Automatic renewal contracts have become ubiquitous in our everyday lives; however, few give thought to the laws and regulations governing them. Whereas the federal government has regulations governing automatic renewal contracts[1], most states, similarly, have laws governing automatic renewal contracts, or automatic renewal laws (“ARL”). Perhaps unsurprisingly, in 2009 California enacted one of the strictest ARLs intended to end the practice of charging consumer credit cards without a customers’ explicit consent for ongoing shipments of product or deliveries of a service.[2]
What is an Automatic Renewal under the Under California’s Automatic Renewal Law?
An “automatic renewal” is defined as “a plan or arrangement in which a paid subscription or purchasing agreement is automatically renewed at the end of a definite term for a subsequent term.”[3] Similarly, a “continuous service” is defined as “a plan or arrangement in which a subscription or purchasing agreement continues until the consumer cancels the service.”[4] While these definitions may appear to be esoteric, we encounter a number of automatic renewals or continuous services in our everyday lives – everything from meal kit boxes such as HelloFresh and Blue Apron, to monthly subscription boxes like Birchbox or LootCrate, to digital subscription services like Netflix, Hulu, Apple Music, or Spotify.
What Does California’s Automatic Renewal Law Require?
If a business wants to offer an automatically renewing contract it must:
- Clearly and conspicuously disclose, before a contract is fulfilled, the “automatic renewal offer terms” or “continuous service offer terms” of the contract;
- Obtain the “affirmative consent” of a costumer to the “automatic renewal offer terms” or “continuous service offer terms”;
- Disclose any cancellation policies; and
- Provide notice of any “material changes” to the terms of the “automatic renewal offer terms” or “continuous service offer terms”[5]
What Terms Must Be Disclosed Under California’s Automatic Renewal Law?
The California automatic renewal law requires that “automatic renewal offer terms” and “continuous service offer terms” be disclosed in a clear and conspicuous manner before the contract is made or fulfilled and must include:
- That the subscription or purchasing agreement will continue until the consumer cancels;
- A description of the cancellation policy that applies to the offer;
- That reoccurring charges that will be charged to the consumer’s credit or debit card or payment account with a third party as part of the automatic renewal plan or arrangement and the among of the charge;
- The length of the automatic renewal term; and
- The minimum purchase obligation[6]
In 2018, the California ARL was amended to include that if the offer included a free gift or free trial than it must clearly and conspicuously notice the customer of the price that they will be charged and when the free trial expires.
What Happens If My Business Does Not Comply with California’s Automatic Renewal Law?
The California ARL does not provide for a private right of action, meaning a California resident cannot directly sue a business for violating the automatic renewal law. The law simply provides that “all available civil remedies that apply to a violation of [the California ARL] may be employed.”[7]
That is not to say that the California ARL is without teeth. To be sure, an organization known as the California Auto Renewal Task Force (CART), made up of District Attorneys from a variety of Californian counties, has filed numerous actions against businesses for allegedly violating the ARL. An action brought by CART recently settled with the business agreeing to pay $400,000 in penalties and an additional $150,000 in restitution for violating California ARL by failing to get the customers’ affirmative consent as outlined above.[8]
Are There Any Other Concerns If My Business Engages in Automatic Renewal Contracts?
In addition to California, the federal government may impose regulatory requirements regarding automatic renewal contracts of which your businesses should be aware. Under Restore Online Shoppers’ Confidence Act (ROSCA), the Federal Trade Commission is tasked with investigating businesses who fail to:
- Clearly and conspicuously disclose material terms of contract such as whether it is reoccurring;
- Obtain the consumer’s express and informed consent before making a charge; and
- Provide a simple mechanism to stop reoccurring charges.[9]
A recent case involving a California based company, Age of Learning, Inc. d/b/a ABCmouse, resulted in a $10,000,000 settlement after FTC alleged that ABCmouse failed to provide a sufficiently simple mechanism to stop the reoccurring charges for educational content.[10]
As transparency remains a cornerstone of compliance initiatives, whether under California’s ARL or ROSCA, it is critical for businesses to have great foundation for their business before scaling to avoid potential settlements or fines. Our experienced litigation and compliance attorneys at Octillo can help your business navigate the complexities of drafting appropriate notices, or handling litigation resulting from California’s or any other states’ ARL.
*Attorney Advertising: Prior results do not guarantee a similar outcome.
[1] See e.g. Section 5 of the FTC Act, 15 U.S.C. § 45(a) (regulating unfair or deceptive practices); Restore Online Shopper’s Confidence Act (ROSCA), 15 U.S.C. § 8403 et seq (prohibiting charging customers unless there has been clear disclosure of, and express consent to, the material terms).
[2] Cal Bus & Prof Code § 17600 et seq.
[3] Cal Bus & Prof Code § 17601(a).
[4] Cal Bus & Prof Code § 17601(e).
[5] Cal Bus & Prof Code § 17602.
[6] Cal Bus & Prof Code § 17601(b)(1-5).
[7] Mayron v. Google LLC, 54 Cal. App. 5th 566, 570 (2020); Cal Bus & Prof Code § 17604(a)
[8] DA Announces Consumer Protection Settlement In Auto-Renewal Case (Mar. 7, 2021 at 5:48pm), https://patch.com/california/santacruz/da-announces-consumer-protection-settlement-auto-renewal-case
[9] 15 U.S.C. §§ 8401-8405 et seq.
[10] See FTC, 10 million ABCmouse settlement: Avoiding auto-renewal traps (Sep. 2, 2020 at 12:10pm), https://www.ftc.gov/news-events/blogs/business-blog/2020/09/10-million-abcmouse-settlement-avoiding-auto-renewal-traps
