KEY TAKEAWAYS:
- Automatic renewal clauses in consumer-facing agreements have been the focus of federal regulators for decades.
- More recently, states have taken an increased interest with 31 states now having autorenewal laws.
- Different states have different requirements but there are commonalities that we can use to prepare our organizations’ terms for compliance.
Automatic renewal provisions in contracts have been under increased scrutiny. On a national level, the Federal Trade Commission (FTC) has been regulating these types of contractual clauses for decades.[1] And more recently, the Consumer Financial Protection Bureau has gotten more involved–filing suits against companies who are taking advantage of consumers through the use of dark patterns in click-through agreements.
In the past decade, though, states have begun enacting automatic renewal laws as well. As of December 1, 2022, thirty-one states have automatic renewal laws in effect. And each one is slightly different. Though a pattern is beginning to emerge.
This article provides an overview of the ten main elements in state automatic renewal laws that businesses should really take into consideration when drafting automatic renewal clauses. Especially in click-through or consumer-facing agreements, such as online terms and conditions, privacy policies, and website terms of use.
1. Covered Transactions
Automatic renewal laws vary state-by-state in terms of what is considered to be a “covered transaction.” For example, California takes a broad approach that covers “any plans or arrangements in which a paid subscription or purchasing contract is automatically renewed at the end of a defined term for a subsequent term.” While other states define a “covered transaction” by the length of the contract (e.g., years vs. months).
2. Offer Details
Contracts should include specific information related to any free gift or trial period component of an offer. This means that businesses must ensure the contractual language clearly notifies consumers of the term, costs, any free trial involved, and any other obligation.
3. Presentation of Terms
Consumers must have easy and clear (conspicuous) understanding of the automatic renewal terms before the purchasing agreement is fulfilled. There are state specific caveats as to how this should be delivered, such as through a published website, or something delivered to the consumer directly.
4. Affirmative Consent of Automatic Renewal Terms
Businesses must be able to demonstrate that they have received affirmative consent from consumers regarding their enrollment into an automatic renewal contract, rather than relying on a consumer’s ignorance on the fact that they have an active subscription (a dark pattern). Having a process in place to capture this consent–whether in a signed contract or an electronic form–is generally required.
5. Acknowledgement Sent to Consumer
Businesses should provide the Consumer with an acknowledgement of their order that the consumer can retain, such as an email. This should include the terms of the order, the cancellation policy, and (now this is key) a description of how to cancel. See the section below for more on the Cancellation Method.
6. Adopted Cancellation Policy
A cancellation policy should be drafted and readily available for a consumer review. The consumer should not have any difficulties accessing the cancellation policy.
7. Cancellation Method
Convoluted and inconspicuous cancellation methods are under increased scrutiny. Streamlined processes are generally preferred.
For example, several states now require that require contracts entered online (i.e., click-through agreements), must be cancellable online as well. Additional recommended methods of cancellation should include dialing a toll-free number, emailing a specific address, or going to a certain portion of an online offering with a clear “cancel” button.
8. Renewal Notice
Businesses should be notifying consumers of an upcoming automatic renewal well before the notice period. For example, in California, if a cancellation requires 30-days notice, the business should notify the consumer at least 3 days, and at most 21 days, before the cancellation notice period. This timeline varies state by state and should be reviewed accordingly.
9. Notice of Material Changes
Most click-through agreements have a clause stating that the offering business can change the terms at any time with or without notice to the consumer. Others state they only need to provide notice of material changes. But state laws are trending towards requiring clear and conspicuous notices of any changes to the renewal terms.
10. Enforcement
Restitution with regards to violation of automatic renewal laws vary, but they have generally entered a significant fine, returned amounts collected, and mandated that the violator fix what is lacking in their contracts. Examples include the New York Times settling at $5.5M in a class action suit, the Washington Post settling at $6.7M, and the online weight loss program Noom settling at $62M.
This is a high-level overview of guidelines related to state-regulated automatic renewals in contracts. Because of the variation, it may be best practice to go with the most stringent set of rules as the rest of the states catch up.
[1] Section 5 of the Federal Trade Commission Act.
