With several new state laws effective in 2022, it is becoming increasingly difficult for businesses to develop baseline compliance protocols across federal and state automatic renewal laws.
Against this backdrop, federal and state regulators continue to examine the sales practices of companies that sell products and services on an automatically renewing basis; states continue to pass new laws—and strengthen existing laws—that further embolden private plaintiffs and class action lawsuits; and the card brands have imposed increasingly strict requirements on companies offering products and services on a negative option basis.
Here we break down the compliance challenges posed by varying state laws addressing automatic renewal programs (also known as continuous service, continuity, subscription, or negative option programs), how newer card brand rules further stir the pot, and the low-hanging fruit that law enforcement agencies and private plaintiffs are going after for monetary redress and injunctive relief.
New State Laws, New Compliance Challenges
New laws in Delaware, Colorado, and Illinois became effective on January 1, 2022. These add to the burgeoning list of laws already in effect in California, Virginia, New York, Vermont, the District of Columbia, and other states that have been written specifically to address automatic renewal sales and subscription offers to consumers. As we have previously noted, the amendments to the California automatic renewal law will go into effect in July 2022. Virginia is also reviewing updates to its laws.
The core concepts underpinning the various state laws, as well as the federal Restore Online Shoppers’ Confidence Act (ROSCA), include clear and conspicuous disclosures of offer terms, affirmative consent to the offer terms, and a simple cancellation mechanism. In many states, order confirmation and notices of automatic renewal are also key requirements. A few states now impose additional consent and disclosure requirements if the subscription starts with a free trial. Where the laws start to differ, however, commands some attention to detail:
- The amended California law will tighten requirements surrounding free trial and promotional periods and annual programs, and will require businesses to honor cancellation requests immediately, “without engaging in any further steps that obstruct or delay the consumer’s ability to terminate the automatic renewal or continuous service immediately.” California, like other states, requires that consumers who enroll online be required to cancel online.
- Delaware’s law regulates negative option programs with an initial term of twelve months or longer with a renewal period of at least one month. Like other states, Delaware requires clear and conspicuous disclosure of automatic renewal terms; renewal reminders; and a cost-effective, timely, and easy-to-use cancellation mechanism. Interestingly, Delaware’s law requires a consumer to give a seller notice and the opportunity to cure any violations before filing suit.
- Colorado recently implemented a law requiring terms that are presented clearly and conspicuously before a contract is executed; a written acknowledgment containing the offer terms, cancellation policy, and information about how to cancel; and a simple, cost-effective, timely, easy-to-use, and readily accessible mechanism for cancellation of the contract or trial period. Businesses selling to Colorado consumers must present an online link that directs consumers to detailed information about the automatic renewal offer.
- Colorado, Delaware, and California laws now impose renewal reminders for autorenewal programs with an initial term of one year or more. Vermont law requires that subscriptions with an initial term of one year or more include disclosures that are in boldface type. Vermont also has a requirement interpreted by some plaintiffs’ attorneys as requiring a second opt-in specific to the subscription terms.
- California also has new notice requirements for reminding consumers who accept a free trial lasting more than 31 days that their trial will continue into a paid subscription unless the consumer cancels, with notice to be provided at least 3 days before and at most 23 days before the expiration of the trial period.
- The District of Columbia requires that sellers that offer a free trial of one month or more obtain the consumer’s affirmative consent to continue with the paid subscription, before charging the consumer.
- Illinois recently expanded its existing law to apply to all automatic renewal programs—not simply annual programs. The law imposes notice, cancellation, and consent requirements similar to those in other states.
In short, the list of state law variations is growing and making it more difficult to apply a universal compliance standard, especially with respect to renewal notices and other nuanced requirements. These compliance challenges may be compounded by issues encountered in determining where a consumer resides, for purposes of state law compliance.
Courts across the country, including in California and New York, continue to evaluate consumer claims under state autorenewal laws. For example, multiple cases in California have recently analyzed the sufficiency of pre-enrollment disclosures and post-order confirmations, and whether a cancellation mechanism is sufficiently simple to allow consumers to terminate their enrollment.
Card Brand Rules
As we have previously written, MasterCard announced new rules that will go into effect this year. The rules will require more robust disclosures, including prominent disclosures related to any trial periods. Immediately following enrollment, merchants will need to send a confirmation of the consumer’s enrollment by email or any other electronic method.
This confirmation must include the terms of the subscription (including the terms of a trial, if applicable) and clear instructions on how the consumer can cancel the subscription. In addition, the business must provide an electronic receipt after each recurring charge. Merchants offering negative option programs of six months or longer must send additional renewal reminders. Finally, merchants must provide an online or electronic cancellation mechanism.
Federal Trade Commission (FTC) Developments
In recent months, the FTC has issued new guidance on negative option programs and released an enforcement statement regarding negative option marketing. The policy reflects the FTC’s aggressive stance on ROSCA’s requirements, and its position that many companies use “dark patterns” to deceive consumers into enrolling in subscriptions. The FTC continues to be active in enforcing ROSCA, especially since its authority to pursue companies alleged to have engaged in unfair or deceptive practices has been curtailed at least temporarily by the Supreme Court in its decision in AMG Capital v. FTC.
To learn more about the new requirements and other updates affecting negative option programs, join Ellen Berge and Shahin Rothermel for a webinar discussing these topics on February 23. Click here to register.