Service Product Subscription Regulations
Subscriptions are an indispensable tool for recurring revenue business models, including among manufacturing customers offering product or service subscriptions, but their growing popularity has been a target for regulators and litigants. 2022 is poised to continue shaping this emerging landscape, with new regulatory frameworks, federal and state enforcement, and continued potential for private litigation. Keeping abreast of the evolving regulatory framework and key consumer protection themes in this space can help manufacturing companies with subscription model offerings prepare for the path ahead.
Federal regulatory framework for subscription models
Recent developments from the Federal Trade Commission (FTC), including an enforcement policy statement and press release, signal an intent to increase enforcement activity against auto-renewal subscription offers, more formally called “negative options”. Negative options include offers in which there is a “term or condition under which the seller may interpret a consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement as acceptance or continued acceptance of the offer”. The FTC categorizes some of these offerings as “illegal dark patterns that deceive or trick consumers into subscription services.” While acknowledging that ratings are individualized, the FTC has provided basic guidelines for avoiding “illegal dark patterns,” including:
Clearly and prominently disclose material terms, including the existence of the negative option offer, the total cost of the offer, and how to cancel the offer;
Disclose these material terms before consumers accept the purchase;
Obtain the express informed consent of consumers to these offers; and
Avoid unreasonable obstacles to cancellation.
Recent FTC enforcement actions provide more guidance on how manufacturing companies can implement compliant negative option features. In late spring 2022, the FTC announced a settlement with an online platform based, in part, on the company providing hard-to-cancel subscription plans. Although specific to each case, this settlement order again outlined key FTC-approved compliance features. Affirmative consumer consent must be obtained separately from any other consent. For online and written offers, the consumer must affirmatively accept the negative option function (including by tick box, signature or other comparable method). For disclosures to be “clear and visible,” companies must provide disclosures, similar to original communications, that are easily noticeable, unavoidable, and understandable. Although companies must provide an order confirmation for the renewed subscription, this notice should contain only the essentials and should not include marketing materials. To facilitate cancellations, consumers who subscribed orally should not be put on hold by customer service for more than 10 minutes, and companies should return any consumer’s voicemail within one business day.
Developments for state regulation of subscription models
In line with federal guidelines, state auto-renewal laws increasingly require companies to clearly and prominently inform consumers of what consumers are subscribing to, obtain consumer affirmative consent to subscribe, provide an acknowledgment of receipt of the order and offer an easy way to cancel. However, the evolving patchwork of state laws often places unique and changing requirements on consumer-facing businesses, including manufacturing companies offering product or service subscription models. The following states have recently enacted new or revised automatic renewal statutory frameworks:
California: California has new requirements for its automatic renewal laws that will take effect in mid-2022. California already required “clear and prominent” notice of the terms of the subscription offer, affirmative consumer consent to those terms, and an easy way to cancel.
The amended law introduces recall notice and online termination requirements and comes into effect July 1, 2022.
In some cases, companies must send out recall notices that clearly and prominently state the following:
The subscription will automatically renew unless the consumer cancels;
The length of the renewal period and any additional terms;
Methods of cancellation by the consumer;
For electronic notice, either a link to cancel or another reasonably accessible electronic method to facilitate cancellation; and
For free trial periods longer than 31 days, a company must generally send the consumer a reminder notice between 3 and 21 days before the end of the trial period.
For a subscription with an initial term of one year or more, the company must send the consumer a reminder notice between 15 and 45 days before the end of the initial term.
For online termination, the online termination method must allow termination at will and without incurring additional steps that impede or delay the consumer’s ability to terminate immediately. This requirement is stricter than those of other jurisdictions. Businesses must offer at least one of the following:
a “direct link or prominent button” or
a pre-written, immediately accessible termination email that a consumer can send to the business without having to add any information.
Colorado: Recent Colorado law also requires clear and conspicuous terms; a written acknowledgment of receipt with terms of the offer, cancellation policy and cancellation advice; and a simple way of cancellation. Businesses must include an online link that provides consumers with detailed information about the auto-renewal offer.
Delaware: Delaware law applies where negative option programs have an initial term of one year or more, with a renewal period of at least one month. Delaware requires clear and visible terms, including disclosure of automatic renewal terms, renewal reminders, and an easy way to cancel. Before filing a lawsuit, Delaware requires consumers to give the seller notice and an opportunity for recovery.
Illinois: The Illinois statutory regime now applies to all auto-renewing programs rather than just annual programs. Illinois has notice, cancellation, and affirmative consent requirements comparable to requirements in other states.
Idaho: Beginning in January 2023, Idaho will impose certain notice and cancellation requirements for subscriptions lasting 12 months or longer. Idaho requires clear and prominent disclosure of automatic subscription renewal terms and cancellation methods. The methods of termination shall include free online termination of the subscription and termination in the same manner used by the consumer to subscribe. Businesses must provide consumers with a renewal notice 30-60 days prior to renewal, which must describe the products, state the price, notify the consumer of the renewal, and provide at least two methods of cancellation.
Virginia: Virginia now requires clear and prominent disclosures before renewal terms for automatic renewals, consumer affirmative consent to the agreement containing the terms of the automatic renewal offer before charging the consumer, and an acknowledgment of the renewal terms automatic or continuous service offer, cancellation policy and information on how to cancel in a way that the consumer can retain.
Auto-Renewal Subscription Dispute Trends
As state legislatures pay more attention to enacting and amending automatic renewal laws, private litigants have followed suit. This includes costly class action litigation and settlements against companies offering subscription models for products or services. However, other companies have successfully avoided consumer auto-renewal litigation at the motion-to-dismiss stage, establishing that the company provided the notice required under the law. While this strategy has been effective with less defined legal requirements and less robust case law, this strategy may prove increasingly difficult as states establish granular legal requirements for compliance. Stricter and pervasive state regulations, along with growing FTC guidance, create a new landscape for litigants to navigate, and consumers may have more tools to plausibly assert claims.
Regulation of the key subscription model
Clarity, consent and convenience are important features of model subscription programs. The FTC’s Enforcement Policy Statement and recent settlement order are helpful frameworks for manufacturing companies offering subscription models of products or services. National companies should consider regulatory programs in high-impact states like California, which not only has a sizable consumer population, but is also traditionally a frontrunner in consumer protection. Companies with a more targeted reach should also consider relevant legal requirements in their key states. Some credit card companies, like MasterCard, are also starting to impose notice requirements on private companies. Government regulations and requirements from private actors continue to move towards obvious and clear disclosures and consent.