The law surrounding negative option and continuity programs continues to evolve rapidly. Feeling a bit overwhelmed with the latest developments? Below is what you need to know in light of new laws, new enforcement actions, new class action activity, and new state-by-state requirements for cancellation, notice, disclosures, and other key points. If you’d prefer to catch up on our March 1 webinar, RSVP here.
Expansive Federal Regulatory Action
The Federal Trade Commission has started to use the buzzwords “dark patterns” and “junk fees” when enforcing the Restore Online Shoppers’ Confidence Act (ROSCA), the primary law used by the FTC to regulate subscription agreements executed online. The FTC is attempting to expand ROSCA—a consumer protection law written to protect online shoppers—to business-to-business contracts with automatic renewal provisions when they are signed online.
Following an enforcement policy statement issued in 2021, the FTC made clear its view that many negative option and continuity practices constitute “dark patterns” that manipulate consumers into taking actions against their wishes. In September 2022, it held an open commission meeting to present its findings on digital dark patterns and reaffirmed its intention to target these practices. In November 2022, the FTC announced a $100 million settlement with Vonage to resolve allegations that the company engaged in dark patterns to make it difficult for consumers to cancel. The FTC alleged that Vonage failed to provide a simple cancellation mechanism because customers could enroll online but could not cancel in the same way.
According to the complaint, Vonage also engaged in aggressive retention efforts to “save” customers who sought to cancel their enrollment. Furthermore, the FTC alleged that Vonage failed to adequately disclose that customers who canceled before the end of their contract term would be charged an early termination fee, because the early termination fee was disclosed in Vonage’s fine print Terms of Service, instead of in the offer funnel itself. While many businesses in many industries have historically charged an early termination fee to customers who wish to cancel a contractual commitment, and Vonage’s ads disclosed the existence of the early termination fee, the FTC characterized the fee as a “surprising” junk fee.
The FTC’s order with Vonage requires the company to provide a cancellation mechanism that mirrors the enrollment method (i.e., it permits customers who enroll online or through a mobile application to cancel through the same website or mobile app). The order also prohibits the company from taking “any action that is unnecessary to cancel,” including using any “dark patterns.”
Consumer-facing businesses are not the only ones in the crosshairs of FTC ROSCA enforcement. Businesses that provide products and service to other businesses now also have reason to track ROSCA enforcement developments. The FTC’s theory in the business-to-business context is that any agreement between businesses that includes an automatic renewal clause and is executed online (including through an electronic app) constitutes a transaction with a negative option feature effected on the Internet, and thus is subject to ROSCA. The FTC’s position has not been upheld by a court, but there is every indication that the FTC would not be afraid to try its theory in litigation, notwithstanding compelling arguments against the FTC’s view.
The Consumer Financial Protection Bureau (CFPB) has also entered the fray, filing a lawsuit against TransUnion in April 2022 alleging that the company violated a 2017 order because it misrepresented the recurring fees, and failed to obtain express informed consent to the negative option feature. Notably, the 2017 order stated that “express informed consent” to the negative option feature required “a check box on the final order page that consumers must affirmatively check to select the Negative Option feature (i.e., it cannot be pre-checked), and which clearly and conspicuously states that the consumer agrees to be billed for the product unless the consumer cancels before the trial period expires.” In its current complaint, the CFPB also invokes references to “dark patterns,” alleging TransUnion made it difficult for consumers to cancel. Transunion filed a motion to dismiss the complaint, which the court denied in November. The case is ongoing.
State Regulatory Action
The California Automatic Renewal Task Force (CART) also continues to challenge automatic renewal programs under California’s Automatic Renewal Law. In October, it entered a settlement with Naked Wine resolving allegations that its “Wine Angel” and “Wine Genie” subscription programs violated California’s Automatic Renewal Law. The settlement requires the company to obtain affirmative consent, which it defines as “a check-box, signature, express consent button, or other substantially-similar mechanism” that the consumer “must affirmatively select to give consent to the automatic renewal offer terms,” which must appear immediately adjacent to the automatic renewal offer terms.
The order states that the automatic renewal consent mechanism “cannot relate to consent for anything other than the automatic renewal offer terms (such as final payment or completion of the transaction).” The order also requires Naked Wine to pay full refunds to all California consumers who participated in the subscription program beginning in April 2017 through the date of settlement, and $650,000 in civil penalties and investigative costs.
The task force also entered a settlement last month with Savage Fenty, Rhianna’s lingerie company that offered clothing on a subscription basis through its VIP program. The company agreed to pay $1.2 million in civil penalties, restitution, and investigative costs. In addition, the defendants agreed to clearly and conspicuously disclose the offer terms and obtain affirmative consent to the recurring charges. Interestingly, the order set out the specific language of the consent: “I agree to the paid Xtra VIP Membership and the Terms Conditions of this website,” with the terms “paid Xtra VIP Membership” and “Terms Conditions” hyperlinked.
The settlement also requires the company to permit consumers to cancel exclusively online, at will, and without engaging in any further steps that obstruct or delay the consumer’s ability to terminate the automatic renewal or continuous services immediately. This requirement tracks the language required by the most recent amendments to California’s amended automatic renewal law, which went into effect in July. Companies that are running automatic renewal programs should take a closer look at their cancellation processes, paying particular attention to, for example, online chats with limited available, extensive “save” attempts, and multiple steps and web pages the customer must navigate before their cancellation request is accepted.
California is not alone. Earlier this month, the DC attorney general’s office settled a case with Grubhub, which alleged that Grubhub misrepresented various fees and the benefits available through its Grubhub+ monthly subscription program. In the settlement, Grubhub agreed to pay $3.5 million, prominently disclose its various fees, and stop advertising that Grubhub+ users get free delivery without disclosing that additional fees apply.
The Washington state attorney general also issued a consumer alert in October, noting that a substantial percentage of Washington residents had been unintentionally enrolled in subscription services when attempting to make a one-time purchase, crediting “pre-checked boxes” as a “significant source of the problem” and encouraging consumers to notify the AG’s office so that it can “take action” against alleged offenders. Other AG offices, such as New York’s, have issued similar consumer notices and are taking enforcement action, both publicly and through confidential inquiries, against various companies.
New Laws
State legislatures are continuing to pass new laws that impose additional, and often technical, requirements for negative option programs.
California
The most recent amendment to California’s automatic renewal law took effect in July. It states that consumers who enroll in automatic renewals online must be able to cancel online “without engaging in any further steps that obstruct or delay the consumer's ability to terminate the automatic renewal or continuous service immediately.” The merchant must provide a method of cancellation that is online in one of the following formats: a prominently located direct link or button, which may be located within either a customer account or profile, or within device or user settings; or an immediately accessible termination email formatted and provided by the business that a consumer can send to the business without additional information.
California’s new law also requires notices to be provided for free gift offers or certain promotional trials lasting more than 31 days that convert into an automatic renewal. Businesses offering negative option (continuity) programs with an initial term of one year or longer must now provide notice at least 15 days and not more than 45 days before the automatic renewal offer or continuous service offer renews.
Although class action plaintiffs’ attorneys have begun to challenge companies for their alleged failure to comply with these requirements, we have not yet seen courts issue a decision on the merits concerning the requirement.
Virginia
Virginia updated its automatic renewal law requiring companies that allow customers to enroll in automatic renewal offers online to “make available a conspicuous online option to cancel a recurring purchase.”
Florida
Florida’s automatic renewal law was amended last year to require that consumers be permitted “to cancel the service contract in the same manner, and by the same means, as the consumer manifested his or her acceptance of the service contract.”
Tennessee
Tennessee’s automatic renewal law, which mirrors a prior version of California’s law, went into effect this year.
Idaho
Idaho’s new law will require sellers to provide cancellation in the same manner that the consumer used to subscribe. (“The seller shall provide methods of automatic subscription renewal cancellation that include free online cancellation of the subscription and cancellation in the same manner that the consumer used to subscribe.”)
Class Actions
Given how many laws are now in effect, it should not come as a surprise that class action plaintiffs are pursuing these cases with increasing frequency and pursuing aggressive new theories of liability.
Multiple settlements were entered last year, in addition to the Noom settlement that we blogged about here. For example, Potpourri Group, Inc. agreed to pay $2.5 million to resolve allegations that the company enrolled customers in automatically renewing subscriptions for the company’s VIP membership programs without their consent and charged customers for the membership without fully informing customers about the renewal terms.
Earlier in the year, JustAnswer paid $4.7 million to settle claims that its expert answer subscriptions violated California law. Personalized gift companies Bradford Exchange and Hammacher Schlemmer also agreed to pay $475,000 to resolve allegations that they violated California’s automatic renewal law by enrolling consumers in their subscription-based rewards program without their consent.
A number of these lawsuits challenge what seem to be technical violations. One lawsuit filed against FloSports alleged that the company violated New York automatic renewal law by charging customers on an annual basis, despite advertising the price as a per-month breakdown. In addition, despite providing a disclosure immediately above the call-to-action button on the payment page, the plaintiffs alleged that the company failed to obtain “affirmative consent” because “it never requires the individual to read or affirmatively agree to any terms of service, i.e., by requiring consumers to click a checkbox next to the automatic renewal offer terms before consumers complete the checkout process and submit their order.”
Although many state laws impose technical requirements for automatic renewal programs, some class action plaintiffs have chosen to file under general state consumer protection laws. For example, one class action lawsuit alleged that Panera’s Unlimited Sip Club subscription program violated Michigan’s consumer protection law because it advertised “unlimited” free drinks for a monthly price when in reality customers could receive only one free beverage every two hours.
Although courts in California have held that California’s automatic renewal law applies only to consumers in California, we have seen an uptick in cases involving non-California consumers challenging a company’s automatic renewal practices under California’s more general consumer protection laws—the California Consumer Legal Remedies Act (CLRA), Unfair Competition Law (UCL), and False Advertising Law (FAL).
In one case, a New York plaintiff alleged that StreamLabs, a subscription streaming service, violated California law by unlawfully misrepresenting its recurring charges. The plaintiff argued that this, in turn, constituted deceptive advertising in violation of the CLRA, fraudulent conduct under the UCL, and deceptive advertising in violation of the FAL. In that case, the plaintiff did not allege any violations of the automatic renewal law, although she referenced the law in her complaint when discussing the challenged practices. The court held that although a New York resident cannot file a lawsuit predicated on California’s ARL, it denied the defendant’s motion to dismiss her claims under California law. It is unclear whether courts will hold these cases to a different standard than ARL lawsuits, which typically involve very technical challenges to autorenewal practices.
As you can see, there are so many developments in the laws and how they are enforced that you may not be able to stick with a business-as-usual approach in 2023. To learn more, join Ellen Berge, Shahin Rothermel and Ari Rothman for a webinar discussing these topics on March 1, 2023 from 2:00 to 3:00 p.m. EST. Click here to register.