Dozens of lawsuits have been filed in the last several years attacking retailers’ subscription or automatic renewal programs for failing to comply with state and federal disclosure, consent, and acknowledgement requirements. Recently, there have been several notable developments—including changes to the strictest auto-renewal law in the country, and million-dollar settlements in both private and government actions.

California Adds New Restrictions to Its Already-Stringent Law

Although almost half of the states in the country have laws restricting automatic renewal programs, California’s Automatic Renewal Law (ARL) (California Business and Professions Code Section 17600, et seq.) is the Plaintiff’s bar’s clear favorite.

The ARL requires retailers to: (a) clearly and conspicuously disclose; (b) receive the customer’s “affirmative consent to the agreement” to; and (c) send an acknowledgement setting forth, following terms:

  • That the subscription or purchasing agreement will continue until the consumer cancels;
  • The description of the cancellation policy that applies to the offer;
  • The amount the customer will be charged, how often the customer will be charged, and whether and when that amount will change; and
  • The length of the automatic renewal term or that the service is continuous, unless the length of the term is chosen by the consumer.

Based on new amendments to the ARL that take effect on July 1, 2018, retailers who allow consumers to sign up for a program online must also provide consumers with a means to cancel their enrollment online. This means that vendors will not be able to require customers who sign up online to cancel via phone or mail.

The updated California law also imposes new requirements on retailers who provide automatic renewal offers that include a free trial or gift, or short-term promotional or discounted prices. Under the new requirements, the initial offer should clearly and conspicuously state when and how consumers can cancel before being charged the normal price, and how much they will be charged after the promotional rate expires. Additionally, the retailer should obtain consent before charging a consumer for an automatic renewal or continuous service that is made at a promotional or discounted price for a limited period of time. Notably, these amendments are much less restrictive than the original version of the bill, which required express consumer authorization for the auto-renewal separate from the consumer agreement for the free gift or trial, in addition to notice of the auto-renewal or pricing change three days before the new billing takes place.

The statute explains that a clear and conspicuous disclosure should be made in larger or otherwise contrasting type, in a manner that clearly calls attention to the language, and in visual proximity to the request for consent to the offer. However, the affirmative consent and acknowledgement requirements are far from clear. For example, does a retailer satisfy the disclosure requirements if it describes a program as a “3-month subscription?” Does the act of paying for that “3-month subscription” constitute consent to being charged for each of the three months? Similarly, how soon does the “acknowledgement” email need to be sent? Would notice of an upcoming order constitute adequate acknowledgement?

Unfortunately, the courts have not had much opportunity to answer these questions, as the vast majority of these cases settle soon after filing and not many others have matriculated through the system enough to generate caselaw. Some of these settlements have not been cheap: In 2014, for example, both Sirius XM Radio and Angie’s List settled auto-renewal cases for several million dollars.

Potential Defenses

Thus far, several retailers have been successful in extracting themselves from these claims at the pleadings stage. Several potential defenses are available to defendants:

  • No private right of action: Numerous courts have found that the ARL does not create an independent, private right of action, based on the finding that neither the statute nor its legislative history indicates any legislative intent to create such a right.1
  • Contractual provisions: Arbitration clauses, limitations of liability, choice of law and other contractual provisions can limit a company’s exposure to liability.
  • Lack of injury: Plaintiffs suing under California’s Unfair Competition Law must show that they lost money or property as a result of the defendant’s conduct. Similarly, the Supreme Court held in Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1542 (2016) that Article III standing requires plaintiffs to have suffered “concrete” injury. Where a plaintiff understood at the time of purchase that she was enrolling in an automatic renewal program, she arguably lacks standing, regardless of whether the defendant complied with the statute’s formal notice and disclosure requirements.
  • Out-of-state plaintiffs: ARL claims brought by out-of-state plaintiffs have repeatedly been dismissed for lack of statutory standing, given that the plain language of the ARL states that the statute is limited to California consumers. See Cal. Bus. & Prof. Code 17602(a) (it “shall be unlawful for any business making an automatic renewal or continuous service offer to a consumer in this state” to engage in certain conduct.”) (emphasis added).2
  • Misinterpretation of the “gift” provision: The ARL’s, “gift” provision—which provides that “In any case in which a business sends any goods, wares, merchandise, or products to a consumer, under a continuous service agreement or automatic renewal of a purchase, without first obtaining the consumer's affirmative consent as described in Section 17602, the goods, wares, merchandise, or products shall for all purposes be deemed an unconditional gift to the consumer”— only applies where the plaintiff bought tangible goods. “In other words, a consumer could keep a good or product that is sent in violation of the Automatic Renewal Law, but there is nothing to keep when it is only a service that is provided.”3
  • Safe harbor: Finally, retailers regularly argue that they are protected by the ARL’s safe-harbor provision, which provides: “If a business complies with the provisions of this article in good faith, it shall not be subject to civil remedies.” Bus. & Prof. Code § 17604(b).

State Enforcement

A recent action was brought against dating website eHarmony by the district attorneys for Santa Clara, Santa Cruz, Napa, and Shasta Counties, in addition to the Santa Monica city attorney, alleging that the website violated the ARL. The prosecutors alleged that eHarmony “did not clearly and conspicuously explain the automatically charged subscription fee, did not provide the consumer with their dating contract, or explain their right to cancel as required by law.”

Under a consent judgment filed on January 8, 2018, eHarmony agreed to pay $2.28 million to settle a consumer-protection lawsuit filed over its automatic-charging practices. The settlement consisted of $1.28 million in penalties and $1 million in restitution to class members ($30 per customer). eHarmony also agreed to change its sales practices, including to clearly disclose its renewal terms, to allow users to cancel their subscriptions easily, and to send a summary of key terms after customers enroll.

The first state action in this area came in August 2017, when Santa Monica settled a similar auto-renewal case with weight loss and supplement company Beachbody for $3.6 million. Under that settlement, Beachbody agreed to change its practices, including requiring customers to check a box to show consent to auto-renewal terms. According to the city attorney, that settlement provided a model for the eHarmony settlement.

Federal Enforcement In addition to being subject to state auto-renewal laws, all businesses are subject to the Federal Trade Commission Act, 15 U.S.C. Section 41, et seq., which requires businesses to honestly and clearly disclose their auto-renewal policies. Congress’ enactment of the Restore Online Shoppers’ Confidence Act provides the FTC and state attorneys general with an additional basis for targeting companies’ renewal policies. ROSCA generally prohibits charging online consumers for goods or services through a “negative option feature” to an agreement, whereby the customer’s silence or failure to cancel the agreement is treated as acceptance of the offer. In other words, ROSCA requires companies to obtain consent from customers before signing them up for a free trial that automatically turns into a paid subscription. A seller may only avoid this requirement by clearly and conspicuously disclosing the material terms of the agreement before obtaining the customer’s billing information, obtaining the customer’s express consent before making the charge, and providing a simple way to stop the recurring charges. Even though ROSCA took effect in 2011, the FTC did not bring its first action under the law until October 2014. Since then, the FTC has brought several actions against retailers offering subscription services.

Online lingerie retailer AdoreMe recently agreed to pay $1.38 million to settle FTC charges that the company violated the FTC Act and ROSCA by failing to clearly communicate the terms of its VIP program. Under the program, customers are automatically charged $39.95 for store credit if they fail to buy an item or “skip” within a five-day window each month. The complaint alleges that although consumers were told that they could use this credit at any time, they would forfeit the credit if they ever cancelled their membership.

Additionally, the FTC claimed that the company violated ROSCA’s requirement that there be a simple method of cancellation.

Under the stipulated judgment, filed on November 30, 2017, AdoreMe agreed to pay the FTC nearly $1.38 million, less any amount already transferred to eligible customers for forfeited store credits. The agreement also prohibits the company from making misrepresentations regarding the use of store credit or the terms of any negative option program. The court specifically ordered AdoreMe to make the cancellation process easier by allowing customers who enrolled online to cancel online, and allowing customers who enrolled over the phone to cancel by phone.

Conclusion

In light of increased scrutiny from the California state legislature, local and federal governments, and the plaintiffs’ bar, retailers offering subscriptions and other auto-renewal programs should closely review their advertisements, sign-up procedures, and confirmation materials to make sure that they are protected—particularly in light of new amendments to the applicable statute.