Subscription-based goods and services are offered in almost every aspect of our lives, especially in the marketplace and sharing economy, where many companies operate primarily or entirely online. Companies must be aware of the often overlooked regulations that apply in the digital push toward automatic renewal of everything from the purchase of goods and services to memberships and subscriptions. This blog will deal with some common automatic renewal laws and their potential impact on your subscription-based business.
Automatic Renewal: What It Is and Why It Matters
An automatic renewal is a subscription that renews on its own, either at the end of the term of the original contract or after a certain time period. An automatic renewal may seem simple, but it's subject to a complex set of regulations - including federal laws, state laws, and credit card rules - that each company must adhere to, especially when the automatic renewal occurs online.
Currently, a Patchwork of State and Federal Laws Exist
Federal and state laws have long limited business-to-consumer companies from charging consumers for products and services based on consumer inaction (e.g. refusal of an offer, cancellation of an agreement or rejection of an offer). This type of transaction is generally referred to as "negative options" and refers to continuous service subscriptions, automatic renewals, membership clubs, free-to-paid trial offers and other conversions.
Negative option billing plans typically take one of the following three forms:
Automatic renewals: Paid subscriptions that automatically renew at the end of a predetermined period for another period, unless the consumer explicitly opts out before the renewal period.
Continuous services: Paid subscriptions that remain indefinitely in effect unless the consumer cancels the service.
Free Trials: A service or good that begins charging a fee (or increased fee) after a certain promotional period, unless the consumer cancels or rejects the service or good within a certain time frame.
In late 2021, the Federal Trade Commission (FTC) issued an Enforcement Policy Statement Regarding Negative Option Marketing. The statement describes how the FTC could enforce unfair and misleading practices related to recurring billing and subscription programs. The FTC's declaration on the heels of Notice of Penalty Offense letters on other consumer protection issues is another indicator that the FTC is looking to take a more aggressive approach to unfair or misleading practices.
The FTC also enforces the Restore Online Shoppers' Confidence Act (ROSCA) at the federal level to ensure that goods and services are provided in a legitimate manner. Due to consumer protection concerns, there are now about 20 states that regulate automatic renewals, and at least six states that have introduced legislation in 2022.
States such as California, Colorado, Delaware, and Illinois recently updated their business-to-consumer automatic renewal, or continuous subscription service, laws to require companies to provide consumers with enhanced notice, consent, reminders, and cancellation procedures. On July 1, 2022, in addition to complying with California automatic renewal law requirements, any company that offers a subscription with a term of one year or more or a free trial period of more than 31 days must provide consumers with a renewal notice prior to renewal. Several similar state automatic renewal law requirements also came into effect earlier in the year, as early as January 1, 2022.
Merchant Card Agreement Rules
In addition to federal and state requirements, businesses should also check their merchant card agreement terms for automatic renewal notice requirements. Both Mastercard and Visa, for example, have adopted rules on automatic renewals and require certain additional notifications to their customers.
Legal Consequences of Violating Automatic Renewal Laws
If you violate automatic renewal laws, you could face severe legal consequences. The type of legal consequences you face depends on the specific laws you break and the severity of those infractions. And, depending on what type of business you operate and how many people are affected by your violation, you could face a hefty fine. For example, if you violate the FTC’s proposed automatic renewal legislation (if it passes), you could be fined up to $40,000 per violation. If you violate state automatic renewal laws, you could also face legal consequences by way of class action lawsuits. Each state has its own laws governing automatic renewals, so you’ll have to check your state’s legislation to know for sure what rules you must follow.
What Best Practices can Help your Business Comply with Automatic Renewal Regulations?
To comply with current regulations, the following best practices are ways to ensure your business is protected.
Clear and Conspicuous Notice of Renewal Terms: Consumers must be clearly and conspicuously informed of the renewal terms before purchasing. The contract must clearly display the terms of the renewal in stark contrast to the surrounding text (e.g. contrasting type, font, color, etc.) and in the visual proximity to where the consumer is given the opportunity to accept the offer (e.g. above the "I accept" button). The following should be included: company contact information, whether the service automatically renews or remains in force until the consumer cancels it affirmatively, the length and other conditions of any renewal period (e.g. the amount of money charged and any changes), any minimum purchase requirements and a description of the cancellation policy.
Free-to-Pay Trials or Promotional Offer Conversions: In addition to the above requirements for "clear and conspicuous notice of terms," free-to-pay trials or conversions of promotional offers must include the amount charged after the end of the promotional period and a description of the cancellation policy. In addition, you must provide clear and conspicuous notice of changes to renewal terms and sufficient notifications prior to any charges.
Affirmative Consent: An opt-in mechanism should be provided before a consumer is charged for services, in order to obtain ‘affirmative consent.’ Consent can be obtained by checking a box, signing a document, or other affirmative opt-in near conspicuous and clear negative option disclaimers. For example, providing an opt-in box near the automatic renewal terms may be sufficient, provided it is not pre-checked, and such consent remains distinct from the consumer's consent to any other purchase terms.
Post-Sale Acknowledgement: Automatic renewal offers should include a post-sale acknowledgment that concisely describes the material terms of the offer in a way that consumers can easily remember. Consumers should receive the following: the renewal terms, the cancellation policy, and information on how to cancel, among other things.
Cancellation Options: The cancellation policy, as well as one or more methods to cancel the service, should be provided. The cancellation mechanism must be simple and consumer-friendly, with the following available: a toll-free telephone number (if it exists), an email address, and/or a postal address. If the consumer accepts the subscription offer online, the business must offer a cancellation method exclusively online. To meet most state’s requirements, the company must allow the consumer to cancel at will. It must be provided in the consumer account profile, as well as in a pre-formatted termination email to which the consumer can send an email without including any additional info.
If you offer automatic renewals, you must clearly inform your customers about the terms of the renewal and how they can cancel or revoke their consent. You must also abide by the regulations for automatic renewals in the jurisdictions where your business operates. Automatic renewal compliance requires careful examination of current procedures in your company, including email notices. If you need help with this evaluation or have any questions about these regulations, please contact us at email@example.com.