Corporate America is always looking for a way to pad the bottom line at the expense of the unsuspecting consumer, and automatic renewal provisions in service providers’ contracts is just one prime example. Over the past several years, however, as subscription-based product and service providers have bloomed in seemingly every sector, so have the popularity of these contractual provisions.
Consumers are now buying goods such as razors, clothing, and baby products, as well as subscriptions to Internet-based services such as cloud-based storage and streaming video or music, along the same lines they used to subscribe to magazines, newspapers, and CDs (remember Columbia House?). Service is perpetuated through automatic renewal. As companies thrive using this setup, more and more companies flock to the auto-renewal model..
While such subscription-based services can benefit consumers by offering time and cost savings, they can also be abused by companies, especially when these policies are not clearly disclosed or when subscriptions are difficult to cancel..
However, consumers are starting to fight back against this lack of transparency and underhanded terms, and have begun filing class action lawsuits pursuant to state and federal laws around the country..
How Do I Know if I Agreed to an Automatic Renewal Contract?
A typical automatic renewal clause may read something like this:
Each Term shall automatically renew for subsequent periods of the same length as the initial Term unless either party gives the other written notice of termination at least thirty (30) days prior to expiration of the then-current Term.
Under this clause, customers would have to notify the provider, in writing, that they did not want to renew the contract at least thirty days before the end of the current contract term. If the customer failed to provide timely written notice, the contract would automatically renew. These types of clauses may be included in various contracts, but are particularly prevalent in service, distribution, and supply contracts. Some leases also include a provision for the lease to automatically renew for another year if the tenant fails to give notice that they do not want to renew by a certain date.
Numerous States Enact Automatic Renewal Laws
To date, at least sixteen states have enacted statutes regulating automatic renewals to varying degrees: California, Connecticut, Florida, Georgia, Illinois, Louisiana, Maryland, New Hampshire, New York, North Carolina, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, and Utah. These statues vary in how strict they are applied, and whether they apply to consumer products and/or services generally, or target abuses in connection with specific goods or services. In general, each requires companies to disclose automatic renewal policies in a clear and conspicuous manner, and some of the statues even require companies to obtain customers’ permission before charging a credit card and to disclose how to cancel the subscription to avoid future recurring payments.
It should come as no surprise that consumer-friendly California (where Johnson & Weaver’s main office is located) probably has the most strict automatic renewal law on the books. California’s automatic renewal law prohibits retailers from charging consumers’ credit card, debit card, or bank account for ongoing orders without their explicit consent.
Further, California requires businesses that automatically renew customers’ orders to specifically state the automatic renewal or continuous service offer terms in a “clear and conspicuous” manner before the order is finalized, meaning that the terms of the automatic renewal must be in a larger or contrasting font or type that “clearly calls attention to the language” and that the disclosure must be made before and in immediate proximity to the signature line or online authorization button.
The California statute also requires the company to obtain “affirmative consent” before charging the customer under any renewal policy. Additionally, businesses must provide customers with a copy of their contractual terms, including information on how to cancel the subscription. The California law applies to contracts entered into by any California resident, regardless of where the company is located.
Recently, New York (where Johnson & Weaver maintains an office) introduced legislation similar to the California law, which would require customers’ express consent before charging them for a renewal. This new bill would be much stricter than New York’s current law regulating automatic renewal offers. Other states with fairly strict statutes include Georgia (Johnson & Weaver also maintains a Georgia office), Connecticut, Oregon, Illinois, and Florida.
Federal Protection for Consumers Against Automatic Renewals
In addition to being subject to state auto-renewal laws, all companies are subject to the Federal Trade Commission Act (“FTC”) which requires companies to honestly and clearly disclose their auto-renewal policies. Additionally, Congress enacted the Restore Online Shoppers’ Confidence Act (“ROSCA”) which provides the FTC and state attorneys general with an additional basis for targeting companies’ renewal policies. ROSCA generally prohibits charging online consumers for goods or services through a “negative option feature” to an agreement, meaning that a company cannot treat the customer’s silence or failure to cancel the agreement as acceptance of the offer. Stated differently, ROSCA requires companies to obtain consent from customers before signing them up for a free trial that automatically turns into a paid subscription. However, consumers need to be aware that a company may avoid this requirement, but to do so the company must clearly and conspicuously disclose the material terms of the agreement before obtaining the customer’s billing information, obtaining the customer’s express consent before making the charge, and providing a simple way to stop the recurring charges.
What Are the Penalties for Violating Automatic Renewal Laws?
The penalties for violating state automatic renewal statutes can be serious and can include restitution for the consumers’ full subscription payments as damages. Some states allow for even broader potential relief to consumers. For example, California’s automatic renewal law allows for liability under other laws, such as California’s unfair competition law, and also provides that any goods tendered to a customer pursuant to a noncompliant automatic renewal policy “shall for all purposes be deemed an unconditional gift to the consumer.” This provision may subject the offending company to a claim that it must provide restitution to the consumer for 100 percent of gross revenues received pursuant to the automatic renewal, even if the consumer actually wanted or anticipated the renewal.
What Can I Do?
If you suspect that you have been the victim of one of these improper automatic renewals, contact Johnson & Weaver for a free consultation and case evaluation. You may telephone us at 619.230.0063 or email us at contact us.