The U.S. Department of Justice (DOJ), acting upon a referral by the Federal Trade Commission (FTC), filed suit against Adobe Inc. and two of its executives in the Northern District of California on June 17, 2024. Under the FTC Act, the agency must first refer complaints seeking civil penalties, as this Adobe complaint does, to the DOJ. The DOJ then decides whether to file the case on behalf of the United States or reject the referral, in which case the FTC can file the case on its own.
The heavily redacted complaint alleges that Adobe’s practices in connection with its “annual, paid monthly” (APM) subscription plan are unfair and deceptive practices that violate Section 5 of the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA), which governs the sale of products and services sold through a “negative option feature” online.
The Complaint
Adobe moved from a perpetual licensing model to a subscription-based model in 2012. Adobe offers three types of subscriptions: monthly, annual paid monthly (APM), and annual prepaid. According to the complaint, Adobe’s subscription enrollment flow drives consumers toward its lucrative APM subscription by default, without adequately disclosing material terms of the plan, including (1) the length of the subscription; (2) the existence of a substantial early termination fee; and (3) the amount of the early termination fee. The FTC alleges that Adobe hides important plan terms, such as the 50% cancellation fee if canceled in the first year, behind tooltips and hyperlinks despite knowing that many consumers never access this optional text.
The complaint further alleges that Adobe forces consumers to endure a convoluted and burdensome cancellation process designed to prevent consumers from canceling their subscriptions. For instance, per the complaint, consumers attempting to cancel their APM subscription have had their calls or chats disconnected, or they were needlessly transferred among multiple customer service representatives. It was not always clear to consumers when they had successfully canceled their subscription, but Adobe provided no refunds, or only partial refunds, to consumers who incurred additional charges after unsuccessfully attempting to cancel.
According to the three-count complaint, Adobe and its executives knowingly violated ROSCA by (1) failing to clearly and conspicuously disclose material terms of the APM subscription before obtaining the consumer’s billing information; (2) failing to obtain consumers’ express informed consent to be charged in connection with a negative option transaction; and (3) failing to provide a simple cancellation mechanism. Under ROSCA, civil penalties of up to $51,744 per violation may be awarded when the violations are committed with “actual knowledge or knowledge fairly implied.” The alleged conduct also constitutes unfair or deceptive acts or practices under Section 5(a) of the FTC Act. In addition to civil penalties, the complaint is seeking injunctive relief, civil money penalties, and consumer redress.
Notably, the FTC continues a recent trend of naming executives along with the company in high-profile cases. David Wadhwani is the president of digital media business, and the complaint alleges that he was a driver behind Adobe’s shift to a subscription-based model. Maninder Sawhney is senior vice president of digital go-to-market & sales. Although the allegations against Wadhwani and Sawhney are heavily redacted, it is clear that the FTC believes the executives supervised, participated in, and had actual knowledge of the alleged deceptive enrollment practices.
Executives may be individually liable if they participated directly in the deceptive practices, had the authority to control the deceptive practices, or had or should have had knowledge of the deceptive practices. An FTC civil investigative demand was issued to Adobe in June 2022 related to Adobe’s APM plan disclosures and cancellation mechanisms, but according to the complaint, Adobe continued to engage in the same deceptive practices.
Proposed Amendments to the Negative Option Rule Would Give FTC Additional Tools to Regulate Subscription Services
The FTC has proposed significant amendments to its Rule Concerning the Use of Prenotification Negative Option Plans, which is commonly known as the “Negative Option Rule.” The current rule applies only to prenotification negative option plans for physical goods. The proposed rule, published in the Federal Register on April 24, 2023, would be significantly more expansive, imposing new legal requirements on all media containing any type of negative option feature. Under the proposed rule, all negative option sellers would be required to clearly and conspicuously disclose all material terms of the transaction and the underlying good or service, separately obtain the consumer’s express, informed consent to a negative option feature, and provide for easy and immediate cancellation. The FTC received over 1,000 comments during the public comment period and subsequently held a hearing on January 16, 2024 about the proposed amendments. If the proposed rule is finalized, the FTC will be able to seek consumer redress, civil penalties, and other relief from violators.
Takeaways
The FTC is expected to continue to crack down on companies offering subscription services that allegedly make it difficult for consumers to understand the terms and cancel. If the proposed amendments to the Negative Option Rule are finalized as expected, businesses should expect even more aggressive enforcement by the FTC.
The FTC has signaled a few important points for businesses to keep in mind:
- Corporate executives will continue to be a target of regulatory scrutiny, especially those involved in or supervising the alleged unfair or deceptive practices.
- Companies offering subscription plans should ensure that their enrollment flow clearly discloses all material terms in places that customers will see them.
- Companies should monitor and address customer complaints and address systemic issues identified by those complaints before regulators become involved.
- Companies should ensure their cancellation process is not unnecessarily burdensome by allowing simple online cancellation and properly training customer service representatives.
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