Selling Your Customers a Subscription? Avoid These Mistakes.
Two years into the pandemic, consumers may be feeling “subscription fatigue” (too many subscription services to keep track of), but many companies are still offering more and more services on a subscription basis. The appeal is simple: a repeat customer provides companies with steady and predictable revenue. Meanwhile, the customer knows they’ve locked in their favorite services.
However, it is important that businesses understand the federal and state regulations surrounding selling services on a subscription or auto-renewal basis. Over the past several years, as the prevalence of subscription services increased, so did complaints, and the Federal Trade Commission (FTC), as well as several states, took notice and enacted regulations to help combat deceptive practices.
What is Subscription Marketing?
A subscription or auto-renewal is sometimes referred to as a “negative-option” offer or plan in which sellers interpret a customer’s failure to take an affirmative action (such as rejecting an offer or canceling an agreement) as assent to be charged for the next round of goods or services. This broad definition incorporates automatic renewals (e.g., at the end of a given month you are automatically charged for another month) and free to pay trial offer conversions (e.g., a company offers a one-month free trial, but after one month, a consumer is automatically charged for the next month of service).
Below we provide a brief overview of the regulatory landscape as well as notable enforcement actions. It is important to keep in mind that roughly 30 states have laws regulating automatic renewal purchases in one way or another, so companies should not rely solely on compliance with federal law. If you sell a service or product on a recurring basis, or are planning to, contact the authors to understand your company’s obligations.
Federal and State Law
In 2010, Congress passed the Restore Online Shoppers’ Confidence Act (“ROSCA”) to address consumer grievances with online transactions, including online negative-option plans. The law provides that online negative-option marketing is unlawful unless a company:
- Clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information;
- Obtains express informed consent before charging the consumer’s credit card; and
- Provides a simple mechanism to stop the charges.
As the rise of subscription services continued in recent years, many states began enacting their own laws, some of which are more onerous than ROSCA. Certain states enacted laws that apply only to term lengths above six or twelve months. Other state laws provide specific notice requirements when selling free trials that convert into paid auto-renewals.
The Federal Trade Commission (“FTC”) has brought several enforcement actions alleging ROSCA violations in recent years—often resulting in high-dollar monetary judgments. For example, in September 2020, the FTC announced a settlement with Age of Learning, Inc. d/b/a ABCmouse for $10 million to settle allegations that the popular educational software company failed to properly disclose the material terms of its auto-renewal and made it difficult for consumers to cancel.
These actions are likely to continue. In October 2021, the FTC issued a policy statement warning marketers against using so-called “dark patterns” to trap consumers into subscription services. The policy statement highlighted three main areas marketers should be aware of: (1) disclosure; (2) consent; and (3) cancellation. The FTC’s accompanying press release noted that the “agency is ramping up its enforcement in response to a rising number of complaints about the financial harms caused by deceptive sign up tactics, including unauthorized charges or ongoing billing that is impossible to cancel.”
In addition, state attorneys general and class action plaintiffs have also brought various actions alleging violations of state auto-renewal laws. In February 2022, Noom, a fitness app developer, agreed to settle a class action lawsuit in New York related to alleged auto-renewal violations for $56 million.
Regulators have made clear that cracking down on deceptive subscription marketing is a priority. If you sell services that auto-renew, or are planning to, it is important that you understand the complex state and federal regulations. Contact the authors to learn more.