ADventures in Law

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The California legislature recently renewed its efforts to regulate automatic renewal programs with <a href="https://leginfo.legislature.ca.gov/faces/billCompareClient.xhtml?bill_id=202320240AB2863&amp;showamends=false" target="_blank" rel="noreferrer noopener">proposed amendments</a> to its Automatic Renewal Law (ARL). This development does not follow any lack of attention to this area by the state – California already has one of the strictest laws governing automatic renewals in the United States.

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These proposed amendments, which if the bill becomes law could become effective as early as January 2025, impose more stringent requirements that businesses will need to adopt to remain in compliance with California’s ARL. Notably, the proposed amendments track closely with the FTC’s <a href="https://www.federalregister.gov/documents/2023/04/24/2023-07035/negative-option-rule" target="_blank" rel="noreferrer noopener">proposed changes</a> to its Negative Option Rule, which we discussed in more depth <a href="https://www.jdsupra.com/legalnews/ftc-one-ups-itself-with-one-proposed-1984444/" target="_blank" rel="noreferrer noopener">here</a>.

Most significantly,both the Negative Option Rule and the proposed amendments to the California ARL would require that businesses obtain affirmative consent to the automatic renewal provision. If either proposal becomes law as currently drafted, it would radically change how businesses are required to approach selling subscriptions, which are the most common form of automatic renewal program.

Here is a full summary of the proposed changes to the California law:

Affirmative Consent Requirements

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As noted above, this bill would significantly expand the burden on businesses to obtain a consumer’s affirmative consent to future, recurring charges, e.g., subscription renewals. Current law requires, subject to a few exceptions, that businesses disclose the automatic renewal terms and obtain the consumer’s consent to them. The consent, however, can happen at the same time that the consumer agrees to the transaction itself. As a result, many businesses disclose that the agreement will automatically renew but do not include any affirmative consent mechanism other than the button that completes the purchase. The buy flow will use language like “by clicking ‘Complete Purchase,’ you agree…” next to the automatic renewal terms, linking consent to the consumer completing the transaction. Under these proposed amendments, that will no longer be compliant with California law.

The proposed amendments would instead require that the business obtain the consumer’s “affirmative consent to the automatic renewal or continuous service separately from any other portion of the contract.”In other words, businesses could not obtain agreement to the transaction generally and the automatic renewal terms at the same time. Instead, there will need to be a button or, more likely, a checkbox specifically for the automatic renewal terms. The buy flow will provide the automatic renewal terms, and in order to complete the transaction the consumer will need to click a checkbox next to them signaling their consent. The checkbox must be connected to only the automatic renewal terms – it can’t be used to signal consent to any other provisions, such as the site terms or the privacy policy. The company will also need to retain proof of that consent for three years or for one year after the consumer cancels, whichever period is longer.

If passed, this bill would constitute a sea change in the world of subscription marketing. Any business selling subscriptions in California would need to add this checkbox or something similar to its purchase process, which effectively means any national company will have to comply. While this specific bill may not pass, there is a strong push toward this requirement. Regulators are concerned that consumers are purchasing subscriptions without understanding how they will be charged, and our expectation is that whether through California, the FTC, or another entity, sooner or later this will be a legal requirement.

Misrepresentations for an Automatically Renewing Service

The amendments would also prohibit a company from misrepresenting (expressly or by implication) “any material fact related to the transaction, including, but not limited to, the inclusion of an automatic renewal or continuous service, or any material fact related to the underlying good or service.” This change would mean companies violate this law for any false misrepresentation of their policies or services, regardless of whether the misrepresentation was related specifically to the automatic renewal provision. Previously, businesses only violated the ARL by not completing the specific steps required to automatically renew a service – under this proposed language, any misrepresentation, even if separate from renewal, would violate this law. A good example of how this would play out is demonstrated in the <a href="https://www.ftc.gov/news-events/news/press-releases/2021/06/operators-moviepass-subscription-service-agree-settle-ftc-allegations-they-limited-usage-failed" target="_blank" rel="noreferrer noopener">FTC’s 2021 settlement with MoviePass</a> in which it alleged under both the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA) that the company had failed to “disclose all material terms of the transaction” when it, among other things, failed to disclose material terms related to its movie subscription service (“one movie per day”). The “one movie per day” claim was a claim for the service and not a billing issue, which would typically be regulated as misleading advertising under the FTC Act, but the FTC still brought charges under ROSCA. Similarly, in California, misrepresentations in advertising are already in violation of the state’s general consumer protection statute, but under the proposed amendments they would also violate the ARL. This is likely less impactful a change under California law than it was for FTC enforcement. The FTC has different remedies available to it under ROSCA compared to those under the FTC Act, while California or plaintiffs’ attorneys could bring cases under California’s general consumer protection statute without those limitations. Regardless, it is another option in the regulator’s toolbox for any potentially misleading advertising claims.

The amendments would require a business to provide a consumer with a notice “before obtaining the consumer’s billing information.” While the consent provision is the most significant proposal, this language would also potentially lead to notable changes. Businesses would have to include the automatic renewal terms in their buy flow prior to collecting credit card information, which currently is often not the case. ROSCA already includes a similar provision, so arguably this is not new law, but the change would open up enforcement on this issue to California regulators and its class action bar, both of which are very active.

The bill also requires an annual reminder notice be sent for all subscriptions. Many states have notice requirements, but typically they don’t apply to all subscriptions. Only Colorado currently has a similar requirement this broadly applicable.

The definitions of “automatic renewal” and “continuous service” would be amended to include that a free subscription or purchasing agreement would be subject to the law. This differs from the current version of the bill, which only includes a paidsubscription or purchasing agreement. The definition of automatic renewal is also expanded to specifically refer to a “provision of a contract” in addition to a “plan or arrangement.”

The proposed amendments would require that if a business provides a toll-free number for cancellation, the business must answer calls promptly during normal business hours and “shall not obstruct or delay the consumer’s ability to cancel, or require the consumer to engage in additional steps to cancel the automatic renewal or continuous service immediately.” The bill defines business hours as no fewer than 12 hours between 6 a.m. and 10 p.m. Pacific Time, Monday-Friday (excluding holidays).

Additionally, the proposed amendments would require that the ability to cancel be available to the consumer “in the same medium” in which the consumer initially signed up for the automatic renewal or continuous service. California’s law already requires that consumers who sign up be able to cancel online, but this bill proposes to extend that requirement to all forms of purchase.

In what could be construed as a business-friendly change, the proposed amendments include directions for how to provide notice if a business increases the fee under an existing automatic renewal or continuous service offer. The business would be required to, at least 45 days in advance, provide a clear and conspicuous notice of the fee increase, and such notice would need to include information regarding how to cancel in a manner “that is capable of being retained by the consumer” (e.g., email). California already required notice for “material changes,” but the law does not specify how exactly to comply if increasing fees. Considering price changes are eventually of interest to almost every subscription service, it may be helpful for businesses to have these concrete steps detailing a compliant way to act in that area.

We will continue to keep a close eye on this area and update you if the bill becomes law. Keep in mind that while there is no private right of action in the ARL, plaintiffs’ attorneys frequently bring cases in this area under the state consumer protection statute, which does have an ARL. Any changes to the ARL carry regulatory and class action risk.

California Renewing Its Commitment to Its Automatic Renewal Law