Don't give away your product or services



January 19, 2016

Commercial Litigation Alert

Author(s): John R. Foote

Does your business offer an automatically renewing purchase of products or services? If so, then you should be aware of the existence, scope and requirements of California’s Automatic Renewal Law (Cal. Bus. & Prof. Code § 17600, et seq.), as well as the serious risk it may pose to your business.

Risk to your business

Under California’s Automatic Renewal Law, any goods provided to a California consumer pursuant to a noncompliant automatic renewal arrangement “shall for all purposes be deemed an unconditional gift to the consumer.” Although the law attracted little attention when it became effective in December 2010, it has recently become an emerging focus of litigation for the plaintiffs’ class action bar, inducing a new wave of class action suits in California. Plaintiffs’ lawyers claim the remedy is restitution of all gross revenues received pursuant to a noncompliant automatically renewing purchase of products or services, an outcome that would likely create a significant economic, regulatory and reputational risk to your business.

Scope

California’s Automatic Renewal Law applies to businesses offering an automatic renewal plan or arrangement to California consumers whereby the consumer incurs a recurring automatic charge to his or her credit card or payment account for the purchase of ongoing shipments of a product or ongoing deliveries of service. The law applies to automatic renewal arrangements with any California consumer, regardless of where the business may be located.

Disclosure and consent requirement

California’s Automatic Renewal Law requires a business to obtain the consumer’s affirmative consent to the business’s “automatic renewal offer terms” prior to charging the consumer for a subscription. The automatic renewal offer terms must provide the consumer with the following essential information (where applicable):

  1. That the subscription will continue until the consumer cancels it.
  2. When and under what circumstances a subscription can be canceled.
  3. How much and how often the subscriber will be charged. If the amount of the charge might change, that possibility must be disclosed, as well as how much it will change, if that is known.
  4. How long the automatic renewal period will last or that the service is continuous, unless the length of the term is chosen by the consumer.
  5. The minimum purchase obligation or minimum amount of time a subscriber must stay subscribed, if any.

The business must disclose its automatic renewal offer terms in a “clear and conspicuous” manner, which means that the terms must be presented in such a way that “clearly calls attention to the language”—e.g., larger type than the surrounding text, contrasting type, font or color to the surrounding text, or set off from the surrounding text. The terms must also be within “visual proximity” to the request for the consumer’s affirmative consent to the automatic renewal offer terms.

Acknowledgment requirement

After the consumer has accepted an automatic renewal arrangement, the business must provide the subscriber with an “acknowledgment” of the subscriber’s enrollment in a manner that can be retained by the subscriber. The “acknowledgment” must include the terms of the automatic renewal offer, as well as information on a cost-effective, timely and easy-to-use mechanism for cancelling the subscription—e.g., toll-free telephone number or e-mail address. If the offer includes a free trial, the business must allow the consumer to cancel before the consumer is charged for the goods or services and provide information in the acknowledgment on how to effect that cancellation.

Notice of material change requirement

The business must also provide a “clear and conspicuous” notice to the consumer if there has been any material change to the terms of the automatic renewal arrangement. Such a notice must also provide information on how to cancel the subscription.

Although many states have enacted laws regulating subscription-based product and service providers, California’s Automatic Renewal Law is, unsurprisingly, perhaps the strictest. Many businesses—especially those located outside of California—remain unaware of the requirements of the law and have failed to update their websites to come into compliance. Nixon Peabody LLP can conduct a comprehensive review of your company’s website and disclosures and counsel your company on how best to comply with California’s Automatic Renewal Law. We can also handle any type of complaint that is brought against your company for a purported failure to comply with this law.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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