The gold standard for many nonprofit membership organizations is to persuade members to agree that their membership can automatically be renewed and charged to their credit card whenever it expires. The same is true for nonprofit journal subscriptions and a variety of other goods and services offered by nonprofit organizations, whether tax-exempt under section 501(c)(3), 501(c)(4), 501(c)(6), or another section of the Internal Revenue Code.
However, a number of states have been concerned about the impact on consumers of such "auto-renewals" by companies. Following in the footsteps of other states, the District of Columbia recently passed a law regulating auto-renewal offers, which is expected to take effect in March following its transmittal to Congress. The law affects all companies, nonprofit and for-profit, that sell goods or services to a DC resident pursuant to a contract that automatically renews at the end of a definite term. Although the DC law mirrors other states' laws in some respects, it creates much stricter requirements in others.
First, similar to other states' requirements, the law requires advertisers who sell goods or services on an auto-renewal basis to clearly and conspicuously disclose the auto-renewal provision and cancellation procedure in the contract.
Second, if a company sells an auto-renewal offer with an initial term of 12 months or more that automatically renews for a term of one month or more, the company must send notifications to the consumer at the end of the first year and annually thereafter, which must be sent via mail, email, text message, or mobile phone app (if the consumer has consented to receiving such mobile messages). The notification must clearly and conspicuously disclose that the contract will automatically renew unless the consumer cancels; the cost of the goods or services for the auto-renewal term; the deadline by which the consumer must cancel to prevent auto-renewal; and the methods by which the consumer may obtain details of the auto-renewal provisions and cancellation procedures. If the notice is provided by email, the email must include a hyperlink allowing the consumer to cancel the auto-renewal.
Finally, if a nonprofit offers free trials to consumers that convert to a paid membership, subscription, or other good or service with a renewal term of one month or more, the company must notify the consumer between one and seven days before the trial period ends that the contract will automatically renew, and obtain the consumer's affirmative consent to the auto-renewal before charging the consumer. Critically, this consent must be obtained even if the nonprofit has already obtained the consumer's affirmative consent to the free trial.
Although the law imposes stringent requirements, it also offers a safe harbor defense for good faith violations of the law. To avail itself of this safe harbor defense, the nonprofit must implement written procedures to comply with the law, any violations must have been by mistake, and in the event of a mistaken violation of the law, the nonprofit must provide the consumer with a credit for the amounts billed or refund to the consumer all amounts paid by the consumer because of the mistaken renewal.
Note that the DC law applies only to the sale of "goods and services." Many charities seek regular donations that auto-renew, such as a monthly donation that continues indefinitely. Because donations are not goods and services, they would not be covered by the new requirements, although in the interest of transparency and maintaining the public's trust, charities should ensure that they have clearly and conspicuously disclosed the terms of the auto-renewing donation and how to end it. Also, although many charities provide low-cost premiums such as tote bags and coffee mugs in return for donations, we do not believe these convert the donation into the sale of a good or service for purposes of the DC law.
The DC law comes in the wake of the passage of auto-renewal laws in other states like California, Vermont, and Virginia, in addition to the federal Restore Online Shoppers' Confidence Act (ROSCA), which was enacted at the end of 2010. Nonprofit organizations offering products and services on an automatically renewing basis should take note and make sure their offers comply with the most recent laws and requirements.