Once upon a time, subscriptions were something customers signed up for that resulted in a magazine or newspaper arriving for a set amount of time. Today? Subscriptions have become the norm. From Netflix and Audible at home to subscriptions for Adobe and Microsoft for work, it is clear that business models have evolved.
Subscriptions can be convenient for consumers, and they are an excellent way to maximize revenue for businesses offering long-term products and services, but there are risks businesses must be aware of that relate specifically to their subscription model and the consumers impacted by it.
Auto-renewal laws are evolving too, and they can significantly impact businesses that offer auto-renewing subscriptions to their customers. Many states have expanded or are considering expanding the scope of these laws, and the Federal Trade Commission is getting involved as well in an effort to protect consumers and ensure they have all the pertinent information prior to clicking the “buy now” button.
What are Auto-Renewal Laws (ARLs)?
Simply put, ARLs are laws that govern the ways in which businesses can sell products and/or services that involve a subscription. Provisions involve the form and content of the offers and regulate the disclosures businesses have to make around things like automatic renewals, how to obtain customer consent, what kinds of reminders customers receive and how often, and how subscriptions can be canceled. Some of these laws are very specific, relating only to certain kinds of products or businesses, like your gym, while others are very broad and extend to any business offering an automatically renewing contract. The goal of all these laws is to protect the consumer from unfair and/or deceptive practices.
Existing laws vary by state, but as with all things regulatory, some are more arduous than others. Some of the states with the most far-reaching consumer protection laws for auto-renewal include California, Colorado, New York, and Hawaii. These states, and a steadily growing list of others, have built in additional protections that include extra rights for consumers like the ability to cancel a subscription mid-term, multiple cancellation options, and provisions for refunds in particular situations. For example, in Ohio, gyms offer prorated refunds to members moving more than 25 miles away from a gym location.
(For a look at which states have the strictest ARLs, go here.)
Penalties Can Be Stiff
In the best-case scenario, violation of an ARL may result in the contract being deemed void and unenforceable, but in worst-case scenarios, businesses can suffer enormous penalties for noncompliance. Attorney General (AG) enforcement actions are serious business, as M&S Partner Helen Mac Murray discussed here, and getting on the wrong side of one of these laws can result in AG action or even a class action lawsuit being brought against a business. These actions can involve millions of dollars in penalties. In some cases, noncompliance can even put a merchant’s credit card processing capabilities at risk, thanks to the additional protections credit card companies offer their customers.
What Are the Regulations for Auto-Renewal?
Generally speaking, there are six specific components that must be included in any automatically renewing contract, regardless of the state in which you operate or serve customers.
- Initial disclosures about what the offer entails: Sellers are required to present the terms of any automatic renewal offer clearly and conspicuously.
- Initial disclosures about the contract period: The contract period must be clearly presented prior to the purchase being completed.
- Obtaining consent is a key part of these contracts, and it must be “express” and “informed,” meaning consent was voluntarily given by a competent individual in writing after full details of the offer have been disclosed.
- Written acknowledgment must be given to the customer after the purchase, and it has to include the initial disclosures (listed above), the cancellation policy and specific information on how to cancel. If a free trial of any kind is part of the offer, this also includes details on how to cancel before being charged.
- Cancellation methods are required to be cost-effective, timely, and easy to use: Some ARLs specify that there must be an online cancellation method available.
- Renewal reminders vary by state, but in general, customers must receive a reminder that their subscription will renew automatically unless canceled, along with cancellation information and a way to learn more about renewal.
How Should Businesses Structure Their Auto-Renewal Offers?
Remember that ARLs protect the consumer, so keep the consumer in mind when structuring any offers that auto-renew. There are a few things you can do to stay on the right side of the ever-evolving field of ARLs:
- Get to know the ARLs in your state and any state where you do business.
- Tailor contracts to meet federal standards and individual state laws.
- Consider including disputes resolution provisions in your agreement when it’s permitted by law.
- Always keep in mind Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) concerns.
- Contracts get more complicated when you include a free trial, pricing variations or changes, and differing term lengths, so pay attention to the law carefully if using any of these.
- Consult with legal counsel to ensure your agreement falls within the scope of current ARLs.
We’re here to help. Reach out to us using our contact form if you have any questions or concerns about your automatically renewing services or products!
A Senior Attorney at M&S, Erica draws on her previous experience as in-house counsel to advise clients on federal and state consumer protection laws and defend them in litigation and government enforcement actions.