Automatic Renewal and Subscription Program Developments in the US: January 2023
Businesses seeking to maintain compliance with the patchwork of laws and regulations governing subscription and automatic renewal programs do not have an easy time of it. State legislatures across the country are frequently passing new laws and amending existing ones, courts regularly render decisions interpreting those laws, and federal agencies are increasing enforcement activity in the space. Recent months have brought a number of developments in these areas that businesses offering automatic renewal and subscription programs would do well to keep an eye on.
KEY LEGISLATIVE CHANGES
California, often seen as the state leader in automatic renewal legislation, recently amended its comprehensive regulatory regime,1 with the changes effective as of July 1, 2022. In addition to the existing requirements regarding pre-transaction disclosures, affirmative consent, and post-transaction acknowledgment, California now has obligations involving the sending of a renewal notice and the manner in which a consumer must be allowed to cancel.
Specifically, if the initial term of the subscription or automatic renewal program was a year or longer, the business must send a renewal notice to the consumer containing certain required information between 15 and 45 days before the renewal. If the program involved a free gift or trial or promotional discount that lasted more than 31 days, a notice must be sent between 3 and 21 days before the trial period ends.
As to cancellation, a consumer who signed up online not only must be permitted to cancel online (a requirement that is becoming fairly common across states and for the Federal Trade Commission (FTC) in its interpretation of the federal analogue, the Restore Online Shoppers’ Confidence Act (ROSCA)), but also must be able to do so “at will, and without engaging any further steps that obstruct or delay the consumer’s ability to terminate” the service immediately. To facilitate the cancellation, the business must offer one or both of (a) a prominently located direct link or button in the customer’s account, profile, or settings; or (b) an immediately accessible pre-written cancellation email that the consumer can send without any additional information.
Since the change in the law, there has been considerable discussion in the business community as to how to implement these requirements, particularly when a business has “step-down” options that a consumer might prefer to outright cancellation. (An example would be a fitness provider that has a less-expensive, online-only option in lieu of in-person classes that had become too difficult for a customer to attend.) The use of the terms “obstruct” and “delay” in the statute is significant in this analysis since they suggest a process that is onerous, lengthy, or otherwise difficult for the consumer, as distinguished from an additional question or two offering “step-down” options that a consumer might want to be made aware of before cancelling. These additional questions also allow the business and consumer to actually confirm the cancellation, ensuring that it was not done inadvertently (something that, in itself, would cause consumer injury). California courts have yet to opine on these issues.
On January 1, 2023, a new automatic renewal statute went into effect in Idaho.2 The law requires a business offering an automatic renewal or subscription program online to make certain disclosures at the time the consumer signs up for the program and to allow the consumer to cancel online (and in the same manner in which the consumer signed up, if not online). If the length of the automatic renewal term is 12 months or more, the business must also send a notice to the consumer containing certain required information between 30 and 60 days before the renewal.
Tennessee’s law also went into effect on January 1 of this year.3 It largely mirrors California’s original automatic renewal regime, requiring pre-transaction disclosures, affirmative consent, and post-transaction acknowledgment as well as the ability to cancel exclusively online. It does not include a notice/reminder provision or additional details as to methods of cancellation.
RECENT CALIFORNIA DECISIONS
In recent months, two California courts have issued decisions on motions to dismiss in automatic renewal cases, DeBono v. Cerebral Inc.4 and Zeller v. Optavia, LLC.5 Both cases offer potential automatic renewal litigants important factors that should be kept in mind at the pleading stage.
DeBono v. Cerebral Inc.
In DeBono, the court dismissed with leave to amend a class action complaint alleging violations of California’s consumer protection laws—the Unfair Competition Law (UCL), False Advertising Law (FAL), and the Consumer Legal Remedies Act (CLRA)—based on alleged noncompliance with California’s automatic renewal law (ARL). An ARL plaintiff in California is obligated to plead ARL violations in this manner because the ARL does not provide a private right of action.
The court pointed out numerous shortcomings in the plaintiffs’ pleading related to the ARL, including:
- A consumer “cannot simply allege an ARL violation; they must also allege that the violation injured them.” The plaintiffs pointed out various allegedly noncompliant features of the defendant’s website but failed to articulate how those features caused them harm.
- Their allegations related to cancellation being difficult were not well-pled. Two of the three named plaintiffs did not state that they had complied with the defendant’s cancellation procedures, and the third, who did follow those procedures, was able to cancel easily.
- Two of the three named plaintiffs were from outside California, and the ARL only applies to offers made to consumers in California.
Zeller v. Optavia
The Zeller opinion does not address specific compliance issues related to the ARL but instead discusses a number of procedural issues that frequently come up at the motion to dismiss stage in ARL suits: judicial notice, standing, equitable relief, applicability of the ARL, and agency.
ARL complaints typically contain references to, and sometimes screenshots of, the defendant’s website and may also attach or otherwise include copies of emails sent by the defendant business to the plaintiff. An ARL defendant will often want to provide the court with exemplar screenshots or emails of its own on a motion to dismiss, particularly if the complaint does not provide any or the screenshots are somehow inaccurate. To that end, the defendant in Zeller asked the court to take judicial notice of four exemplar emails and its website. The court denied the defendant’s request. As to the exemplar emails, the court stated that the particular emails were not referenced in the complaint and, therefore, were not “central” to the matters in the complaint, as required for judicial notice in the Ninth Circuit. And while the contents of a website may be a proper subject for judicial notice,6 the defendant in Zeller failed to point the court to the specific pages or portions of the website applicable to the claims and did not demonstrate how the complaint “necessarily relied” on those pages or portions.7
Businesses seeking to use additional materials to support a motion to dismiss an ARL complaint would therefore do well to (1) expressly point out to the court that, and how, the materials are referenced, relied on, and central to the complaint; (2) be specific about the documents and/or website elements of which they are seeking judicial notice, using screenshots if possible; and (3) authenticate the materials through a sworn declaration of an employee with knowledge.
The Zeller defendant also attacked the plaintiffs’ standing in multiple ways, none of which were ultimately persuasive to the court.
First, the defendant asserted that the plaintiffs did not have standing because they either did not receive an automatically sent shipment of goods at all, or they did not receive an automatically sent shipment that they did not want, based on the timing and details of their enrollment, shipments, and payment. The court concluded that these issues were disputed and, therefore, not a proper basis on which to grant a motion to dismiss.
Second, the defendant argued that because the plaintiffs did not enroll themselves directly in the program, but instead were enrolled by a company employee to whom they gave their payment information, they never actually viewed or used the website and, therefore, did not have standing. This argument is facially compelling—the plaintiffs did not use or see the website!—but unlike in DeBono, the court found that the plaintiffs’ particularized allegations were sufficient to confer standing: even if others enrolled them, they were nonetheless enrolled in an auto-ship program without their knowledge or consent and without the proper disclosures beforehand.
Finally, the defendant attempted to rely on Spokeo, Inc. v. Robins8 to claim that plaintiffs were merely alleging a procedural violation of the ARL and had not suffered actual harm. Again, contrary to the finding in DeBono, the court here concluded that the complaint’s statement that the plaintiffs would not have made any purchases had they been given ARL-compliant disclosures was a sufficient injury in fact for standing purposes.9
Unavailability of Equitable Remedies
The defendant did succeed in eliminating the plaintiffs’ claims that sounded in equity because the plaintiffs clearly had an adequate remedy at law. Relying on Sonner v. Premier Nutrition Corp.10 and Guzman v. Polaris Indus. Inc.,11 the court found that by seeking monetary damages under the CLRA, the plaintiffs had an adequate remedy at law and could not maintain any equitable claims, including their FAL, UCL, and unjust enrichment causes of action, and their requests for injunctive relief and equitable restitution.
Applicability of the ARL
The defendant attempted to distinguish its program from a “subscription” program intended to be covered by the ARL by explaining that its customers did not pre-pay for their shipments—instead, the customer is only charged for actual products purchased, which are then shipped at a later date. Citing the legislative intent of the ARL, however, the court disagreed, stating that there is no requirement that the program involve a pre-payment, only an “alleged arrangement in which a consumer’s credit card is charged at the end of a definite term in exchange for shipment of products.”
Zeller involved a somewhat unusual ARL circumstance, which, as stated, had so-called “coaches” taking the plaintiffs’ information and signing them up for the defendant’s program. The defendant attempted to use this fact to dismiss the plaintiffs’ claims due to a failure of agency or causation given that the plaintiffs did not see the website. The court again did not credit the defendant’s arguments, however, citing specific allegations in the first amended complaint regarding the defendant’s training of those coaches that it determined were sufficient to state a principal-agency relationship.
The Consumer Financial Protection Bureau (CFPB) recently published a new guidance document, Circular 2023-01, on “Unlawful negative option marketing practices” (the “Circular”). (The Circular was covered in detail by co-author Christopher Leach and other Mayer Brown colleagues.) While the Circular should put businesses on alert because it indicates that a second federal agency, in addition to the FTC, is stepping up its examination of automatic renewal and subscription practices, the “good news” is that its enforcement principles largely track those previously published by the FTC in its November 2021 “Enforcement Policy Statement Regarding Negative Option Marketing.” Indeed, the Circular reads as if the CFPB was attempting to fit ROSCA’s requirements into the CFPB’s more general purview of prohibiting unfair and deceptive acts and practices, even though the CFPB does not have authority to enforce ROSCA. As a result, businesses under the CFPB’s jurisdiction can take some comfort in the fact that if they are in compliance with the most comprehensive state automatic renewal laws, they will likely be in compliance with both agencies’ asserted guidelines, which focus on the common themes of (1) up-front disclosures; (2) express, informed consent; and (3) straightforward cancellation procedures.
On the cancellation point, it is worth noting that the Circular adds support to the interpretation of California’s recent amendments regarding cancellation, discussed above, that a business can permissibly query a consumer wishing to cancel before completing the cancellation. The Circular states that “[i]t is understandable that sellers will generally prefer to retain their existing customers” and does not forbid them from attempting to do so—instead, it advises only that “[sellers] must do so in a manner that complies with the [Consumer Financial Protection Act].” Further, the Circular goes on to provide examples of violative practices, all of which are quite egregious: (1) claiming cancellation can be effected immediately and with no questions asked, and then having sales representatives rebut requests to cancel so that the consumer has to request cancellation multiple times; (2) misrepresenting the costs and benefits of provided services; (3) hanging up on consumers attempting to cancel; (4) keeping cancelling consumers on hold for an unreasonably long time; (5) providing false information regarding how to cancel; and (6) giving inaccurate reasons for delays in processing cancellation requests. These actions are examples of “obstruct[ion]” and “delay” (the language from California’s amendment) and would appear to be distinct from a business briefly offering a consumer certain alternative options instead of cancellation and/or confirming the desire to cancel before finalizing the cancellation.
FTC Enforcement Action
The FTC continued its enforcement of subscription services with a complaint against an online investment advisor, Wealthpress Holdings, and two of its officers. Among other things, the FTC alleged violations of ROSCA’s requirements to disclose all material terms and obtain express informed consent prior to obtaining an automatic renewal purchaser’s billing information, because many of the defendants’ purported disclaimers that consumers might lose money or that none of the stock recommendations actually were recommendations were buried in defendants’ terms and conditions rather than clearly and conspicuously disclosed. The company agreed to settle the case for $1.2 million in restitution to consumers and a $500,000 civil penalty.
Although the FTC’s commissioners approved the matter unanimously, Republican Commissioner Christine Wilson wrote a brief concurrence explaining her vote in favor of the ROSCA count. Her analysis focused on the first ROSCA prong—requiring clear and conspicuous disclosure of “all material terms of the transaction” before obtaining billing information. Commissioner Wilson explained her view that not all material information regarding a product or service being purchased is a “material term of the transaction” (emphasis added). But she believed the facts here satisfied that element because the defendants forced consumers to agree to the terms and conditions as part of the purchase. Thus, the significant disclaimers in those terms were material terms to the transaction that should have been conspicuously disclosed. Her analysis suggests that her vote might have changed if the key disclosures had not been buried in the terms. Of course, her vote was not essential to the outcome of the matter but may signal how the FTC might act under the next Republican administration.
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The only thing constant about the world of automatic renewal and subscription law, to borrow an old adage, is change. Businesses offering automatic renewals or subscriptions—particularly those operating nationally—must always be on the lookout for new developments and regularly review their online purchase flows, telephone sales scripts, and consumer communication practices to ensure they remain in compliance.
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Michael Jaeger is a litigation counsel in Mayer Brown’s Los Angeles office and the author of Practical Law’s Practice Notes on state automatic renewal laws and a participating observer on the Uniform Law Commission’s Recurring Service Charges Drafting Committee.
Christopher Leach is a litigation partner in Mayer Brown’s Washington DC office and a former enforcement attorney with the Federal Trade Commission’s Division of Financial Practices.