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Many of us purchase products or services on subscription plans that renew automatically, without the need for any additional action. Magazine subscriptions, streaming music, and streaming video services are common examples of these kinds of subscription plans. So are cloud computing services like Dropbox and Office365. It is a lucrative model for businesses, because the business doesn’t have to reach out to the consumer after a period of time to solicit renewal. In addition, customer inertia typically plays in the business’s favor. We tend to let these subscriptions run on indefinitely. If you operate a business that sells goods or services to consumers using that business model, however, you should ensure that your auto-renewal plan complies with a California law governing the practice, even if your business is not located in California. Otherwise, you run the risk of having those subscriptions be considered “gifts,” and you may be subject to penalties. Class action lawsuits have recently been filed against Spotify, Dropbox, and Hulu, alleging widespread violations of the California law. Please read further, and I will describe the five basic requirements for your company’s auto-renewal subscription plan.
Before going into the specific requirements for auto-renewal subscription plans, it is important to understand two things. First, the rules apply only to businesses selling to consumers. Business-to-business transactions are not included. Second, the rules apply to sales to consumers in California, regardless of where the selling business is located. As long as your customer is in California, the law applies. This makes it important for businesses in other states to ensure that they are in compliance with California’s rules.
Now let’s take a look at the five requirements for an auto-renewing subscription plan:
First, the terms should be presented in a clear and conspicuous manner before the subscription agreement is fulfilled. Also, the terms should be placed in visual proximity (or in the case of a voice offer, such as by phone, in temporal proximity), to the request for consent to the offer.
Second, you must get the consumer’s affirmative consent to the terms, before charging his or her credit card, debit card, or other payment account.
Third, you must provide an acknowledgement to the consumer, containing the terms of the plan, the cancellation policy, and information on how to cancel. This acknowledgement has to be in a form that can be retained by the consumer. If your offer contains a free trial, you must disclose in the acknowledgement how to cancel, and you must allow the consumer to cancel before the consumer pays for the goods or services.
Fourth, you must provide a toll-free telephone number, e-mail address, postal address (only when directly billing the customer), or another cost-effective, easy-to-use means for cancellation, that is described in the acknowledgement.
Fifth, if you make a material change to the terms of an auto-renewal plan, you have to provide the consumer with a clear and conspicuous notice of the change, along with information about how to cancel, in a form that can be retained by the consumer.
The California law has been in effect since December 2010, but many existing businesses located outside of California may not even be aware that it applies to them. Whether you operate an existing business or are starting a new business, if you use auto-renewal subscription plans as part of your business model, you should carefully review your terms and practices to make sure you comply with these California requirements.
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