The monthly subscription model possesses clear and unmistakable benefits for online product and service providers. However, despite their simplicity and lower prices, such plans are also risky. As a result, automatic renewal plans must be designed to comply with applicable federal and state consumer protection laws in order to avoid claims from consumers that they unknowingly agreed to continuing payment obligation terms.
At the federal level, the Restore Online Shoppers’ Confidence Act (“ROSCA”) regulates online transactions with negative options features such as trial offers, automatic subscription renewals and continuity plans. ROSCA requires online merchants to clearly and conspicuously disclose all material terms prior to the consumer entering any billing information or completing an order. ROSCA also requires online merchants to obtain express informed consent prior to charging the consumer, and to provide a simple mechanism for the consumer to cancel recurring charges. ROSCA is enforced by the FTC and state Attorneys General.
A number of states have also enacted laws regulating automatic renewal provisions in contracts without affirmative consent from the subscribed party. Particularly noteworthy is California’s automatic renewal law (Cal. Bus. & Prof. Code § 17600 et seq.).
California’s automatic renewal law (the “Statute”) provides for a private right of action and is more onerous than ROSCA and other state laws. The Statute applies to most individual consumer contracts that include an automatic renewal feature and for which the consumer authorizes a recurring automatic charge to the consumer’s credit card or bank account for the purchase of services, memberships, subscriptions or other products.
The Statute applies to contracts entered into by any California resident, regardless of where the company is located. Penalties for violating the ALR can be severe as the Statute provides that aggrieved consumers may retain whatever “goods, wares, merchandise or products” they received without having first provided affirmative consent, at no cost and as “unconditional gifts.”
Plaintiffs’ attorneys routinely argue that aggrieved consumers are entitled to restitution for all renewal revenues collected from California consumers. Plaintiffs also typically include alternative unfair or fraudulent business practices claims, which expose defendants to additional liability.
In short, the Statute proscribes:
- Prior to charging the consumer, failing to clearly, conspicuously and prominently (in close proximity to the request for consent) disclose that the subscription agreement will automatically and continuously renew, and that payments of a certain amount will be charged to the consumer, until it is cancelled;
- Initiating charges prior to obtaining express, informed and affirmative consent to the relevant automatic renewal provisions;
- Prior to finalizing the transaction, failing to clearly and conspicuously disclose how to cancel the subscription and avoid further recurring charges;
- Failing to provide a written acknowledgment in a retainable form that contains the offer terms (including the automatic renewal terms), the cancellation policy and information on how to cancel (for offers that involve a free trial, providers must also allow the consumer to cancel before any payment obligation is incurred and explain how to do so in the written acknowledgement);
- Failing to provide a toll-free telephone number, email address or other cost-effective, timely, easy-to-use mechanism for cancellation; and
- Failing to provide clear and conspicuous notice if there is a material change to the terms of the automatic renewal offer, and information about how to cancel prior to implementation of the change, in a manner that is capable of being retained by the consumer.
Under California’s law, “clearly and conspicuously” means in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks, in a manner that clearly calls attention to the language.
Note that the Statute applies to individual consumer contracts, not B2B contracts. Section 17601(d) of the statute provides that consumer means “any individual who seeks or acquires, by purchase or lease, any goods, services, money, or credit for personal, family, or household purposes.”
Given the potential for wide-ranging damages relating to improperly structured automatic renewal offerings, consumer-based class actions are rapidly proliferating. So is related regulatory scrutiny. Online subscription-based product and service providers doing business in California are well- advised to take preventative measures now by consulting with an FTC Defense Attorney that has expertise in this area.
The Statute also contains a potential safe harbor defense for those that implement reasonable efforts to comply in good faith. As a result, awareness of and compliance with the law is critical in order to preserve a reasonable argument that technical violations should be excused.
The language and format of your consumer-facing websites, subscription plans, automatic renewal terms, cancellation rights, disclosures and website agreements must be consumer-friendly and fully-compliant.
This article should be of interest to any online subscription-based product or service provider. Contact the author if you are interested in discussing the design and implementation of preventative compliance controls, or if you are being threatened with civil litigation or a regulatory investigation.
Richard B. Newman is a leading Internet Law Attorney at Hinch Newman LLP focusing on advertising and digital media matters. His practice includes conducting legal compliance reviews of advertising campaigns, representing clients in investigations and enforcement actions brought by the Federal Trade Commission and state Attorneys General, commercial litigation, advising clients on promotional marketing programs, and negotiating and drafting legal agreements.
Information conveyed in this article is provided for informational purposes only and does not constitute, nor should it be relied upon, as legal advice. This article does not, nor is it intended to, cover all state automatic renewal statutes or applicable payment-specific laws and regulations. No person should act or rely on any information in this article without seeking the advice of an attorney.
