February 11, 2022 Articles

The Problematic Proliferation of Automatic Renewal Laws

Answers to 10 key questions every consumer-facing company should be asking about automatic renewal laws.

By Michael Daly, Matthew Adler, and John Cappel
Just as automatic renewals have proliferated, so, too, have efforts to regulate them.

Just as automatic renewals have proliferated, so, too, have efforts to regulate them.

Pexels | Olya Kobruseva

Once confined to a handful of offerings like magazine subscriptions and gym memberships, automatic renewals now accompany an astounding array of consumer goods and services. As the Washington Post recently reported, the “subscription economy” is estimated to be worth $650 billion in 2021 and expected to be worth $1.5 trillion by 2025. That explosive growth should come as no surprise as businesses and consumers alike have come to appreciate that automatic renewals improve the predictability and efficiency of delivering goods and services.

But just as automatic renewals have proliferated, so, too, have efforts to regulate them. Citing concerns over unexpected renewals or inconvenient cancellations, state legislatures have created a patchwork of confusing and often conflicting automatic renewal laws (ARLs). And that undoubtedly has hurt the consumers that legislatures had hoped to protect. That is so because Balkanized regulations invariably increase the price of goods and services by increasing costs (as established businesses struggle to comply with the rules) and decreasing competition (as emerging businesses struggle with whether to enter the market in the first place).

The year 2021 saw more of the same. Two states—specifically Colorado and Delaware—enacted new broad ARLs that took effect on January 1, 2022. Other states that already had ARLs on the books—notably California and Illinois—passed amendments that impose new and often onerous requirements. And still other states are considering adopting ARLs of their own. All of this counsels in favor of regularly reviewing the law and revising operations to reduce the risk of scrutiny and liability.

Below, we provide an overview of ARLs—what they govern, what they require, etc.—by providing answers to some of the most frequently asked questions in this space.

1. What Kinds of Contracts Are Governed by ARLs?

Many newer ARLs are notable for the breadth of activities that they regulate, but that was not always so. Indeed, many states have narrow ARLs that govern only particular industries, for example, health clubs, buyers’ clubs, or “containerized solid waste hauling,” of all things.

By contrast, many newer ARLs apply broadly to all manner of continuing or renewing contracts for (1) goods, (2) services, or (3) both. To be sure, they are also subject to various exceptions and exemptions, for example, based on the duration of the original or renewal terms or whether a business is already subject to regulatory oversight by specific agencies. On the whole, though, “broad” ARLs are just that—broad enough to create challenges and risks for businesses offering consumer contracts on a continuing or renewing basis.

2. What Are “Automatic Renewal” and “Continuous Service” Contracts?

Although some ARLs distinguish between “automatic renewal” and “continuous service” contracts, generally there is little, if any, practical difference between the two. For example, California defines an “automatic renewal” contract as one that “is automatically renewed at the end of a definite term for a subsequent term,” and it defines a “continuous service” contract as one that “continues until the consumer cancels the service.” The line between the two can sometimes be less than clear. As a practical matter, though, differentiating between them is often unnecessary because statutory requirements apply equally to both.

3. What Do ARLs Generally Require?

Although ARL requirements differ from state to state, they generally contain some combination of the following requirements:

  • Clear and conspicuous disclosure of the automatic renewal terms, including pricing
  • Visual proximity of the automatic renewal terms to the request for consent
  • Affirmative consent from the consumer
  • An acknowledgment with information on (among other things) cancellation procedures
  • Notice of any material changes in certain contractual terms
  • Reminders about the contract’s approaching renewal

But those requirements differ in sometimes subtle ways. For example, some states specify the size and type of “clear and conspicuous” font; other states mandate precise cancellation options for certain contracts, such as online cancellation options for online contracts. And while reminders are generally tied to cancellation deadlines, in some states they are tied to renewal dates—and in some states they are not required at all. What’s more, some states have altogether different requirements; for example, Vermont’s law contains a requirement of a “double opt-in”—i.e., separate consent to the contract generally and the renewal specifically.

Because each ARL ultimately represents a variation on a common theme, crafting nationwide compliance strategies unfortunately demands a close review of each applicable law.

4. What Are the Potential Consequences of Violating an ARL?

ARLs generally implicate one or more enforcement mechanisms:

  • Enforcement by consumers pursuant to a private right of action in the ARL itself
  • Enforcement by consumers pursuant to “unlawful” or “unfair” business practice provisions in related consumer-protection statutes
  • Enforcement by attorneys general and district attorneys

ARLs also generally implicate one or more of the following consequences for violating them:

  • Court orders declaring that the contract is void or voidable
  • Court orders requiring injunctive relief that mandates and/or prohibits certain practices
  • Court orders requiring restitution to consumers
  • In a few states, court orders declaring goods purchased during the term of the contract to be “unconditional gifts” and requiring reimbursement of money paid for those goods

5. Are There Defenses for “Good Faith” Attempts to Comply?

Several states offer some form of “good faith” defense. These generally exempt businesses from liability if they can show that the alleged violation was merely the result of an error (such as accidentally failing to process a cancellation) and that they have made amends (such as refunding the cost of the contract that the customer paid after trying to cancel). While the prerequisites differ from state to state, businesses that are in substantial compliance may be able to invoke this defense.

6. Do Any Other Laws Regulate Automatic Renewals?

Although state ARLs impose the most onerous and specific requirements, they are by no means the only laws to consider when offering renewing or continuing consumer contracts. At the state level, businesses should always be mindful about complying with more generic consumer-protection statutes, such as those requiring accurate disclosures or prohibiting false advertising. And at the federal level, section 5 of the Federal Trade Commission (FTC) Act prohibits unfair or deceptive business practices, see 15 U.S.C. § 45(a); and the Restore Online Shoppers’ Confidence Act requires clear disclosure of, and express consent to, the material terms of online consumer contracts. Id. § 8403 et seq.

Considering automatic renewal to be a type of “negative option” feature, the FTC has outlined principles to guide marketers in their use. See Fed. Trade Comm’n, Negative Options: A Report by the Staff of the FTC’s Division of Enforcement (2009).

7. Are There Any New ARLs?

In 2021, Colorado and Delaware passed new ARLs that took effect on January 1, 2022. That makes them the sixth and seventh jurisdictions (after North Dakota, Vermont, Virginia, New York, and the District of Columbia) to enact new broad ARLs since the beginning of 2019. This flurry of activity follows several years of relative quiet: between the end of 2013 and the beginning of 2019, only one new broad ARL went into effect.

Colorado requires (1) clear and conspicuous disclosures, (2) written acknowledgments provided to consumers, (3) notices of material changes to the contract terms, and (4) reminders of approaching renewals. Reminders of approaching renewals are relatively common features of broad ARLs, but the timing in the Colorado ARL is different in that these reminders are required on a roughly annual basis regardless of the renewal term length. Also unlike most other states, Colorado’s ARL requires “express consent” to renewal terms that are longer than a year, without specifying when such consent must be provided—i.e., at the time of contracting or at the time of renewal. And while several ARLs create a private right of action, Colorado’s ARL vests its attorney general with “exclusive authority” to enforce the statute.

Delaware’s new ARL is generally less onerous than many existing ARLs. Like many states, Delaware requires (1) clear and conspicuous disclosure of automatic renewal terms; (2) renewal reminders for certain renewals extending the contract beyond 12 months; and (3) a cost-effective, timely, and easy-to-use cancellation mechanism, including online cancellation for online agreements. However, the law applies only to “merchandise” rather than, as seen in many ARLs, “goods and services.” It allows consumers to file suit under existing consumer-protection laws but also includes a “good faith” defense and requires that consumers give businesses an opportunity to cure any alleged violation before filing suit.

8. Were There Amendments to Existing ARLs in 2021?

The ongoing evolution of ARLs includes recent amendments by California and Illinois—which were among the first states to adopt broad ARLs. In both cases, the states adopted ARL provisions that have become more common in more recent statutes.

California’s A.B. 390 will take effect on July 1, 2022. It will (1) require businesses to provide renewal reminders to consumers who agreed to an initial contract term of one year or more, (2) require renewal reminders for free or discounted trials that last more than 31 days, and (3) add detailed requirements about ease of access to online cancellation links.

Illinois’s H.B. 3955 took effect on January 1, 2022. It requires that businesses provide an online cancellation option for online agreements. That requirement is similar to ones in other ARLS, for example, existing laws in California, New York, and Vermont, as well as the new laws in Colorado and Delaware.

9. The California Example: How Are ARLs Interpreted?

Compliance with ARLs can be complicated by ambiguous statutory language that leaves broad latitude for conflicting interpretations. These ambiguities were highlighted by two federal court rulings in 2021 concerning California’s ARL—and the seemingly divergent reading of regulators who often file suit to enforce the statute.

California’s ARL requires businesses to “provide an acknowledgment that includes the automatic renewal offer terms or continuous service offer terms, cancellation policy, and information regarding how to cancel in a manner that is capable of being retained by the consumer.” Cal. Bus. & Prof. Code § 17602(a)(3). What the law does not specify, however, is exactly when this acknowledgment must be provided. To the contrary, it simply says that this requirement “may be fulfilled after completion of the initial order.” Id. § 17602(e)(1). But must the acknowledgment be sent immediately after completion of the initial order, or can it be sent weeks or months later?

The U.S. Court of Appeals for the Ninth Circuit and the U.S. District Court for the Central District of California recently addressed this issue in Hall v. Time and Gershfeld v. Teamviewer, respectively, both of which held that acknowledgments sent in the months before renewal—i.e., many months after purchase—satisfied the acknowledgment requirement. Hall, 857 F. App’x 385 (9th Cir. 2021); Gershfeld, Case No. 21-0058, 2021 WL 3046775 (C.D. Cal. June 24, 2021). Their decisions are consistent not only with the statute’s plain language but also with the logic of other ARLs that require a reminder to be sent shortly before renewal—which is when consumers would be most interested in acting.

But state courts and state regulators will not necessarily follow the federal courts’ interpretations of this state statute.

Notably, the California Auto Renewal Task Force (CART), a coalition of California district and city attorneys, has entered into a number of settlements that require “immediate” postpurchase acknowledgments. Failure to follow CART’s interpretation, whether it is correct or not, could ultimately prove to be costly, as demonstrated by Match Group, Inc.’s $2 million settlement with CART in July 2021.

What’s more, California’s recent ARL amendment did not clarify the issue. To the contrary, it left the acknowledgment requirement untouched and added another requirement for a renewal reminder. It thus remains unclear how California’s acknowledgment requirement will be interpreted in state court.

10. Is Further ARL Legislation Anticipated?

The continuing evolution of ARLs can be seen not only in the laws that have been passed but also in the laws that have been proposed on the subject. In many states without a broad ARL, legislation has been introduced at some point to create such a law. For example, broad ARL bills were introduced in at least eight states other than Colorado and Delaware in 2021: Alabama, Indiana, Kentucky, Massachusetts, Missouri, New Hampshire, Texas, and West Virginia. Bills to amend existing broad ARLs were also introduced in at least three states other than California and Illinois in 2021: Florida, North Carolina, and Oregon.

Although none of these bills had been passed at the time of writing, and many died early in the legislative process, legislative interest in ARLs can be a precursor to the passage of an ARL in subsequent years. In Delaware, for example, an ARL bill introduced in 2018 failed to receive as much as a subcommittee vote; three years later, Delaware passed a broad ARL.

While it is impossible to predict when or where the next ARL will be enacted, the track record of growth in ARLs and continued legislative interest in them—combined with anticipated growth in the underlying subscription-type contracts that ARLs govern—mean that it will be only a matter of time before another state joins the ranks of those with a broad ARL.

Michael Daly is a partner and John Cappel is an associate at Faegre Drinker Biddle & Reath LLP in Philadelphia, Pennsylvania, and Matthew Adler is an associate at Faegre Drinker in San Francisco, California.

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