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Auto Renewal Lawsuits

By on October 27, 2016

The ease and convenience of subscription services has led to the skyrocketing in popularity for companies offering auto-renewal services. Ranging from entertainment to beauty products, almost anything is accessible via subscription and the California legislature has taken note of the possible vulnerabilities for consumers, enacting the Automatic Renewal Law (“ARL”), Business & Professions Code Sections 17600 et seq., The ARL was made effective in December 2010 and seeks to end the practice of charging consumers for continuing services or products—including beauty products, online music and magazine subscriptions— without their explicit consent. It is particularly aimed at companies that engage in automatic renewals and electronic billing and seeks to discourage companies from hiding important billing terms from California consumers, regardless of where the company is located.

Section 17602 of the ARL makes it unlawful for businesses that offer automatic or continuous service to not present the offer terms in a clear and obvious manner before the subscription agreement is fulfilled. Particularly, it requires that the consent be apparently visible to the consumer. It also provides that the business must obtain affirmative consent to the agreement when the business is charging the consumer’s credit or debit card, or when a third party billing service is used. Furthermore, it holds the business must also provide an acknowledgement including the terms, cancellation policy, and cancellation procedure in an accessible and understandable manner to the consumer.

The business is also required to provide a toll-free phone number, e-mail, postal address or other alternative for cancellation that is easy-to- use, economically accessible and timely. Finally, the ARL requires companies to give clear and conspicuous advanced notice of any material changes in the terms to the consumer.

Any business that fails to comply with the ARL may be subject to civil liability. In California, the penalties for violating the ARL can be steep because the state permits liability under other statutes as well, such as the unfair competition law and, in some circumstances, permits the consumer to retain the goods received as an unconditional gift. Furthermore, Plaintiffs’ law practitioners assert that under this statute, businesses must provide restitution to the consumers affected by impermissible practices, even to those who wanted the renewal or anticipated it. The ARL, however, notes that businesses that comply with its provisions in good faith will not be subject to civil remedies.

Interestingly, California is not the only state to enact a provision targeting automatic renewal services, though it does appear to be the most stringent. As of 2015, sixteen states have set in place some provision like the ARL, generally requiring conspicuous terms and affirmative consent by the consumer for billing.

On a Federal level, all companies are subject to the Federal Trade Commission Act, 15 U.S.C. Section 41, et seq., which requires honest and clear disclosure of auto-renewal policies. The FTC has consistently brought suits across the country against violators, including DirectTV LLC back in March of 2015 in California. DirecTV was accused of violating the FTC Act by charging customers for premium channels after the end of their free trial automatically.

Additionally, Congress enacted the Restore Online Shoppers’ Confidence Act (“ROSCA”) in 2011 to target unfair renewal policies. It generally bans charging consumers though a “negative option” feature to an agreement. This “negative option” treated consumer silence or failure to cancel as an acceptance to the offer. ROSCA remedied this by requiring business to obtain consent before committing them to an automatically renewing free trial. To circumvent this, companies must obtain consumer consent and conspicuously inform the consumer of the terms as well as provide an easy way to stop the recurring charges. In 2015, the FTC issued a complaint in the Central District of California against a company that advertised “risk-free” trials for skin care products with a fee of less than five dollars for shipping. In this case, the defendants failed to disclose that they would charge the consumers’ credit or debit card for the trial product after a ten-day period. These products would typically cost almost $100 dollars and after the ten days, the consumer would be automatically enrolled in a plan and be sent more products, incurring more fees each month. The FTC particularly noted the seriousness of the violation because many consumers would not receive the products in time to return them before the ten-day trial window closed to avoid the large fee. It also noted that the company failed to inform consumers that returned products would incur a $15 dollar restocking fee.

Various suits have been brought forth under the ARL. Notably, these defendant companies include Birchbox, American Automotive Association (“AAA”), Spotify, DropBox, Hulu, LifeLock, and HelloFlo.

In Bleak v. Spotify USA Inc., (N.D. Cal., No. CV-13- 5653)—which was sent to arbitration —Spotify was sued for allegedly charging consumers’ cards or accounts with a third party service for automatic renewals without their consent. Moreover, Dropbox Inc. and Hulu LLC were also served suits for similar accusations of violating the ARL conditions for affirmative consent. Another recurring issue is the failure to inform consumers of the automatic renewal terms in a clear fashion, as happened in Gee v. American Automotice Association and Abrego v. Blizzard Entertainment Inc. (which produced the computer game World of Warcraft, on which a film production is set to be released).

More recently, Birchbox, a beauty-product subscription service, was sued for charging consumer credit cards without getting affirmative consent to the automatic renewal terms and failing to provide information on how to cancel the service. Additionally, the complaint alleged that there was no disclosure in Birchbox’s acknowledgement for its free trials on how to cancel before incurring charges for the recurring subscription. Along the same vein, HelloFlo, a company specializing in feminine hygiene products, was also sued for similar violations. The complaint particularly notes that “Terms of Service” consists of a twelve-page document and that the cancellation instructions are buried within this wall of text.

While it is unclear yet as to how the courts will really determine the damages owed to consumers, if settlement agreements are any indication, these figures will be immense. Though many settlements in these cases are confidential, the ones that did disclose the settlement figure publicly show million dollar figures. For example, Sirius XM Radio settled its case for 3.8 million dollars in 2014 and Angie’s List settled for 2.8 million dollars in Indiana. For larger companies, this indicates that the settlement—and damages if trials happen— will be much larger.

The increasing reliance of companies on the auto-renewal business model is placing consumers at risk if companies do not comply with the law as required. Notably, consumers should remember that California law requires businesses to provide clear terms of the agreement, in a visible manner and not buried in mountains of text. They should also keep in mind that companies must obtain affirmative consent before enrolling customers in any renewable billing plans and must also provide easy-to- access cancellation methods.

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