Legal Review: California Tightens Automatic Renewal Requirements

Legal Review
Damon Wright
Ellen Berge

The “subscription economy” receives a lot of buzz these days, but the truth is that the business model of selling to consumers on a recurring basis — sometimes called “continuity” or “negative option” marketing — has been around for decades.

The subscription model’s surge in popularity stems from its convenience and the growth of the internet economy. The model allows time-strapped consumers to simplify their lives by receiving uninterrupted delivery of their favorite foods, beauty products, lifestyle boxes (e.g., razor blades, dog treats, etc.), magazines and newspapers, as well as uninterrupted access to the latest streaming shows or online cloud storage to back up all the family vacation photos. 

However, consumers sometimes are not clear on how to unsubscribe from a service or exactly what price they’ll pay after a discounted or free trial period. That has made the subscription model a favorite enforcement target of the Federal Trade Commission (FTC), state attorneys general, and class action plaintiff attorneys. In response to the surge in popularity of subscription-based offers, many states are enacting or updating their automatic renewal laws (ARLs) to ensure consumer protection.

California stands out as a leader in enforcement actions targeting subscription offers. On the heels of increased class action filings under California’s current ARL, which was enacted in 2010, the state has passed a new, more strident, version of the law.

Known as Senate Bill 313, the law has a number of significant changes from the 2010 law, which was already broader and more specific than the federal Restore Online Shoppers’ Confidence (ROSCA), which is enforced by the FTC.

What Changed?

The 2010 California law requires auto-renewing consumer contracts to clearly and conspicuously disclose terms, obtain affirmative consumer consent before imposing a charge, and provide an acknowledgment that contains the terms, the cancellation policy, and a simple cancellation method. 

The new California law builds on those requirements by requiring that all automatic renewal, continuous subscription, or free gift or trial payment plans must:

  • Provide “clear and conspicuous” explanation of any updates to the price or purchase agreement to be charged after a free gift or trial concludes.
  • Secure affirmative consumer consent to non-discounted pricing prior to billing.
  • Disclose how consumers can cancel automatic renewal prior to payment for the continuing service after a free gift or trial.
  • Provide an “exclusively online” cancellation mechanism for consumers who originally accepted the service agreement online.

It Could Have Been Worse

The good news for retailers is that the final law is not as onerous as some lawmakers originally wanted.

Earlier this year, a version of SB313 passed the California Senate requiring express consumer authorization for any automatic renewal to be separate from the consumer agreement for the free gift or trial. It also required mandatory notice of the automatic renewal or pricing update a full three days before the new billing takes place, and required that companies maintain a cancellation process that “allows the consumer to cancel the service or offer as easily as the consumer accepted the service or offer.” These items are not included in the final version that will become law on July 1, 2018.

The Bottom Line

The effective date allows retailers time to adapt to the new standards. While change can be intimidating, it also provides a healthy incentive to innovate. This can lead to an evolution of marketing tactics, a better differentiated brand identity, and greater consumer benefit. 

By taking these steps while auditing compliance with ROSCA, state automatic renewal laws, and other compliance obligations, a retailer can become well positioned to achieve a competitive advantage in the marketplace.