Retailers that promote auto-renewal subscriptions online will have to allow online cancellation when a new California law takes effect July 1.

Jamie Rubin, partner, InfoLawGroup

Jamie Rubin, partner, InfoLawGroup

Auto-renewal subscription programs are a great way for e-commerce businesses to build a constant revenue stream. And they benefit both the company and the consumer. Companies can sell their product or service consistently over a period of time, while the customer doesn’t have to be hassled with repurchasing the product or service every month or year.

My daughter has a guinea pig, and we have set our Amazon account to send us her preferred guinea pig food each month, for which we get automatically charged the same amount each month. Little Trevor will never starve! Similarly, we subscribe to Netflix, and we pay a fee that is automatically charged to our credit card each month. Many subscription programs offer new customers the ability to try a service for free for a trial period. To take advantage of the free trial offer, customers have to provide a credit card that will be automatically charged at the end of the trial if the customer does not cancel in time.

The FTC has stepped up enforcement and updates to California’s auto-renewal law that will take effect in July will make compliance even more complex.

Subscription programs and free trial offers are not new. But executing subscription programs and free trial offers in a legally compliant manner still stymies companies large and small. Minor compliance violations can hit both a company’s bottom line and its reputation. The ease with which a customer can sign up online for a subscription program or free trial offer has attracted even more interest from regulators. Indeed, some old subscription program laws are being updated at the state level and lawsuits are being pursued.

Online dating service eHarmony, for example, was recently hit with a consumer-protection lawsuit filed by four California counties (Santa Clara, Santa Cruz, Napa and Shasta) and the city of Santa Monica over its automatic-charging practices. According to the Santa Clara County District Attorney’s Office, eHarmony “did not clearly and conspicuously explain the automatically charged subscription fee, did not provide the consumer with their dating contract, or explain their right to cancel as required by law.”

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Well-meaning companies such as eHarmony don’t intentionally mislead their customers, but the oversight still proved costly. eHarmony settled the suit for $1.28 million, plus it agreed to pay an additional $1 million in restitution to affected customers. The company will also make changes to its site and provide proper notices to its customers going forward.

While eHarmony is the most recent example, it’s certainly not alone. Meal-kit service Blue Apron, make-up subscription service Birchbox and identity theft-protection company LifeLock—to name a few—have also been hit with similar suits in recent years.

The prevalence of these suits may soon see an uptick. The Federal Trade Commission (FTC) has already stepped up enforcement actions. And updates to California’s auto-renewal law that will take effect in July will make compliance even more complex.

Companies that run subscription type programs, or are considering starting one, should be aware of the lesser known details of these laws and take precautions so they don’t end up on the wrong side of a lawsuit.

Auto-renewal disclosures 101

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Setting up a compliant auto-renewal and free trial program goes far beyond ensuring the right message is conveyed to the buyer somewhere along the purchase flow. Companies must make specific disclosures at specific points throughout the purchase, confirmation and renewal process. Companies need to present key terms in a clear and conspicuous manner, but they also need to repeat them. Generally speaking, regulators think that disclosures are easy to miss online.

For example, an organization launches a “seven-day free trial” of its service online. On the first web page the consumer sees “start my free trial,” the company should also disclose the amount the customer will have to pay once the trial is over, how often the subscription will renew thereafter, how to cancel to avoid being charged and where to find the full terms applicable to the transaction (e.g., the subscription agreement).

On the following page, on which the customer selects its subscription frequency preference (e.g., monthly or yearly), the company should disclose additional material outside of pricing. For example, if the subscription is for content, such as streaming video, the company should clearly state on which devices the subscriber is able to view the content.

There are several requirements that are specific to the checkout page. First, the company should repeat all the disclosures it stated throughout the purchase flow. But checkout can’t be the first time the consumer sees these disclosures—it must have made them previously throughout the buying process. Secondly, at checkout, there must also be an express agreement to the terms of the subscription contract, such as agreement language next to an unchecked box that the purchaser must tick to complete the purchase.

Finally, at the end of the purchase flow, the company should provide a confirmation screen with the details of the transaction and cancellation instructions and an email with the same information.

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For many companies, these details can be confusing and easily overlooked. Oftentimes, organizations assume that by simply stating a disclosure once throughout the entire purchase flow, they have fulfilled their legal obligations. And that oversight is how they may end up hearing from a regulator or a plaintiff’s attorney.

While these current requirements may seem complicated, compliance is about to get even more complex—particularly with the updates to California’s auto-renewal law (ARL).

The changing face of compliance

Gone are the days when companies could require their customers, who signed up for an auto-renewal subscription online, to make a phone call or fill out a form and send it in the mail to cancel an auto-renewal subscription. Beginning July 1, California’s ARL requires companies that offer auto-renewal subscriptions online must also allow for cancellation online.

Additionally, California and several other states require that companies offering recurring subscriptions longer than 30 days, such as an annual subscription, notify those customers 30 to 45 days in advance of the auto-renewal—reminding them that the company will be renewing the subscription. While this requirement isn’t new, oftentimes companies are unaware of it.

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There is no better time than now for companies to audit their subscription agreements and processes to ensure they are currently in compliance—and set in place measures to remain compliant after July 1. These companies should engage legal counsel who know these laws and know how to implement the required disclosures in a clear and conspicuous way—addressing both state laws and FTC requirements.

Companies need to remember: The $2.9 million eHarmony settlement was the result of four counties in one state banding together to file suit. Had it been the FTC that launched the investigation and filed the complaint, the cost to the company could have been much higher.

InfoLawGroup is a law firm that concentrates on legal issues concerning privacy, data security, traditional & emerging media, advertising & promotions, consumer protection matters, information technology, e-commerce & intellectual property.