California’s Auto Renewal Law: Read it and Weep

The holiday season conjures pictures of families gathered around the tree; of happy children tearing the wrapping off their overpriced presents while their parents desperately try to stay awake because it’s five in the morning and they spent half the night wrapping the damn things.

Although it isn’t wrapped, the State of California has given class action attorneys the best gift they can hope for this Christmas: California’s Auto-Renewal Law, which has given rise to a torrent of new lawsuits targeting businesses that offer subscription-based goods or services to California consumers.

The statute applies to any virtually any arrangement in which a paid subscription or purchase is automatically renewed until the consumer cancels.  It is not limited to online subscriptions, but also recurring billing arrangements obtained via paper and over the phone.

A successful recurring billing program (which we’ll call a subscription for the purposes of this article) is a seller’s holy grail, and most of them will do anything to protect that revenue stream.  Hopefully, this article will help your company navigate the requirements of this

The Basics

The main purpose of the statute is to require businesses to disclose their subscription terms in a clear and conspicuous manner (including cancellation information), and to obtain affirmative consent before charging consumers debit or credit cards on a recurring basis.

How to Comply

The following terms must be clearly and conspicuously disclosed in close proximity to the point of acceptance (i.e., the a submit button in an online form, or right before asking a consumer to agree to the transaction over the phone):

1. That the subscription will continue until the consumer cancels;

2.  A description of the cancellation policy;

3.  The amount of the recurring charges;

4.  The length of the automatic renewal term or that the service is continuous until cancelled; and

5.  The minimum purchase obligation, if any.

The business must also provide the consumer with an acknowledgement capable of being retained that contains the following:

  •  The subscription offer terms;
  • The cancellation policy; and
  • A cost-effective, timely, and easy-to-use mechanism for cancellation (e.g., toll free phone number, email address) and instructions on how to cancel.

The Meaning of Clear and Conspicuous

The statute also provides details required what constitutes clear and conspicuous written disclosures. Specifically, written disclosures must be “in a manner that clearly calls attention to the language” as follows:

  • 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.

In the case of an audio disclosure, clear and conspicuous means “in a volume and cadence sufficient to be readily audible and understandable.”

Affirmative Consent

The statute requires business to obtain affirmative consent before charging consumers debit or credit cards on a recurring basis.  Although the statute does not define what constitutes affirmative consent, requiring a consumer to take a specific action (check a box or say “I agree” over the phone) should be sufficient.

Free Trials and Material Changes 

If the subscription offer includes a free trial, the business must disclose how to cancel before a consumer is charged.

If the seller introduces a material change to the subscription program after acceptance, it must provide the consumer with clear and conspicuous notice of the material change, and provide information regarding how to cancel in a manner that is capable of being retained by the consumer.

Remedies

Although enacted for the benefit of consumers, the Auto-Renewal Law’s available remedies represent a virtual handout to class action attorneys.  The statute provides that all civil remedies that apply to a violation of the statute are available, and (to add insult to injury), the statute states that anything sold without the requisite disclosures will be considered an unconditional gift to the consumer.

In other words, consumers may be entitled to refunds (including shipping and handling costs) without having to return their purchases! 

Defenses:

  • Good Faith Exception: The statute expressly provides that a business will not be subject to civil remedies if it “complies with the provisions of this article in good faith.”  Naturally, “good faith” in the context of the statute isn’t defined, so this will be a matter for the courts to decide.
  • Mandatory Arbitration Provisions and Class Action Waivers: Enforceable mandatory arbitration provisions with class action waivers (such as in in Terms of Conditions or Terms of Use policies) may provide an effective strategy to attempt to minimize exposure to class claims brought under the Auto-Renewal Law.
  • Exempt Companies. The statute identifies a limited set of businesses exempt from its requirements: (1) businesses with authorization issued by the California Public Utilities Commission (“CPUC”), (2) businesses regulated by the CPUC, Federal Communications Commission, or Federal Energy Regulatory Commission, (3) entities regulated by the Dept. of Insurance, (4) certain alarm company operators, (5) banks, bank holding companies, credit union, and other financial institutions licensed under state or federal law, (6) service contractor sellers and service contract administrators regulated by the Bureau of Electronic and Appliance Repair.
  • California Residents:  At two least federal district courts have dismissed cases brought under this California statute by residents of other states,  and have expressly held that the statute limits recovery to only California citizens.

The bottom line is simple: sellers that utilize auto-renewal services for sales of goods or services in California need to carefully review their pre and post transaction disclosures to ensure compliance with the intricate requirements of California’s auto-renewal law.

 

Seth Heyman
Seth D. Heyman is a California attorney with extensive experience in advertising and marketing law, corporate law, contracts, governmental regulations, international business, and Internet law. He has counseled numerous successful companies, both public and private, and was responsible for regulatory compliance, contract management, corporate governance, and HR best practices for multiple organizations in many diverse industries, including marketing, telecommunications, energy, and technology development. He offers insight and guidance on federal and state direct mail, TV, radio, telemarketing, and Internet marketing laws, as well as online promotions, Internet privacy, data protection regulations, and similar matters.