Federal and State Governments Focus on Auto-Renewal of Subscriptions and Product

The Federal Trade Commission (“FTC”) recently proposed a rule that would create new obligations and liabilities for businesses using customer agreements that automatically renew unless the customer takes action to terminate. Auto-renewed subscriptions are widespread in online agreements and are convenient for both parties when fully disclosed and applied in good faith. Anyone who has tried to cancel a gym membership, however, can imagine why auto-renewal is also a perennial source of fraud and deceptive practices. Unscrupulous businesses often poorly disclose or conceal the provision and then spring the trap by making cancellation difficult or impossible.

Below I briefly describe the rule’s proposed requirements. The FTC is gathering input on the proposed provisions and underlying concepts and is accepting comments from the public until June 23. While still only a proposed rule, consider its terms carefully. The FTC has been intensely focused on this topic for many years – it is highly motivated to pass a broad rule and likely has developed rather fixed views on the proposal, potentially making the agency less amenable to compromise.

Easy Cancellation Mechanism Required

Under the proposal, the means of cancellation must be “at least as easy to use as the method the consumer used” in entering into the agreement. The proposed rule release does not offer much guidance on this requirement. The FTC intentionally left this proposed concept amorphous, leaving businesses with flexibility in adopting a means of cancellation while providing itself with leeway to address the ingenuity of bad actors. As has been said in the securities context, borrowing from Shakespeare, “[i]t might be said of fraud that age cannot wither, nor custom stale its infinite variety.

At a minimum, the FTC made clear that cancellation of an auto-renewal subscription must be available through the same means as consent was given. If the agreement was entered into online, cancellation must be available online. The same would apply outside of the online context, such as telephone, mail, etc. This alone would have marked benefits to consumers. Businesses that make cancellation difficult and time-consuming often require cancellation through specific means. For instance, a business might enter into an agreement online but then require cancellation by phone during specific hours at a number that is suspiciously and consistently unanswered. In the context of online agreements, the business must “provide an accessible cancellation mechanism on the same website or web-based application used for sign-up.”

Likely, the FTC will look directly to the subjective parity of the means of entering into the agreement and means of its termination. The FTC stated its thinking concisely but insightfully: “Because sellers have huge incentives to create a frictionless purchasing process, ensuring cancellation is equally simple should remove barriers, such as unreasonable hold times or verification requirements.

Separate Consent to Auto-Renewal Term

An auto-renewal provision is often buried amongst various terms or explained in a confusing way. The proposed rule requires specific, separate consent to auto-renewal. Further, it expressly prohibits burying the renewal in information or language that “interferes with, detracts from, contradicts, or otherwise undermines the ability of consumers to provide their express informed consent[.]” It requires affirmative consent to that portion alone, stating that such consent must be given “through a check box, signature, or other substantially similar method, which the consumer must affirmatively select or sign to accept the negative option feature, and no other portion of the offer..

Again, this provision was left rather ambiguous to provide both the industry and agency with flexibility, focusing on a more principles-based approach than on bright-line rules. The FTC succinctly stated its goal in taking such an approach: “Specific prohibitions may be counterproductive, solving today’s issues only to inadvertently provide a road map to tomorrow’s deception.

No Retention Measures or Up-Selling Before Cancellation

Businesses often require a customer canceling its agreement to listen to a number of potential “upsells” before effecting the cancellation. Often the duration of these upsells and/or the “hard sell” given are alone enough to dissuade a canceling customer to put off the task to another time. Such conduct is specifically prohibited under the proposed rule as the FTC does not find it comports with the requirement for a simple cancellation mechanism. Under the proposed rule, the customer must be given the option of hearing about potential inducements not to cancel, but the customer may decline to hear such options and the cancellation must be completed.

Reminders of Auto-Renewal and Means of Cancellation

Except for agreements for physical goods, the proposed rule would require a business using an auto-renewing agreement to provide the customer with periodic reminders describing the service at issue, the charges for the service, the terms of the auto-renew provision, and the means of canceling the agreement. Of course, the frequency of the reminders would depend upon the term of the contract (e.g., more frequent reminders for quarterly renewals than for annual).

The proposed rule states that the reminder must, as a minimum, be provided through the same means as is used to enter into the agreement.^[11] This seems to refer generally to broad descriptions of the medium used; for example, a company that enters into agreements on its website could provide an email reminder. This provision seeks to provide a customer with actual notice of an auto-renewing agreement before he or she is surprised with unexpected charges.

These proposed rules could have a major effect on online commerce, and businesses would be prudent to follow this topic closely to avoid potential liability.