Almost anything can be ordered online and accessed immediately or delivered to your doorstep. Having an item shipped monthly, without the hassle of going online and pulling out one’s credit card over and over, is an even better idea. The automatic subscription renewal business model offers customers a convenient and easy way to shop and promotes brand loyalty.
However, amid increasing consumer litigation targeting companies that have adopted the automatic renewal model, companies do well to carefully vet their subscription renewal policies. At least 22 states, including California, have enacted an automatic-renewal law (ARL). Since late 2013, two Southern California plaintiffs’ lawyers have systematically targeted a slew of technology and other companies with subscription-based services under a 2010 California statute (Cal. Bus. & Prof. Code § 17600 et seq.) that prohibits automatic renewal charges without affirmative consent. The suits seek restitution for unauthorized charges, some as low as $1.99 per customer. Plaintiffs’ lawyers claim that under the ARL, retailers must provide restitution to the consumer for 100% of gross revenues received pursuant to the automatic renewal, even if the consumer actually wanted or anticipated the renewal. Though most cases are still in early stages or have been driven into arbitration, this new brand of litigation could become more than a nuisance if it succeeds on a class-wide basis.
‘Automatic renewal’ class actions
The first ARL class action in California was filed in November 2013 against Spotify. The plaintiff had agreed to be bound by Spotify’s terms and conditions of use, however, which contained an arbitration provision and class-action waiver requiring her to arbitrate her claims against the company on an individual basis. The action was dismissed in July 2014 after the court granted Spotify’s motion to compel arbitration. Spotify was followed by class actions filed against Dropbox in February 2014 and Hulu in March 2014. Dropbox was dismissed pursuant to stipulation in June 2014, and a motion to compel arbitration in Hulu disposed with that case as well.
In 2015, more than a dozen “auto-renewal” class actions were filed in California against technology and Web-based companies. LifeLock, for example, reached a settlement agreement with plaintiffs, which was approved in July 2015. And already in 2016, several additional online merchants are facing class-action complaints. In each case, plaintiffs seek to certify classes of California consumers who purchased goods or services as part of an automatic renewal plan or continuous service offer and assert claims under the ARL, as well as other California consumer protection statutes, including the Unfair Competition Law (Bus. & Prof. Code §§ 17200, et seq.) and Consumer Legal Remedies Act (California Civil Code §§ 1750, et seq.), and seek recovery of damages and restitution, injunctive relief, attorneys’ fees and costs.
Protecting your business
The ARL requires that companies disclose the automatic renewal terms and obtain express consent from a customer before charging a customer's credit card, debit card or bank account on an ongoing basis. There are several proactive measures a business can take to minimize exposure.
- Disclosure. Terms and conditions should address the statute’s requirements and be disclosed in a manner that is “clear and conspicuous” to the consumer.
- Easy cancellation. Providing a toll-free telephone number, email address, postal address (in those cases where consumers are directly billed) or another cost-effective and easy-to-use mechanism to cancel the program is a good practice.
- Acknowledgment. An acknowledgment that includes the program’s terms, cancellation policy and information on how to cancel after a consumer signs up for the service and/or makes a recurring purchase will also help avoid uncertainty. If an acknowledgment was not sent out prior to completion of the consumer’s initial order, send it out today.
- Arbitration. If the terms and conditions governing the automatic renewal program do not include an arbitration provision with a class-action waiver, consider adding one, immediately.
Companies that use subscription or auto-renew payment mechanisms do well to review their practices to ensure that they are in compliance. California is a highly litigious state with an active plaintiff’s bar. To help ensure compliance, consulting counsel with expertise in this area is prudent.
Joshua Briones, Crystal Lopez and Lauren Miller of law firm Blank Rome focus on bet-the-company class actions and have participated in the defense of dozens of class actions in state and federal courts across the U.S., involving all stages of the litigation and appellate processes.