An Analysis of Post-Cancellation Payments: Legal Justification, Regulatory Evolution, and Consumer Recourse (Navigating new laws 2025)
An Analysis of Post-Cancellation Payments: Legal Justification, Regulatory Evolution, and Consumer Recourse (Navigating new laws 2025)
The Legal and Contractual Foundation of Subscription Cancellation
The question of whether a company can attempt to process a payment after a subscription has been canceled in a "timely" manner involves a complex interplay of contract law, federal and state statutes, and financial regulations. The short answer is that while a company may find a narrow contractual basis to attempt such a charge, a confluence of recent legal and banking rule changes has made this practice increasingly difficult, risky, and legally precarious. The fundamental issue often arises from a significant disparity between a consumer’s perception of "timely" and the strict, often obscure, definitions contained within a subscription agreement.
The Concept of "Timely" Cancellation in Contracts and Law
In legal and commercial contexts, the term "timely" is not a vague or subjective concept; it refers to an action that is completed within a specific, legally defined, or contractually stipulated deadline. For subscription services, this deadline is explicitly stated as the required notice period for cancellation within the company's terms and conditions or services agreement. These notice periods can vary widely, ranging from as little as three business days to as long as 30 days or more before the next scheduled billing date. A cancellation request submitted after this defined notice window, even if it feels "timely" to the consumer, may not legally obligate the company to prevent the next payment.
A critical point of confusion for many consumers is the distinction between a subscription’s billing cycle and the required cancellation date. A credit card’s closing date marks the end of its billing cycle, at which point the balance is calculated and reported to credit bureaus. The payment due date is typically set at least 21 days after the closing date. A company's attempt to charge a consumer may occur on or around the closing date, even if the consumer submitted a cancellation request shortly before it, if that request missed the specific notice window defined in the contract. From a strict contractual standpoint, the company may be legally justified in attempting to collect a payment for the upcoming subscription period because the user did not provide a "timely" notice as defined by the agreement.
However, this narrow contractual justification exists in a broader legal and ethical gray area. While a company might be technically compliant with its own terms, its practices may still be considered deceptive or unfair under consumer protection laws if the cancellation terms were not "clear and conspicuous". Many consumers expect that canceling a few days before a charge is sufficient, unaware of a hidden notice period. This disconnect between a user's reasonable expectation of "timeliness" and the complex legal language of a contract is a primary source of post-cancellation payment disputes. The FTC and various state laws have been designed to bridge this gap, mandating that businesses provide transparent disclosures and an easy-to-use cancellation process that aligns with reasonable consumer expectations. The very act of having to "try and/or run a payment" after a consumer has explicitly requested cancellation demonstrates a failure in the process that is increasingly targeted by regulators.
The Prevailing Legal Landscape (Pre-2025)
Approximately six years ago, the legal framework governing recurring subscriptions was notably less robust and more fragmented than it is today. At the federal level, the primary protections came from the Restore Online Shoppers' Confidence Act (ROSCA) and the original FTC Negative Option Rule. ROSCA, enacted in 2010, was a foundational statute that specifically targeted online subscription sales. It required clear disclosures of all material terms of a recurring charge and mandated that businesses obtain a consumer's affirmative consent before billing them. The original FTC Negative Option Rule had a more limited scope, applying only to "pre-notification plans," such as "product of the month clubs," where consumers were sent merchandise and then billed if they did not reject the delivery in a timely manner. (I wonder what a “timely manner” is considered to be in this situation…)
At the state level, the regulatory landscape was a patchwork with significant gaps. While certain states, such as California, had already enacted Automatic Renewal Laws (ARLs) with requirements for clear disclosures and consent, the laws were less prescriptive regarding cancellation mechanisms. The 2018 amendments to California's ARL were an important step, requiring online cancellation for subscriptions initially signed up online, but this was still an early development. For businesses operating nationally, the burden of compliance was often lower because most states had no specific legislation governing these practices, and the existing federal rules provided a less stringent set of requirements than modern regulations.
The Modern Legal and Regulatory Environment
The legal and regulatory environment for recurring subscriptions has undergone a rapid and profound transformation since 2019. This evolution is defined by a push for increased transparency, simplified cancellation, and heightened enforcement.
A key development was the FTC's finalization of its "Click-to-Cancel" Rule in October 2024, which would have modernized the Negative Option Rule. The rule was intended to consolidate requirements for negative option marketing across all media, requiring that cancellation be at least as simple as the sign-up process, and mandating "clear and conspicuous disclosures" and "express informed consent" before obtaining billing information. The rule would have prohibited companies from misrepresenting material facts about the subscription or requiring consumers to speak to a live representative to cancel if they signed up online. However, in a significant turn of events, the Eighth Circuit Court of Appeals vacated the rule in its entirety in July 2025. The court's decision was not a judgment on the rule's substance but a procedural ruling, concluding that the FTC failed to conduct a legally required preliminary regulatory analysis of the rule's economic impact, which the court found would exceed the $100 million threshold.
The vacatur of the federal rule does not, however, signal a return to the pre-2019 status quo. Instead, it places a greater emphasis on the increasingly comprehensive and stringent patchwork of state-level ARLs. Many states have already incorporated concepts from the now-vacated FTC rule, creating a complex and often more demanding landscape for businesses operating across state lines. For example, California's ARL was amended in 2021 to require immediate online cancellation and specific renewal reminders for long-term subscriptions. Similarly, Minnesota's updated law, effective January 2025, mandates annual renewal reminders and prohibits "save" offers during cancellation. Other states, including Utah and Idaho, have also enacted or strengthened their own laws, which may require renewal notices for specific term lengths and mandate cost-effective, timely, and easy-to-use cancellation mechanisms. This shift from a single, unified federal standard to a fragmented state-by-state approach creates a significant compliance burden for national businesses, as they must now navigate dozens of different, and sometimes contradictory, state laws rather than one overarching federal rule.
The FTC's commitment to consumer protection remains unwavering, even without a new rule, they claim. The agency continues to rely on existing authority under the FTC Act and ROSCA to bring enforcement actions against companies for deceptive practices. A recent case against LA Fitness, filed in August 2025, serves as a powerful example. The complaint alleges that the gym used "opaque and complicated methods" to make cancellation "exceedingly difficult," such as requiring in-person visits (this was my case with Planet Fitness in December 2023) or certified mail, and rebilling customers who tried to stop charges by canceling their bank or credit card. This case demonstrates that intentional obstruction of cancellation, even if not explicitly defined by a single federal law, is considered an unfair and deceptive practice that will be actively pursued by regulators.
The Evolution of ACH Payments and its Impact
The payment processing landscape, particularly for Automated Clearing House (ACH) transactions, has also evolved in parallel with consumer protection laws, introducing new technical and financial barriers to post-cancellation payments. The question of whether a company can "run" a payment after a cancellation is not just a legal matter but also a technical one governed by the Nacha Operating Rules.
ACH Payment Processing: A 2019 Perspective
In 2019, the ACH network was a widely used system for recurring payments. Nacha rules at the time required an authorization from the consumer to debit their account, which could be a signed, written document or a "similarly authenticated" method.19 If a payment attempt failed, an Originator (the company initiating the debit) could typically re-initiate the transaction if it was returned for insufficient or uncollected funds (Return Reason Codes R01 and R09) 21. While rules existed for unauthorized transactions, there was less emphasis on proactive, front-end fraud detection and account validation. The primary focus was on the authorization itself, with a less robust framework for handling disputes and unauthorized charges compared to today's standards. NACHA missed the mark with these efforts.
Key Nacha Rule Changes (2022-2026) and Their Implications
Since 2022, Nacha has implemented a series of new rules that have fundamentally altered the recurring payment landscape, introducing new obligations for businesses and enhanced protections for consumers.
WEB Debit Account Validation Rule (Effective March 2022): This rule requires businesses to implement a "commercially reasonable method" to validate a new consumer's bank account before the first debit is initiated. This can be accomplished through methods like micro-deposits or instant account verification, which confirm that the account is valid and exists. This rule is intended to make it more difficult for a company to process a charge on a fraudulent, incorrect, or closed account at the outset.
Fraud Monitoring Rules (Phased Implementation, 2026): Nacha is phasing in new rules that require all ACH participants to implement risk-based fraud monitoring procedures that cover the entire transaction lifecycle. This is a major change from a transactional view to a holistic, risk-based approach, which includes detecting payments initiated under "false pretenses" or "social engineering scams". How will this affect consumer privacy or nonessential data sharing?
New Return Codes and Revoked Authorization: The most direct and powerful change for post-cancellation payments is supposed to be the formalization of specific return codes that give consumers a clear technical path to block future charges. R07 is the return code for when a consumer has "revoked authorization with the Originator," and R10 is for when the consumer advises that the Originator is "not authorized" to debit their account. A company is explicitly forbidden by Nacha rules from re-initiating a payment that was returned with an R07 or R10 code unless a new authorization is obtained. This rule supposedly creates a significant technical and operational barrier for companies attempting to process a charge after a consumer has formally revoked their authorization with their bank.
Connecting the Dots: How Banking Law Changes Affect Payment Procedures
The most significant development is the convergence of legal and financial enforcement mechanisms. A company that fails to provide a simple, transparent cancellation method—a legal violation under many state ARLs—is far more likely to experience an influx of "unauthorized" ACH returns. These returns, particularly R07 and R10, directly impact a company’s return rate with Nacha. The consequences of a high return rate are severe: they can lead to a "high-risk" designation from payment processors, which results in increased processing fees, additional scrutiny, and, in some cases, the termination of the company’s ability to use the ACH network. This creates a powerful, self-enforcing compliance loop where legal non-compliance triggers direct and costly financial network sanctions. The company's attempt to "try and/or run a payment" post-cancellation is now not just a potential civil liability but also a direct threat to its payment processing capabilities.
Consumer Recourse and The Future Outlook
For a consumer facing a post-cancellation payment, there are well-defined and effective methods for recourse that are now more robust than they were a few years ago.
Practical Steps for Consumers
Document Everything: The first and most crucial step is to maintain a detailed record of the cancellation request, including the date, time, cancellation confirmation number, and any related correspondence or screenshots. This documentation is essential for proving that a timely cancellation was initiated.
Attempt to Resolve with the Merchant: Before escalating, a consumer should contact the company directly with proof of cancellation and request a refund. This step is often a prerequisite for a formal dispute with the financial institution.
Initiate a Chargeback or Dispute: If the merchant is uncooperative, the consumer should file a formal dispute with their credit card company or bank. For credit cards, the Fair Credit Billing Act (FCBA) limits a consumer’s liability for unauthorized charges to a maximum of $50, provided the dispute is filed within 60 days of the statement containing the charge. For ACH transactions, the new R07 and R10 return codes provide a clear and powerful mechanism for the bank to reverse the charge.
File a Formal Complaint: Consumers can, and should, report the company to the FTC at ReportFraud.ftc.gov and to their state Attorney General. While these agencies may not handle individual cases, the complaints contribute to a body of evidence used to build large-scale enforcement actions and lawsuits, such as the one against LA Fitness.
The Business Calculus: Risks and Penalties
The risks of processing post-cancellation payments have grown significantly for businesses. The costs of non-compliance extend far beyond a single refunded transaction and include:
Regulatory Fines: Companies can face severe civil penalties from the FTC, with a single violation potentially accruing a fine of $53,088.
Chargeback Costs: Unauthorized transactions are the leading cause of chargebacks. Chargebacks cost U.S. merchants over $170 billion annually and can lead to increased processing fees and account termination for businesses with high return rates.
Legal Action: Companies that engage in deceptive billing practices are highly vulnerable to class-action lawsuits, which have become a popular and expensive form of recourse for consumers.
The Future of Subscription Regulation
The legal and financial incentives for businesses to comply with consumer-friendly subscription management practices are stronger than ever. The vacatur of the FTC's "Click-to-Cancel" rule has not created a regulatory vacuum but has instead accelerated the trend of state-level laws, creating a complex, and in many ways more stringent, set of compliance requirements. The answer to the initial query is a layered one: while a company might find a technical "legal reason" in a contract to attempt a post-cancellation charge, the powerful convergence of state-level laws, a robust banking enforcement framework, and significant financial risks makes this practice increasingly untenable and ill-advised. The risk of incurring severe penalties from regulators, chargeback fees, and reputational damage has made the business calculus of intentional billing after cancellation a highly unfavorable one.