Is Your Automatically Renewable Contract Enforceable?

Setting up contracts to renew automatically offers evident business advantages, but it could also give rise to unintended liability...

Is Your Automatically Renewable Contract Enforceable?

Is Your Automatically Renewable Contract Enforceable?

Setting up contracts to renew automatically offers evident business advantages, but it could also give rise to unintended liability...

Author: Stan Barrett|December 8, 2020

Setting up contracts to renew automatically offers evident business advantages, but it could also give rise to unintended liability if applicable laws and regulations are not followed. As businesses’ use of subscription services has grown, many states have adopted restrictions on their use, while other states, like New Jersey, are considering limiting their enforceability.  These state laws and regulations supplement federal restrictions on automatic renewals, embodied both in principles promulgated by the Federal Trade Commission (“FTC”) to guide marketers on uses of automatic renewals that do not constitute unfair practices (see 15 U.S.C. § 45(a)(1) (“Section 5 of the FTC Act”)) and also in the Restore Online Shopper’s Confidence Act (“ROSCA”).

Automatic Renewal Provisions

Automatic renewal clauses typically state that a service will automatically renew on a certain date for a specified price unless the consumer provides advance notice of its intention to terminate the agreement to the seller. Practically speaking, these clauses allow businesses to renew subscription services simply by charging a consumer’s credit card kept on file. 

These provisions are now used in a wide variety of industries, from Internet content providers to office suppliers to magazine publishers. As the use of this business model has expanded, consumer protection efforts have also gained traction. In most cases, the laws, regulations, or guidance are intended to protect customers who claim they were not aware of or did not authorize automatic renewals, or who find themselves contractually bound to a service provider indefinitely.

Federal Regulations Governing Automatic Contract Renewal

Section 5 of the FTC Act, which regulates unfair or deceptive practices, and ROSCA are the principal federal laws that bear upon uses of automatic renewal provisions. The FTC considers an automatic renewal provision as a “negative option feature”—“a provision under which the customer’s silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer.” 

FTC guidance regarding negative option features advises marketers to follow five basic principles to help ensure compliance with Section 5 of the FTC Act.  Marketers should:

  • Disclose the material terms of the offer in an understandable manner, including the existence of the offer; its total cost; the transfer of a consumer’s billing information to a third party (if applicable); and how to cancel. Marketers should avoid making disclosures that are vague, unnecessarily long, or contain contradictory language.
  • Make the appearance of disclosures clear and conspicuous, placing them in locations on webpages where they are likely to be seen, using easy-to-read text, and labeling them (or links to them) to indicate their importance and relevance.
  • Disclose the offer’s material terms before consumers pay or incur a financial obligation; for example, if a consumer is deemed to have agreed to an offer by clicking a “submit” button, disclosures should appear before consumers click that button.
  • Obtain consumers’ affirmative consent to the offer by taking an affirmative step to demonstrate consent rather than, e.g., relying on a pre-checked box as evidence of consent.
  • Do not impede the effective operation of promised cancellation procedures by making them unduly burdensome; e.g., consumers should not have to wait on hold for unreasonably long periods of time.

The Restore Online Shoppers’ Confidence Act (ROSCA) may also govern automatic renewal clauses. The statute makes it illegal to charge consumers for products sold through online negative options unless the seller:

  • Clearly and conspicuously discloses material terms of the transaction before obtaining the consumer’s billing information;
  • Obtains the consumer’s express informed consent before making the charge; and
  • Provides simple mechanisms to stop recurring charges.

Earlier this year, the FTC fined online learning company ABCmouse $10 million for violating ROSCA. According to the FTC, from 2015 until at least 2018, the company failed to clearly disclose that memberships would automatically renew, charged consumers’ credit cards without express authorization, and made it difficult for consumers to stop recurring charges.

The FTC alleged that ABCmouse advertised “Special Offer” twelve-month memberships for $59.95 without telling consumers that the memberships would renew automatically and indefinitely. Similarly, the company offered consumers enrolled in a free 30-day trial membership extensions costing $39.95 for 12 months or $29.95 for 6 months, but again failed to disclose adequately that the charges would occur automatically and indefinitely after the trial period ended.

The FTC also alleged that ABCmouse failed to provide a simple way to stop automatic renewals despite promising “Easy Cancellation.” The FTC’s complaint alleges that consumers who tried to cancel, whether by telephone, email, or submission of a customer support form, were required to negotiate a lengthy and confusing process that often prevented consumers from completing cancellations.

“ABCmouse didn’t clearly tell parents that their subscriptions would renew automatically, and then the company made it very difficult for them to cancel,” Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, said in a press statement. “[C]ompanies need to be up-front about automatic renewals and get permission before charging customers.”

State Regulations Governing Automatic Contract Renewal

California and Oregon have some of the strictest automatic contract renewal laws on the books. Companies must provide clear and conspicuous notice of automatic renewal provisions. The laws also require that, prior to renewal, businesses must make additional disclosures, provide simple cancellation procedures, and obtain affirmative consent from the consumer. Failure to comply with these requirements can result in the service or product being classified as an “unconditional gift” to the customer.

In New York, businesses seeking to enforce an automatic renewal provision in a “contract for service, maintenance or repair to or for any real or personal property” must, inter alia, provide prior written notice of automatic renewal, served personally or by certified mail, between fifteen and thirty days prior to the termination notice deadline. Courts’ interpretations of what kinds of contracts fall within the ambit of New York’s statute have tended to become more expansive over time; but the fact that the contract must be for the “service, maintenance or repair to or for any real or personal property” limits the scope of New York’s restrictions on automatic renewal provisions compared to California’s and Oregon’s.

In New Jersey, attempts to regulate automatic renewal provisions are ongoing but have not yet succeeded. This summer, the New Jersey Assembly passed Assembly Bill 2462 (AB 2462), which would establish notification standards for certain service contracts with automatic renewal.

Under AB 2462, if a service contract contains an automatic renewal provision for a specified period of more than one month, the seller must disclose the automatic renewal provision clearly and conspicuously in the contract or contract offer. Additionally, if the service contract is for 12 months or longer, and the renewal is for a period of one month or longer, the seller must provide either written or electronic notification to the consumer at least 30 days, but not more than 60 days, prior to the contractual cancellation deadline.  This notification should indicate how consumers may obtain details regarding the automatic renewal provision and associated cancellation procedures (including any changes thereto) and should also disclose that the contract will automatically renew unless the consumer cancels it.

Automatic renewal provisions that fail to meet these notice requirements would be void and unenforceable, and AB 2462 would require sellers to refund a consumer for any unearned portion of the automatically renewed service contract under such circumstances. Similarly, if an error caused the seller to fail to comply with AB 2462, any unearned portion of the contract subject to automatic renewal must be refunded as of the date on which the seller is notified of the error.  Violations of AB 2462 would also constitute an unlawful practice under the state’s Consumer Fraud Act. 

Key Takeaway

Subscription-based services have become extremely popular during the pandemic. As a result, businesses should expect both federal and state regulators to closely monitor the use of automatic contract renewal provisions and to increase enforcement efforts. It is therefore important to ensure that your business meets all applicable notice requirements associated with automatic contract renewal provisions and that the provisions themselves are compliant.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Stan Barrett, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.

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About Author Stan Barrett

Stan Barrett

Stan Barrett, Counsel, is a member of Scarinci Hollenbeck’s Corporate Transactions & Business Law practice group. Mr. Barrett has over a decade of experience in the areas of Corporate Transactions & Business Law, Litigation, Corporate Compliance and White Collar Criminal defense.

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