Automatic Renewal Laws ("ARLs")
Years ago, and for decades, the subscription model of doing business was entirely utilized by the print paper industry. In the last decade, subscription-based transactions have elevated in popularity as a favorable model of offering products and services to consumers. From digital to physical products and services, every industry has the capability to utilize this method of providing and charging for services. Subscribers spend millions every year on per month and annual subscriptions that automatically renew at the end of the term for a following term, providing businesses with a steady and more predictable stream of revenue.
As more businesses adopted the subscription models, consumer protection advocates began warning of “dark patterns.” Dark patterns refer to a user interface that is designed to trick consumers into signing up for a subscription and prevent subscribers from canceling their subscriptions. Several states legislators introduced and enacted legislation and substantial regulations, commonly referred to as Automatic Renewal Laws (“ARLs”), intended to protect subscribers from dark patterns and other unfair or deceptive practices. Some states have ARLs that affect only certain industries: New Hampshire and Pennsylvania ARL law only apply to health club contracts, and New Mexico’s law is only applicable to service contracts. However, several states including New York, California, and Delaware, have ARLs that apply more broadly to any contract where a purchasing agreement is automatically renewed at the end of a term.
Most states with automatic renewal laws have borrowed from each other, giving some uniformity to the state regulations. Most states require clear and conspicuous disclosure of the subscription and termination terms, notice to be given within a certain period of time dependent on the length of the subscription, affirmative consent of the consumer, and easy to use cancellation methods.
However, some states have some distinct requirements only applicable to that state.
California, for example, leads the country in having some of the strictest laws relating to automatic renewals. California requires the ability for consumers to terminate their subscription at will, at any moment, without interference that would delay or deter a consumer from being able to cancel the subscription. Additionally, California specifically requires a business to either (1) provide a prominent link or button that would cancel the subscription, accessible within the settings or user account page, or (2) provide a formatted and pre-written email that a consumer can copy, paste, and email to the business without any other action to effectively cancel their subscription. While these regulations may be unique to California, there is certainly the possibility that other states may adopt California’s laws.
In addition to state legislation, the federal government has been cracking down on deceptive practices. The US Federal Trade Commission (FTC) won a $10 million settlement against ABCmouse, a learning app that allegedly refused to accept cancellation requests made through a phone call, email or a form on its website, and a $62 million settlement against Noom, a weight loss app that allegedly inhibited consumers from being able to get out of the program once a consumer signed up. The FTC gets its enforcement power for automatic renewals through the Telemarketing Sales Rule, Section 5 of the FTC Act, and the Restore Online Shoppers’ Confidence Act (ROSCA). Under ROSCA in particular, businesses must provide “simple mechanisms for a consumer to stop recurring charges from being placed on the consumer’s credit card, debit card, bank account, or other financial accounts.”
Automatic Renewal Laws are not exclusive to the United States. Outside of the US, the EU has also developed regulations around automatic subscription renewals. Germany, in particular, has some of the strictest laws in the EU. Germany enacted its Fair Consumer Contracts Act (FCCA) as of October 2021. Germany requires businesses to have a cancellation button that grants termination of the subscription. The button must be clearly labeled and lead consumers to a confirmation page that details the terms of the termination. Consumers who choose to terminate must be provided with confirmation of the termination including notice of the time the termination will take effect. Additionally, as of March 2022, businesses cannot automatically extend a binding annual subscription after the first two years of a subscription. Instead, the automatic subscription is made for an indefinite period of time, with the consumer being able to cancel the subscription at will.
As legislation continues to develop and be updated, businesses with subscription models must be aware of the developments in this area before non-compliance costs them a pretty penny.
General best practices to be compliant in most states with automatic renewal laws include, but are not limited to:
Obtain Affirmative Consent to Terms Affirmative consent is the voluntary agreement to participate in the subscription. Consent must be expressly given by consumers informed and aware of what they are signing up for after the details of the offer have been disclosed clearly and conspicuously. Affirmative consent is critical not only for the consumer, but to protect the business if the consumer has buyer's remorse or makes false claims about being unaware of the subscription. Clearly and Conspicuous Disclose Terms Businesses must clearly and conspicuously disclose the terms of the subscription, including contact information, notice that the subscription will renew automatically, the amount that will be charged, cancellation policy and information on how to cancel. Clearly and conspicuously means that the required disclosure is difficult to miss (e.g., using different typeface, color, bold, italics, or font size) and easily understandable by ordinary consumers. Of-Kind Cancellation One or more methods by which a consumer can cancel is required. If a consumer subscribes online, there must be a method by which the subscriber can cancel online. If a notice is sent electronically, a link that directs the consumer to cancel or another reasonably accessible electronic method for cancellation must be provided. Online cancellations should take no more than three clicks from the settings or user account page. Timely Notice Businesses must be aware of the notice requirements of every subscription term they offer, i.e., weekly, monthly, or annual subscriptions. This is because many states have different requirements based on the length of the term of the subscription. Unburdensome Cancellation Businesses should refrain from using tactics that are intended to stall or stop the consumer from cancelation. Many states have a good faith exception, which would allow businesses to use good faith efforts to comply with the law as a valid defense. Using tactics that may confuse the consumer or require substantial time and effort to complete the cancellation may likely result in the inability to use this defense. Additionally, these tactics may be seen as dark patterns, which are discouraged by regulation. Good Faith Effort Most ARLs allow for the dismissal of a lawsuit if the business can prove it made a good faith effort to comply with the state regulations. This means a business can avoid heavy penalties for non-compliance if they can show that there was a proper effort to be compliant. One of the best ways to show good faith is to acquire legal counsel to re-examine business practices around automatically renewing subscriptions and follow their legal advice.