California consumers are suing subscription-based companies within and outside the state, in accordance with California’s auto-renewal law (Cal. Bus. & Prof. Code § 17600 et seq.), for the auto-renewal of subscriptions they did not expressly approve, reports Lexology. Lexology says the glut of putative class action cases are due to a lack of sufficient analysis and interpretation of the law since it was enacted in 2010.
The law applies to any arrangement where a purchasing agreement or paid subscription is automatically renewed until a consumer cancels the arrangement, whether agreed upon online, in writing or by phone. To prevent lawsuits, subscription companies are required to disclose their subscription terms, including cancellation details, clearly and conspicuously*. Consumers must be expressly asked to approve the auto-renewal before they are charged on a recurring basis.
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So far, Lexology says numerous subscription-based companies have been hit with lawsuits including Hulu, Spotify, Dropbox, BirchBox, Tinder and others.
Lexology offers the following guidance to help subscription companies avoid conflicts, claims and litigation:
Terms should be disclosed clearly and conspicuously* before the subscription or purchasing agreement is fulfilled. The terms should be available visually or temporally in close proximity to the offer’s request for consent. Those terms must state:
- That the subscription or purchasing agreement will continue until the consumer cancels the agreement
- The cancellation policy in full detail
- The recurring charges that are charged to the consumer’s credit card, debit card or payment account with a third party as part of the auto-renewal arrangement, and if the amount could change, what that amount will be, if known
- The length of the automatic renewal term or that service is continuing, unless the consumer has selected the term
- The minimum purchase obligation, if any
Businesses must provide consumers with an acknowledgment, which can be provided after the initial order is complete, that can be retained by the consumer and that includes:
- The automatic renewal of continuous service offer terms
- The cancellation policy
- A cost-effective, timely, and easy-to-use mechanism for cancellation, like a toll free number or email address, and information about how to cancel
[*Clear and conspicuous means in larger type than the surrounding text, or in contrasting type, font or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks]
For subscriptions and memberships that include a free trial, the auto-renewal offer must tell consumers how to cancel the agreement before they are charged. If there is a material change to the auto-renewal or continuous service, the business must provide the subscribers with a clear and conspicuous notice* (see above) of the material change and explain how to cancel the service in a manner that can be retained by the consumer.
For companies who have not followed the auto-renewal law, legal remedies available to the plaintiff include all civil remedies that apply to a violation of the statute. Also, goods and products sold without the required disclosures are considered unconditional gifts and do not have to be returned, and consumers may be eligible for refunds, including shipping and handling. These remedies could be particularly costly for companies who have millions of subscribers in California.
There are, however, defensive strategies available to subscriptions, outlined by Lexology here.
We’ve always been big proponents of stating terms clearly and transparently as industry best practices, but the situation in California highlights that we must go beyond promoting these as industry ideals. It is not only the right thing to do to be open and transparent, but we are financially liable if we don’t provide clear documentation and get express approval from subscribers before completing an agreement. These are hard – but important – lessons to learn.