Automatic Renewal Subscriptions: New Legal Issues in 2022

Polls show that Americans love automatic renewal subscriptions. A June 2021 poll showed that the average consumer spent $273 a month on subscriptions. While these programs offer consumers easy access to the products and services they love, regulators and legislators have long been concerned about consumer deception. Indeed, the same poll reflects that many Americans do not know how much they spend on these kinds of plans. They do not understand the frequency or amounts of billing or the methods for cancellation. 2022 ushered in a flurry of new laws regarding automatic renewal subscriptions, free trials, negative option plans.

These new laws bring new compliance reminders and headaches to brands. Automatic renewal subscriptions have always been a hot spot for regulatory investigation and lawsuits. With the proliferation of new laws, there is no doubt, then, that legal risk with these programs has risen. In addition, settlements and court awards are often in the hundreds of millions dollar. Compliance mistakes, therefore, can be costly. This article discusses the new laws for 2022 and themes for compliance.

Federal Law and Guidelines

The chief federal statute in this area is the Restore Online Shoppers Confidence Act (ROSCA). It prohibits a brand from charging a consumer’s credit card on a recurring and automatic basis without the consumer’s affirmative consent. Case law interpreting ROSCA has interpreted the statute to prohibit prechecked consent boxes and hidden disclosures. Automatic renewal subscriptions also may require compliance with the Telemarketing Sales Rule, Electronic Fund Transfer Act, and the Postal Reorganization Act. The FTC has turned to all of these statutes in different automatic renewal contexts, as well as Section 5a of the FTC Act, broadly prohibiting unfair or deceptive acts in commerce.

The FTC’s enforcement tools also include its negative option rule. This rule governs continuity programs in which consumers receive merchandise or services and receive a bill if they do not reject them in a timely manner. In 2019, the FTC sought public comment on potential improvements to the agency requirements.

Last year, the FTC identified certain “dark patterns” in b2c marketing. One such pattern concerned tricking, whether purposefully or not, consumers into enrolling in an automatic renewal subscription plan. In particular, the FTC is concerned about terms hidden behind links, difficulty of cancellation, and unannounced changes in the terms of the subscription.

In a policy statement issued in October 2021, the FTC established three major themes for regulatory compliance: 1) the terms of the program must be clear before enrollment (the policy statement provides details on how to do the disclosure); 2) marketers must obtain express informed consent before enrollment (without distracting consumers with extraneous information); 3) the program must be easy to cancel.

In 2022, the FTC is planning a review of its negative option rule. We can expect to hear more from the agency this year as automatic renewal programs of all types are clearly a priority for enforcement activity.

State Laws

On the state level, state legislatures have also been laser-focused on subscription marketing. The result has been a variety of requirements depending on the states, with new laws in recent years in California, New York, North Dakota, Vermont, and Washington, D.C. This year, so far, we have new statutes in Colorado and Delaware that took effect on January 1, 2022, and amendments to existing laws in California and Illinois.

These 2022 laws have beefed up requirements around explaining the subscription terms, providing reminder notices before the renewals, and easy cancellation options. The statutes may apply to both subscriptions and free or discounted trials.

California: This state has a significant history of enforcement through its Autorenewal Task Force. The latest amendment to California’s 2010 Automatic Renewal Law gives the Task Force one more quiver in its enforcement arsenal. The amendment takes effect on July 1, 2022. The state’s law had set a high bar for compliance, and the amendment goes one step further.

California will enhance requirements around renewal notices and cancellation options. Companies offering either automatic renewal subscriptions of more than one year or free or discounted trials of more than 31 days will have to provide detailed renewal reminders based on a schedule dictated in the amended statute. While the amendment exempts a business that entered the contract offline and has not collected or maintained identifying information about the consumer, we would be hard-pressed to find a business that falls into that category.

In addition, the California law makes it easier for consumers to exit the contracts. Brands will have to simultaneously offer a cancellation option that is immediate, proximate, prominent, and direct. Finally, brands that require account authentication to cancel their subscriptions must offer methods to authenticate and terminate at the same without account information. Brands who were previously in compliance with California’s law will now have to take a closer look at their post-enrollment communications and cancellations options.

Colorado and Delaware: These states’ new laws took effect on January 1, 2022. Colorado’s statute applies broadly to renewing subscriptions for a definite term. Delaware’s statute applies to automatic renewal subscriptions whose term exceeds a year. Similar to California’s benchmark statute, both statutes require detailed up front disclosures of the length of the automatic renewal term, any minimum purchase obligation and an easy to use mechanism for cancellation. If the subscription started online, customers must be able to cancel easily online. The statutes also contain notice provisions at the inception of the subscription and again in a timely manner before automatic renewal occurs or with material changes.

• The Colorado statute is unique in that it impacts monthly subscriptions as opposed to annual subscriptions. For monthly subscriptions, the brand must send a renewal reminder to the consumer once the monthly renewals accrue past a continuous twelve month period. The statute also requires express written consent from consumers for subscription terms exceeding one year. In addition, the statute prohibits using an online link to inform consumers about the terms of an automatic renewal contract. Such a link is only allowed if it meets certain placement and timing requirements in the purchase process. The link must also bear a clear label indicating it contains the terms of an automatic renewal contract. (These limitations on links are consistent with the Bed Bath and Beyond 2021 case out of California that asserted: “the terms themselves—not the access point to them—need to be in visual proximity to the request.”)
• Delaware’s new statute passed amidst the backdrop of its generally business friendly climate. Accordingly, the statute omits free trials (CA and CO both include free trials in their statutes). It also applies to automatic renewal contracts for the sale of merchandise, broadly defined, as opposed to good and services. This statute uniquely provides for a private right of action for consumers. At the same time, it requires that consumers give businesses the opportunity to cure deficiencies before filing suite. The statute further outlines the elements of a “good faith” defense to any lawsuit.

Illinois: The amendment to Illinois’ existing law conceptually tracks other states, such as California, New York, Vermont, Colorado and Delaware in requiring online cancellation options. It requires clear and conspicuous disclosure of the renewal terms and cancellation options in the consumer’s contract. In addition, the statute now requires notice to the consumer before the renewal charges occur, accompanied by cancellation procedures. As in the other states, the cancellation methods must be fully accessible and offered online to those who started their subscriptions online. This statute has a unique twist that is helpful to marketers. A brand may avoid liability under the statute if 1) it creates written compliance procedures and enacts them as part of its routine business; and 2) it can show failure to comply was an error that it has cured promptly with a refund.

Credit Card Requirements

The credit card companies are also trying to diminish their financial risk for chargebacks and complaints relating to automatic renewal subscriptions. Visa and Mastercard already had updated their policies for subscription merchants offering free trials and introductory programs. These policies significantly impacted negative option marketing, making it impractical for merchants. Mastercard plans to go further this year. It will have new requirements for its merchants charging consumers for all subscription charges as well as negative option programs.

The credit card’s new requirements follow the legal trends and focus intensely on disclosures and reminders. The credit card company wants detailed disclosures at the point of purchase of the price. These disclosures should indicate what will be billed and the frequency of billing. (Negative option subscriptions continue to have more detailed disclosure requirements that cannot be satisfied through a link, scroll down, or optionally expanded box.) These requirements go into effect on September 22, 2022.

The remainder of Mastercard’s requirements will go into effect earlier, on March 22, 2022. Upon enrollment, merchants will need to send the consumer confirmation of the plan’s details as well as cancellation options. Each time the merchant bills during the subscription period, it must send receipts that once again include cancellation options. Mastercard goes further than most statutes in requiring reminder notifications for negative option or recurring subscriptions that exceed six months. These reminders need to review the terms and offer a cancellation option. The merchant must also offer an easy to use cancellation method.

Takeaways:

The plaintiffs’ bar has been active in this area. While we did see in 2021 some favorable rulings for businesses out of California, those defendants’ disclosures were truly clear and conspicuous. Unfortunately, such disclosures are not the norm in this industry.

The major themes for automatic renewal subscriptions remain: clear and conspicuous disclosures, express and informed consumer consent, and easy cancellation. The new legislation and credit card requirements of 2022 raise the bar, however, on proper program implementation. With a maze of overlapping and sometimes contrasting requirements, brands need to determine the highest common denominators for compliance.

If you are a brand that uses automatic renewal subscriptions, including free trials or discounted trials, you might consider an audit of:
• the geographic scope of your offer
• a granular review of placement, size, appearance, and location of disclosures before enrollment
• how you obtain express and informed consumer consent
• how you disclose and manage simple cancellation options
• post-enrollment communications, including confirmations, billing receipts, and reminder notifications before renewal that link subscription periods
• how you disseminate material changes to the program

If you wish to understand more about the mechanics of these new statutes or to conduct an audit of your automatic renewal practices, contact us here.