id. at 553, 556,
560-61.
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Even though the petitioners in National Automobile Dealers “took full
advantage of every opportunity to participate” in the rulemaking process, “there [was]
reason to believe that petitioners would have used the advanced notice to participate
earlier and more extensively than they were otherwise able to.” 127 F.4th at 560.
That reasoning applies to Petitioners here as well. The opportunity to be heard earlier
on in the rulemaking process may well have impacted the Commission’s decision-
making on the scope of the final Rule and on whether alternatives, which would have
received more substantive consideration by the Commission and regulated entities,
were indeed viable. Petitioners have shown that “it is far from clear that the failure
to issue a[] [preliminary regulatory analysis] had no bearing on the procedure used
or the substance of decision reached.” Id. at 561 (quotation omitted).
Excusing the Commission’s noncompliance with § 22 could open the door to
future manipulation of the rulemaking process. Furnishing an initially unrealistically
low estimate of the economic impacts of a proposed rule would avail the Commission
of a procedural shortcut that limits the need for additional public engagement and
more substantive analysis of the potential effects of the rule on the front end. More
fundamentally, the Commission has attempted to import § 5’s general standards
prohibiting unfair or deceptive acts or practices into § 18’s more circumscribed
rulemaking process. This would allow the FTC to commence civil actions for
monetary penalties directly against regulated entities, rather than following the
administrative cease-and-desist process (with potential judicial review) laid out in
§ 5. Although this is important context for Petitioners’ arguments about the
Commission’s compliance with the specificity and prevalence requirements in § 18,
because we hold the Commission’s rulemaking process was procedurally insufficient
and Petitioners demonstrated prejudicial error, we need not address Petitioners’ other
substantive challenges to the Rule.
C. Remedy. Section 18 of the FTC Act directs that a reviewing court “shall
hold unlawful and set aside the rule” if it finds agency action to be “without
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observance of procedure required by law.” 15 U.S.C. § 57a(e)(3); 5 U.S.C.
§ 706(2)(D). “The ordinary practice is to vacate unlawful agency action.” United
Steel v. Mine Safety & Health Admin., 925 F.3d 1279, 1287 (D.C. Cir. 2019).
Nevertheless, “the decision whether to vacate depends on the seriousness of the
order’s deficiencies (and thus the extent of doubt whether the agency chose correctly)
and the disruptive consequences of an interim change that may itself be changed.”
Sugar Cane Growers Co-op. of Fla. v. Veneman, 289 F.3d 89, 98 (D.C. Cir. 2002)
(cleaned up).
While we certainly do not endorse the use of unfair and deceptive practices in
negative option marketing, the procedural deficiencies of the Commission’s
rulemaking process are fatal here. The Rule does contain a severability provision
which keeps the remaining provisions in effect if any provisions are stayed or
determined to be invalid. 16 C.F.R. § 425.9. But vacatur of the entire Rule is
appropriate in this case because of the prejudice suffered by Petitioners as a result of
the Commission’s procedural error. Given the breadth of the Rule’s coverage, the
party-specific vacatur requested by the Commission is not feasible. Accordingly, we
grant the petitions for review and vacate the Rule.
______________________________
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