In the past several years, subscription-based product and service providers have emerged in almost every sector. People are buying baby supplies, razors, groceries and cloud space by using a model once reserved for magazines. For a monthly fee, startups also offer services such as transportation, personal assistance, and dress rentals — as companies continue to thrive using the monthly subscription model, more startups continue to launch.
Although subscription-based services can benefit consumers by offering simplicity and lower prices, legal issues emerge when customers claim that they did not knowingly agree to continue paying for future products or services. In the past several months, these customers have filed several class action lawsuits against retailers of all kinds, pursuant to both state and federal laws.
Automatic Renewal Laws
To date, at least 16 states have enacted statutes regulating automatic renewals to varying degrees. While these statutes vary in strictness, they generally require companies to disclose automatic renewal policies in a clear and conspicuous manner. Additionally, some statutes require companies to obtain customers’ affirmative consent before charging a credit card, and to disclose how to cancel the subscription and avoid future recurring payments.
Not surprisingly, California’s Automatic Renewal Law (ARL), California Business and Professions Code § 17600, et seq., is perhaps the strictest state statute. The ARL prohibits retailers from charging consumers’ credit card, debit card or bank account for ongoing orders without their explicit consent. Under the law, businesses who automatically renew customers’ orders must state the automatic renewal or continuous service offer terms in a “clear and conspicuous” manner before the order is finalized; this means that the terms must be in a larger or contrasting 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. Before charging a customer, a company must obtain her “affirmative consent” to the renewal policy. Additionally, businesses must provide customers with a copy of their terms, including information on how to cancel the subscription. The law applies to contracts entered into by any California resident, regardless of where the company is located. After the ARL took effect in December 2010, at least 11 class action lawsuits targeting companies’ automatic renewal practices have been filed, several of which have already been voluntarily dismissed
In January 2015, New York introduced legislation similar to the California law (NY Senate Bill 40), 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 Connecticut, Oregon, Illinois, Georgia, and Florida.
Renewed Interest in Auto-Renew Actions
This is not the first time that retailers have been sued pursuant to the ARL or other auto-renew laws. In 2013, a series of class action lawsuits targeted the automatic renewal policies of popular music and video streaming companies. The plaintiffs in each of these cases claimed that the company failed to clearly and conspicuously disclose that they would charge the customer a recurring payment, either after an initial payment or after a free trial expired. Almost all of these suits were brought in California and reached confidential settlements soon after they were filed.
A second wave of these suits began this past December 2014, weeks after Sirius XM agreed to a $3.8 million settlement in a case brought by 45 states and the District of Columbia. Since then, actions have been filed against SeaWorld, Birchbox (subscription beauty service), LifeLock (identity theft protection provider), AAA (roadside assistance provider), Blizzard Entertainment (producers of the online role-playing game World of Warcraft), Tinder (dating app), and Blue Apron (food delivery app). This list of companies is markedly different from those in the first wave: In addition to expanding outside the music and video streaming context, the Plaintiffs’ bar has shown its willingness to bring actions against startups like Birchbox and Tinder. As more companies adopt subscription-based business models, it is almost certain that these actions will continue to arise.
In the first Tinder lawsuit, filed in late April 2015 in the Central District of California, the plaintiff alleges that when the dating app transitioned from being a free service to charging a monthly fee, it failed to clearly and conspicuously disclose that its subscription would automatically renew each month. This action was voluntarily dismissed on July 21, 2015. In late May 2015, two additional cases were filed against Tinder in San Luis Obispo County and Los Angeles County Superior Courts.
In early March 2015, two cases were filed in the Southern District of California against startup Birchbox, which delivers beauty products each month to its subscriber customers. The two cases were consolidated on April 30, 2015 and the plaintiff filed an amended complaint for the consolidated action on May 14, 2015. Both plaintiffs purchased subscriptions from the startup (one of their original complaints explains that the service appeared in the plaintiff’s shopping cart as “Women’s Rebillable Monthly Subscription”). Despite the seemingly transparent name of the subscription, however, plaintiffs claim that Birchbox violated the ARL and California’s Unfair Competition Law by failing to clearly and conspicuously disclose or obtain customers’ consent to the service’s automatic renewal and continuous service terms. In their amended complaint, the plaintiffs claim that the terms should have been “in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks,” and included during the check-out process (instead, they were included in the website’s “Terms and Conditions” section). The parties are scheduled to attend mediation on September 16, 2015, and the case is stayed pending that mediation until October 1, 2015.
The most recent of these suits was filed in June 2015 against Blue Apron, and was removed on July 21, 2015. Similar to the Tinder and Birchbox cases, the complaint alleges that the cooking ingredient delivery app violated the ARL by failing to prevent its automatic renewal terms in a clear and conspicuous manner, charging consumers for continuous service, without their consent, and failing to provide information on how to cancel the subscription.
In March 2015, the Middle District of Florida refused to dismiss the case brought against SeaWorld, which claims that SeaWorld breached its payment plan contract by automatically renewing and charging customers for annual passes to its parks for the upcoming year without their consent and before the current 12-month period ends. The parties attended mediation on May 11, 2015, but were unable to reach an agreement. In late June 2015, the court set the jury trial for March 2017.
The cases against AAA, Lifelock, and Blizzard have each already been voluntarily dismissed.
In addition to being subject to state auto-renewal laws, all companies are subject to the Federal Trade Commission Act, 15 U.S.C. § 41, et seq., which requires stores to honestly and clearly disclose their auto-renewal policies.
Since 2011, the FTC has filed suits in Nevada, Maryland, and Washington against companies for unfair or deceptive business practices related to their automatic renewal policies. The most recent suit was brought against DIRECTV in March 2015 in the Northern District of California. One claim in the FTC’s action is that the company violates the FTC Act by automatically charging customers for premium channels after their free trial for those channels expires. On April 2, 2015 DIRECTV admitted that it offered free trials of premium channels for a limited time, after which it begins charging customers for those channels unless they cancel, but claimed that the terms of these promotions were clearly and conspicuously disclosed to consumers.
Congress’s enactment of the Restore Online Shoppers’ Confidence Act (ROSCA) 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, whereby the customer’s silence or failure to cancel the agreement is treated as acceptance of the offer. In other words, ROSCA requires companies to obtain consent from customers before signing them up for a free trial that automatically turns into a paid subscription. A seller may only avoid this requirement by clearly and conspicuously disclosing 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. Even though ROSCA took effect in 2011, the FTC did not bring its first action under the law until October 2014. The FTC has brought ROSCA claims against at least three businesses since then, including DIRECTV, which indicates the Commission’s increased interest in enforcing this law. DIRECTV also asserted eleven affirmative defenses, including failure to state a claim, equitable doctrines, and lack of jurisdiction and standing. The FTC filed a motion to strike some of these defenses in early June 2015, and DIRECTV filed a reply on June 22, 2015. On July 1, the court issued a scheduling order, calling for the FTC to file an amended complaint by August 1, 2015.
On June 16, 2015 the Central District of California entered a Temporary Restraining Order and the FTC issued a complaint, alleging that since at least 2010, a number of defendants had marketed and sold skin care products on a variety of websites in violation of ROSCA, the FTC Act, and the Electronic Funds Transfer Act (“EFTA”). According to the complaint, the defendants advertised “risk free trials” to receive skin care items, suggesting that consumers would only pay $4.95 or less in shipping costs. According to the complaint, defendants failed to adequately disclose that they would charge consumers’ credit or debit accounts for the trial product, typically as much as $97.88, after a 10-day period, and that customers would be automatically enrolled in subscription plans whereby they were automatically sent more products and charged recurring fees each month. The FTC specifically noted that because the goods often did not arrive until ten days after the order was placed, it was impossible for many customers to return opened products within the ten-day period in order to avoid the $97.88 fee. Additionally, the complaint alleged that defendants failed to adequately disclose that returned items would be subject to a $15 restocking fee.
As the FTC continues to vigorously enforce ROSCA in new industries, retailers using the subscription or automatic renewal models should ensure that their advertisements and terms are compliant.
Penalties for Violating Automatic Renewal Laws
The penalties for violating state automatic renewal statutes can be serious. California’s ARL, for example, 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 non-compliant automatic renewal policy “shall for all purposes be deemed an unconditional gift to the consumer.” Plaintiffs’ lawyers claim that, under this provision, retailers 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. Notably, this provision only refers to “goods” and not to “services.”
Although many of the settlements in past auto-renew cases have been confidential, those with public terms show the potentially high value of these cases to Plaintiffs’ attorneys. As mentioned above, Sirius XM settled an automatic renewal case for $3.8 million in December 2014. In September 2014, Angie’s List settled an auto-renewal suit brought in Indiana for $2.8 million.
Given the potentially high penalties for violating state automatic renewal laws, companies that sell subscription-based goods, services, or memberships should make sure that their user agreements comply with local regulations. To help ensure compliance, companies should consult counsel with expertise in this area before enacting automatic renewal policies. The recent uptick in litigation — which has been brought against startups and established companies alike, in a wide variety of industries — shows that no company is immune from these potentially expensive actions.
 These include California (Cal. Bus. & Prof. Code §§ 17600-17606), Connecticut (Conn. Gen. Stat. § 42-126b), Florida (Fla. Stat. § 501.165), Georgia (O.C.G.A. § 13-12-3), Illinois (815 ILCS 601/10), Louisiana (La. Rev. Stat. § 9:2716), Maryland (Md. Code Com. Law § 14-12B-06), New Hampshire (N.H. Rev. Stat. § 358-I:5), New York (N.Y. Gen. Oblig. Law § 5-903), North Carolina (N.C. Gen. Stat. § 75-41), Oregon (Or. Rev. Stat. §§ 646A.293, .295), Rhode Island (R.I. Gen. Laws § 6-13-14), South Carolina (S.C. Code § 44-79-60), South Dakota (S.D. Codified Laws § 49-31-116), Tennessee (Tenn. Code §§ 62-32-325, 47-18-505), and Utah (Utah Code § 15-10-201).