Auto-Renewal Update

By Kirk Soderquist, James Snell, and Elizabeth Mendoza

No longer reserved for newspapers and magazines, subscription services are now offered by businesses for everything from meditation apps to beauty products to gourmet meals. But before inviting consumers to start a free trial, subscription-based companies should review recent updates to California's Automatic Renewal Law (ARL)(see Cal. Bus. & Prof. Code §§ 17600, et seq.). Changes to this key statute will take effect July 1, 2018, and they broaden its scope to include disclosure rules for temporary discounts and free trials.

Given lawmakers' recent attention to the topic, counsel for any subscription-based businesses should revisit automatic renewal compliance in early 2018.

CALIFORNIA AUTO-RENEWAL BASICS

The ARL claims to ensure that consumers understand any recurring commitment they make. Automatic renewal terms must be presented to potential buyers in a "clear and conspicuous manner." Businesses can satisfy this requirement by featuring key terms in larger, contrasting, or set off text.If the offer begins with a free trial, the price and rules upon conclusion of the trial period likewise must be presented clearly and conspicuously. In addition, the company must provide advance, clear and conspicuous notice of any material change and offer consumers a chance to opt out before the change takes effect.

The ARL mandates that companies obtain affirmative consent before charging consumers' credit cards. Businesses must convey the automatic renewal terms and costs in close proximity to the space reserved for consumer agreement. For online offers, businesses should make the terms visible next to the language seeking consumer consent.

Over the phone, businesses should disclose the automatic renewal terms directly before asking the customer to consent to the terms.

Subscription-based businesses must explain to consumers how to cancel subscriptions and must summarize service terms in a confirmation email or letter following an order. Consumers also must have the opportunity to opt out of any free trial before the paying period kicks in.

Updates to the ARL clarify that consumers who accept automatically renewing offers online must be permitted to cancel them online. Such cancellation could occur through an account portal or via a preformatted cancellation email provided by the business. For automatically renewing agreements accepted over the phone or in-person, the company must offer a straightforward method to cancel, which may include a toll-free phone number, postal address, or email address consumers can use to end their subscriptions. See Cal. Bus. & Prof. Code § 17602 (b) and (c).

Lessons from Recent Litigation

Failure to comply with the ARL can be costly. Some companies have settled class actions for tens of millions of dollars. See, e.g., Williamson v. Mcafee, Inc., 2016 WL 4524307, at *6 (N.D. Cal.) (approving the motion to settle at $11.50 per class member, where the class size is between 7.53 and 8.85 million members).

Certain contractual provisions, such as choice of law, limitation of liability, and use of arbitration clauses, may also help limit companies' exposure to ARL claims. Further, the ARL provision covering unconditional gifts may limit some claims as it does not permit complete restitution for all money paid under a subscription and may not apply to intangible services, such as app or website subscriptions. Cal. Bus. & Prof. Code § 17603; Johnson v. Pluralsight, LLC, 236 F. Supp. 3d 1176, 1183 (E.D. Cal. 2017).

If litigation does arise, businesses may consider several defenses. The ARL provides that companies acting in good faith will "not be subject to civil remedies." Cal. Bus. & Prof. Code § 17604. In addition, only California consumers may rely on the ARL and, for claims brought under the state's Unfair Competition Law (Cal. Bus. & Prof. Code § 17200), plaintiffs must demonstrate monetary or property loss.

Given the significance of California's economy and population, its ARL receives considerable attention. But subscription-based companies and their counsel should also track automatic renewal rules across the roughly twenty other jurisdictions that impose them. Investing in strong compliance can help subscription-based companies offer free trials without costly consequences.

Kirk Soderquist is a Seattle-based partner, James Snell is a Palo Alto-based partner, and Elizabeth Mendoza is a Seattle-based associate at Perkins Coie. They represent clients on a wide range of complex commercial litigation and matters encompassing technology transactions, data privacy and security, and intellectual property.