California's General Assembly enacted a statute in 2009 that purports to prevent California residents from unknowingly agreeing to automatic renewals of a service. The automatic renewal statute has attracted the attention of the plaintiffs' bar and, like provisions of other consumer-friendly California statutes, appears to be tailor-made for inclusion in class action complaints. Accordingly, companies doing business in California should be aware of the existence, scope, and nuances of this statute to assess potential applicability to any products or services that may qualify as automatic renewals or continuous service offerings.

Scope of Act and Statutory Exceptions

California's automatic renewal statute became effective on December 1, 2010.(1) The statute applies to goods and services sold to consumers, which the law defines as "any individual who seeks or acquires, by purchase or lease, any goods, services, money, or credit for personal, family, or household purposes."(2) The statute further defines automatic renewal as "a plan or arrangement in which a paid subscription or purchasing agreement is automatically renewed at the end of a definite term for a subsequent term."(3) The statute then defines "continuous service" as "a plan or arrangement in which a subscription or purchasing agreement continues until the consumer cancels the service."(4, 5)

Disclosure Terms

The automatic renewal statute's first substantive provision requires any automatic renewal offer to be disclosed in a "clear and conspicuous manner."(6) The statute specifically defines "clear and conspicuous manner" as

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 will cause attention to the language.(7)

For audio disclosures, the statute defines "clear and conspicuous" as "in a volume and cadence sufficient to be readily audible and understandable."(8)

Under the statute, automatic renewal offer terms or continuous service offer terms also must be made "in visual proximity," or in the case of an audio disclosure, in "temporal proximity" to the request for consent to the offer.(9)

Affirmative Consent

The statute further requires that the company obtain "affirmative consent" from the consumer before charging a credit or debit card or the consumer's account.(10) While the statute does not define "affirmative consent," court decisions that address the evidence required to establish that a consumer agreed to the terms of the contract suggest that affirmative consent requires some showing that the consumer took action intended to convey agreement, such as clicking an "I agree" box, as opposed to merely having access to terms and not objecting.(11) Thus, the automatic renewal statute appears to require the selling company to obtain evidence that the consumer took action expressing knowledge of and agreement to the terms of the automatic renewal offering before the company can charge the consumer's credit or debit card.

Notice of Retainable Cancellation Policy

Under Section 17602(a)(3), the company must provide to the consumer an acknowledgment that includes the automatic renewal or continuous service offer terms, cancellation policy, and information regarding how to cancel.(12)The Section 17602(a)(3) acknowledgement may be provided to the consumer after completion of the initial order.(13)

Importantly, this acknowledgment must be provided "in a manner that is capable of being retained by the consumer."(14) The Section 17602(a)(3) retainable cancellation policy also must inform the consumer of the "cost-effective, timely, and easy-to-use mechanism for cancellation" that the company must establish and support under Section 17602(b).(15) The statute states that use of a toll-free telephone number, e-mail, or in some circumstances postal address would comply with this requirement, but other cancellation mechanisms also may be permitted.(16)

If the automatic renewal or continuous service offer includes a free trial, the company must disclose in the retainable cancellation policy how to cancel the trial and allow the consumer to cancel the trial before paying for the goods and services offered.(17)

Material Changes to Terms of Service

Section 17602(c) requires that the company must provide "clear and conspicuous" notice of a material change to the terms of the offer and provide information regarding how to cancel prior to implementation of the change.(18) Clear and conspicuous notice has the statutory definition provided in Section 17601.(19) Like the retainable cancellation notice of Section 17602(a)(3), notification of how to cancel in the event of material changes to the terms of service must be provided in a manner that is capable of being retained by the consumer.(20)

Enforcement Mechanisms

The statute provides that all "available civil remedies that apply to a violation of this article may be employed." By referencing available civil remedies, the statute allows plaintiffs to assert claims under Cal. Bus. & Prof. Code Section 17200. Section 17603 also states that if a business "sends any goods, wares, merchandise, or products to a consumer" under a continuous service or automatic renewal agreement but fails to comply with the substantive requirements of Section 17602, the goods are deemed to be "an unconditional gift to the consumer, who may use or dispose of the same in any manner he or she sees fit without any obligation whatsoever on the consumer's part to the business, including, but not limited to, bearing the cost of, or responsibility for, shipping any goods, wares, merchandise or products to the business." This provision appears designed to allow a plaintiff who has received goods under a continuous service agreement or automatic renewal arrangement to argue that any amounts paid for the goods should be refunded because of the deemed unconditional gift. Significantly, this provision only refers to "goods" and not to "services."

Safe Harbor For Good Faith Actions

Section 17604(b) describes a potential safe harbor defense for companies that attempt to comply with the provisions of the article "in good faith." The statute does not provide further description of this potential safe harbor, so the parameters of what actions might constitute "good faith" remain unclear. Nonetheless, the existence of a potential defense based on good faith compliance with the statute further demonstrates why companies should be aware of the statute and should implement policies to conform therewith.

Standing and Application to Non-Californians

The statute provides that "[i]t shall be unlawful for any business making an automatic renewal or continuous service offer to a consumer in this state" to take the actions enumerated in Section 17602.(21) (emphasis added). The limited case law addressing this provision establishes precedent for the position that the statute does not apply to transactions with non-California residents.(22)

California Class Action Litigation Relating to the Automatic Renewal Statute

Several features of California's automatic renewal statue make it attractive to the class action plaintiffs' bar. The statute includes provisions such as the requirement of conspicuous disclosure of terms, receipt of affirmative consent, and provision of retainable cancellation policies that companies might not regularly use or obtain if unaware of the statute's technical requirements. The statute's "unconditional gift" provision also allows a class action plaintiff to allege damages based on a theory that all revenue from the challenged offering should be disgorged to the class.

Not surprisingly, these features have led to the filing of several class action lawsuits in California. There have been at least eight class actions filed under the statue since 2011 and plaintiffs have invoked the statute against a wide range of company offerings, including software purchases, cellphone charges, streaming music services, smartphone applications and online storage services. There do not appear to be any significant judgments or settlements to date in cases in which the statute has been invoked. Nonetheless, the plaintiffs' class action bar is focused on this statute and we expect additional suits to be filed.

Conclusions

California's automatic renewal statute contains requirements that are technical, specific, and can be overlooked by unwary companies. Some of the defendants who have been named in early class action lawsuits have been able to defeat or limit claims based on the statute's language, the existence of mandatory arbitration clauses, standing requirements, and other general defenses to class certification. Nonetheless, companies that sell automatically renewing offerings in California should closely review the requirements of the statute and consider how best to comply.