Purpose of Automatic Renewal Statutes
Automatic renewal laws are pieces of consumer protection legislation that exist across all 50 states. Automatic renewals are generally defined as the automatic renewal of a subscription, product, or service unless the consumer opts-out prior to the end of the subscription period. The prevalence of monthly subscription services has drastically increased over the past decade and along with it, the potential for companies to engage in unfair billing practices . These automatic renewal laws attempt to combat these potentially unjust practices and produce more reliable transparency regarding renewal practices by providing consumers with opt-out methods and clear and conspicuous notice regarding a renewal.
But the automatic renewal laws vary from state to state and not all states offer protection for consumers using digital platforms. Understanding how automatic renewal laws work, and where and what protections exist is vital for any company that operates a subscription service or relies upon recurring billings.
Common Elements to Automatic Renewal Statutes
Across the country, most automatic renewal statutes include common features such as requirements for either email or mail notification of a renewal as well as an express cancellation right. Some states also require a simple way to opt-out of the renewal, such as by fax or email. The scope of the cancelled contract terms is also generally limited to only the renewal terms of future services. For example, customers can cancel prepaid insurance service and receive a pro rata refund of amounts paid for the period in which services have not been provided.
While these features are consistent across many state laws, other key features are less consistent. For example, some laws have no notification requirement, while others require notification upon the initial contract or at least 30 days prior to annual renewal. Moreover, laws vary in terms of what types of services or goods are included and which are exempt. For example, because many maintainers provide continuous services, some laws exempt maintenance contracts even while including renewal provisions. In addition, such services may fall under the repair and service exemption in states that make an exemption for those types of services.
State-Specific Variations
As noted above, automatic renewal laws vary from state to state, and sometimes in some surprising ways. Below is a list of states with significant automatic renewal laws.
California: Starting July 1, 2018, all businesses that sell goods or services through a subscription must provide a "clear and conspicuous" notice of cancellation terms to all California consumers prior to charging them. Written notice of the date any free gift delivery will come to an end must also be provided to the customer. In addition, California’s law requires that the automatic renewal clause must be in bold, capital lettering, and if the term of the automatic renewal is longer than one year, the consumer must be provided a new written notice at least 30 days in advance of renewal, which includes information about how the consumer can cancel his or her subscription. The law also imposes a $5,000 penalty for "intentional violations," defined as including such things as failure to pay penalties, ignoring an email, automated phone call or written request from the Attorney General of California to respond to a complaint regarding a violation.
Massachusetts: Massachusetts law does not allow automatic renewals at all "for newspapers, books, magazines, or periodicals." Subscription renewals are limited to one year for ‘oral subscriptions’ (subscriptions renewed over the phone.) If a business fails to notify the customer in writing within five days of oral renewal, the next renewal will be for a period of 90 days rather than one year. "Failing to send a written notice of renewal period to the consumer is a deceptive act under the law."
Montana: Businesses that enter into automatic renewal contracts with consumers must notify the consumer of the renewal period by mail each year. Failing to provide notice will allow the consumer to cancel the contract without charge until the business complies with the law.
Nebraska: Businesses with automatic renewal contracts with consumers must send the consumer an annual mailing reminding the consumer of the renewal and the price of the renewal.
South Carolina: Businesses are prohibited from automatically renewing consumer contracts exceeding $100 unless, at least 10 days before activation of the renewal, the business provides the customer with a "clear and conspicuous notice." This notice must contain "the duration of the renewal term, the amount to be charged, the manner of payment, and the date the renewal term will begin." A special form must be used if the contract is with a person over age 60.
North Carolina: Businesses must give consumer notice of any renewal of a service for ‘continuous service’ providing that after a consumer has authorized payment for a ‘trial period’ of a service, there is a price increase, the payment will begin, the service will become permanent, or there will be ‘recurring payments,’ whether the consumer will be billed before the payment appears on a bank statement, and acknowledgment of the consumer’s right to cancel.
The list of significant automatic renewal laws is still a work in progress, but other states with relevant laws include:
Oregon Arizona Tennessee Nevada New York
Common Business Pitfalls of Compliance
Due to the extensive nature of these laws, properly implementing an automatic renewal program is challenging to say the least. First, there are many different terms used to describe this type of program, thus requiring a business to understand and alter the language of a program as necessary depending on which states it operates in. Then there is the issue of the filings required, from contracts that incorporate specific language to annual reports that must be filed so the databases of various states list the company as operating in the state. Substantive compliance is also facially required when automatic renewals are offered, meaning that businesses must actually meet the requirements as well, and not just "paper" compliance with the laws themselves. For example, one state requires that the transaction screens allow for easy cancelation options, the shipment of each installment be accompanied by cancelation instructions, and the use of specific signed and returned forms after each installment. It would therefore be erroneous to not have all of these features and still implement a screen click-to-accept to the proposed terms. And finally, there are penalties and lawsuits that can arise as a result of violating these laws. From civil actions to criminal actions, from attorney fees to bad press, even a small violation can become a big problem.
Common Issues Dealing with Consumers
Automatic renewal laws primarily exist to protect consumers. Many automatic renewal laws have a specific provision describing the legislature’s intent in enacting the law. These provisions typically state that the legislature found consumers were confused by the terms of automatic renewal offers and that they did not realize they had been automatically renewed. Such provisions further state that consumers received little to no notices alerting them to an upcoming renewal and to the renewal of the amount of the renewal .
Consumer rights under automatic renewal laws vary between the states, but generally consumers have the right to receive disclosures regarding the automatic renewal, opt-out of the renewal, and to receive a confirmation of the renewal and information sufficient to cancel. Consumers may obtain relief when services are wrongfully withheld from them or improperly charged against them without proper notice of the renewal.
Recent and Anticipated Developments
Though most of the action in the area of automatic renewal laws has taken place on the state level, in July 2015, the Federal Trade Commission ("FTC") announced the publication of new guidelines on online subscriptions and other automatic renewals and negative options. These guidelines are designed to provide guidance to business about how to avoid making misrepresentations about such renewals, as well as guidance from the FTC staff to the industry about best practices for complying with the law. Among other things, the guidance on negative option marketing, also available in Spanish, provides that marketers should not send offers for products or services through the internet unless consumers are clearly and conspicuously informed before being charged, and that they should be given an easy way to cancel the recurring deliveries.
Although there is no general federal law governing negative or automatic renewals, the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., and its regulations promulgated under the authority of the FTC, including Regulation Z, § 226.17(f)(1) require creditors to give meaningful disclosure of the automatic right of the consumer to rescind before becoming obligated under an open-end credit plan and to include in the initial disclosure statements a statement that the first payment may be greater than subsequent payments under an open-end credit plan.
However, there appears to be a lessening enforcement focus by the federal government towards automatic renewal laws. While the Governor’s Office of Consumer Protection of Georgia, the District of Columbia, the State of Florida, the State of Washington, the State of Maine, and the State of Pennsylvania have taken action since 2005 against companies and individuals for making unfair and misleading statements or omissions related to negative option marketing and automatic renewals, the last notable federal case appears to be in 2011.
Regardless of federal activity, however, we anticipate continued enforcement actions by the states, as well as new state legislation regulating automatic renewals. For example, a new law in California went into effect on July 1, 2018 expanding the obligations of businesses to disclose automatic renewal provisions in commercial contracts. Specifically, AB 2071 prohibits businesses in California from charging a consumer if a contract allows for automatic renewal of the contract for a delayed period of time, unless the business provides notice to the consumer by mail at least 15 days before the following occurs: (1) the billing for the renewal begins; (2) the renewal automatically adds additional products or services and bills the customer and (3) a further commitment or obligation would begin.
We expect the trend of states passing legislation governing automatic renewals to continue. The District of Columbia has also introduced legislation targeting businesses that charge cancellation or opt-out fees and further restricting where businesses may instruct consumers to send opt-out notifications.
Attorney’s Conclusion
Given the substantial impact of automatic renewal laws on both businesses and consumers, it is incumbent upon all parties to ensure that they are up to date as to the current states of the law. Even in those jurisdictions that currently do not have any specific automatic renewal laws, it is still important for businesses to note that some states, such as Massachusetts, carry a general prohibition on misleading and deceptive advertising which could be invoked against an automatic renewal plan .
While this blog post has highlighted the most significant trends in the automatic renewal and continuous service space, it does not intend to serve as a complete summary of all of the requirements. This brief treatment is intended to raise awareness and to encourage all stakeholders in this space to continue to monitor developments in this space.