We live in the era of “Do it fast!” Have it now! Have it hassle-free!” As customers demand ease of online transactions, businesses are naturally looking to meet consumer demand while reducing administrative costs. In the digital push towards auto-renewing everything from the purchase of goods and services to memberships and subscriptions, companies offering auto-renewal should be aware of often-overlooked regulations that may apply.
The labyrinth to cross
Although an automatic renewal may seem simple enough, there is a complex regulatory system that governs it – including federal, state, and even merchant card agreement requirements – with which every business must ensure compliance, especially when the automatic renewal occurs in an online transaction.
Congress enacted protections for online shoppers as early as 2010. These protections include “Internet Negative Options Marketing,” which regulates the method by which a company can charge consumers certain recurring fees. In late 2021, the Federal Trade Commission (FTC) issued a press release indicating that it intended to intensify enforcement efforts to combat what it called deceiving and entrapping consumers into subscriptions. In doing so, it issued an enforcement policy statement regarding negative option marketing. As the FTC noted, “[its] The policy statement advises companies that they will face legal action if their registration process does not provide clear, up-front information, obtain informed consent from consumers, and facilitate cancellation.1
In addition to federal oversight, there is a patchwork of about 20 states that regulate automatic renewals and at least six states2 who introduced legislation this year alone. There is clearly a tendency to regulate this practice.
State law generally requires, in addition to other things, that certain prescriptive notices be provided to consumers prior to the date that automatic renewal takes place and an opportunity to opt out of automatic renewal. In fact, in California and Virginia, new legislation is expected to go into effect in July 2022 and January 2023, respectively, which will additionally require prominent online options to override certain automatic renewals.
In 2021, The Washington Job reached a settlement agreement in a class action lawsuit worth nearly $7 million related to allegations that it violated a number of laws and required in the eventual relief to “provide automatic renewal terms on its payment pages in a manner that complies with the requirements of Cal Bus & Code Prof §§ 17600, and. after.”
Giving further insight into the potential opinion of state attorneys general on the matter, the New York Attorney General issued a consumer alert in late 2021 warning customers of “schemes to trick consumers into recurring payments.”
Finally, it should be noted that just because automatic renewals are not specifically regulated by a state does not mean that a company is “safe” by offering such renewals. States without such laws may rely on laws prohibiting unfair, abusive, and deceptive practices to regulate corporate behavior.
Merchant Card Agreement Rules
In addition to federal and state requirements, businesses should review their merchant card agreement rules for automatic renewal notification requirements. For example, Mastercard and Visa have adopted rules involving automatic renewals and require certain additional notifications to their cardholders.
So, is auto-renewal worth it?
Using automatic renewal programs likely reduces consumer hassle and business processing costs while simultaneously increasing revenue. However, with the regulatory regime surrounding automatic renewals, there may be additional compliance costs for those who decide to institute an automatic renewal program.
Businesses that adopt an auto-renewal business model should consult with an attorney to avoid potential pitfalls.
1 This analysis does not include the requirements of Regulation E, regulating pre-authorized transfers, which the company should also take into account.
2 Kentucky, Michigan, Missouri, New Jersey, Pennsylvania and Rhode Island.