May 16, 2014

Don't Let the Golden Goose Lay Rotten Eggs: Rules for Automatically-Renewing Subscriptions in California

Seller Beware: Consumer Protection Insights for Industry

Many retailers of goods, content, and services offer subscriptions that renew automatically without any additional action by their customers. This business model often is convenient for consumers and lucrative for businesses. However, recently-filed class actions against Spotify USA, Dropbox, and Hulu serve as a reminder to comply with California law or risk having those subscriptions deemed "gifts," requiring refunds or imposing other penalties.

The complaints in each of the Spotify, Dropbox, and Hulu cases allege that the retailers offered California consumers automatically-renewing subscriptions without complying with a relatively recent California law governing automatic renewal of subscriptions. Automatically-renewing subscriptions offered in violation of this law could be deemed "unconditional gifts" exposing the retailer to refund claims and other remedies under California Unfair Practices Act. The outcomes of the pending lawsuits are uncertain, and Spotify recently succeeded in compelling the claims to arbitration under its terms of use (a topic on which we may comment in a future post). But retailers should be aware that non-compliance with California's automatic-renewal law could result in significant exposure, and the law appears to be attracting the interest of the plaintiffs' bar.

California's automatic-renewal law has several specific disclosure and cancellation requirements, obligating most businesses offering automatically-renewing or continuous subscriptions to:

  • Present the following subscription terms in a clear and conspicuous manner, before the subscription agreement is fulfilled:
    • That the subscription will continue until the consumer cancels.
    • A description of the cancellation policy that applies to the offer.
    • The recurring charges that will be charged as part of the automatic renewal plan, that the amount of those charges may change (if that is the case), and (if known) the amount to which the charge will change.
    • The length of the automatic renewal term (or a statement that the subscription is continuous), unless the length of the term is chosen by the consumer.
    • The minimum purchase obligation (if any).
  • Obtain the consumer's affirmative consent to the subscription terms before charging the consumer's credit card, debit card, or other payment account (such as PayPal).
  • Provide an acknowledgement that the consumer can retain (such as an email) including the subscription terms, the cancellation policy, and information regarding how to cancel.
  • Provide a cost-effective, timely, and easy-to-use mechanism for cancellation (such as a toll-free phone number or an email address), described in the acknowledgement to the consumer.
  • For free trials, allow the consumer to cancel before payment, and provide cancellation instructions in the acknowledgement to the consumer .
  • Provide the consumer with a clear and conspicuous notice of any material changes to the subscription terms, and provide cancellation instructions with the notice.

Retailers offering automatically-renewing subscriptions to California consumers would do well to audit their current practices, and ensure that they are in line with California's requirements, in addition to those of any other applicable state or federal law.

© Arnold & Porter Kaye Scholer LLP 2014 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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