New changes to California's Automatic Renewal Law

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Litigation Alert

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A newly amended version of California's Automatic Renewal Law (ARL) is now in force, putting into effect additional requirements to what is arguably the country's stiffest consumer-protection law focused on subscription-style plans.

Although numerous laws in other states and the federal Restore Online Shoppers' Confidence Act provide similar enforcement regimes, the amended ARL – which went into effect July 1 – further underscores the California law's status as the highwater mark for regulation in this space.

Since its operative enactment on December 1, 2010, the ARL has been a favorite tool for both the plaintiff bar and government enforcers.1 In California, which is home to significant technology corridors, the ARL has had a unique impact on e-commerce companies with subscription-style offerings. E-commerce companies across industries – from streaming music to identity security to online dating – have been the subject of ARL actions. However, California companies are not alone in facing the ARL's impact. Indeed, any company doing business should take notice of the ARL and prepare for its new requirements.

Key provisions of the ARL

The operating provisions of the ARL are located at Section 17602 of California's Business and Professions Code. Broadly speaking, the ARL imposes five requirements for any business that makes an "automatic renewal or continuous service"2 offer to a California consumer:

1. Clear and conspicuous. The offer must be presented in a "clear and conspicuous manner" and done so before the agreement is consummated and in "visual proximity" to the request for consent.

2. Affirmative consent. The consumer must first provide "affirmative consent" to the offers agreement before charging.

3. Acknowledgement. The business must provide the consumer with a retainable acknowledgement of (a) the offer's terms; (b) the cancellation policy; and (c) information about how to cancel, as described below. (In the event of a "free trial," there must be a disclosure about how to cancel–and an allowance for cancellation–before the consumer pays for the good or service.) It is acceptable for the acknowledgement to be fulfilled after the completion of the initial order.

4. Cancellation. The business must provide a cancellation method which is (a) a toll-free telephone number; (b) an email address; (c) a postal address, if the seller directly bills the consumer; or (d) another "cost-effective, timely, and easy-to-use mechanism."

5. Notice of material change. A "material" change in an offer's terms must be noticed to the consumer–prior to implementation of the change–in a "clear and conspicuous" way if the California consumer had earlier accepted the offer. This notice must also provide retainable information about how to cancel the accepted offer.

The ARL's changes effective July 1, 2018

Originally introduced on February 13, 2017, as California Senate Bill 313 ("SB 313"), the newly amended ARL imposes three significant requirements:

1. Cancellation online. For many of the companies, if not most, that have been impacted already by the ARL, the law now requires them to allow a consumer to cancel an offer exclusively online if the consumer accepted the offer online. (A statutorily acceptable, but not mandated, method may include a "termination email" that the company formats and provides for the consumer to send without additional information.)

2. Affirmative consent to an offer under special pricing. The company's obligation to obtain affirmative consent to the agreement containing the offer's terms now explicitly includes those terms related to an offer made at a "promotional or discounted price for a limited period of time."

3.New disclosures related to free gifts or trials. In two parts of the ARL, the law imposes additional provisions targeting free gifts or trials included as part of an automatic renewal or continuous service.

a. Clear and conspicuous pricing. An offer that includes a free gift or trial must have a "clear and conspicuous explanation" of the offer's pricing or change in pricing upon the trial's end.

b. Acknowledgement. In an obscure change that has largely been overlooked by most commentators, the ARL now includes the term "gift" in the provision that, previously written, related to the acknowledgement disclosure that companies must provide a consumer for an offer that "includes a free trial." In its new form, a "free gift or trial" now triggers a disclosure in the acknowledgement about how to cancel–and an allowance for cancellation–before the consumer pays for the good or service.

What it is, what it's not and what it means

There are several important takeaways from the ARL's new provisions. The first of these is that, with adequate planning, these new obligations do not need to be cost-prohibitive to implement – especially as compared to after-the-fact enforcement by government regulators. The requirement likely to consume most companies' time relates to the online cancellation option that a company must provide to consumers if the consumers accepted their offers online. For many e-commerce companies, online cancellation is already a function in their business – and could, in fact, provide cost-saving streamlining in the customer service process. However, those e-commerce companies that do not currently provide for any form of online cancellation should consider it a compliance priority. For government enforcers such as the California Attorney General's Office and California's 58-county district attorneys, inspection of companies' online e-commerce business is a simple matter of searching the Internet – indeed, to date, several cases have been investigated and suits filed.

In this new version of the ARL, free gifts and trials (and, in this regard, promotional pricing) now have prominence – an issue that the California Senate's author made a specific effort to mention in the bill's introduction. Although specific in nature, this suite of provisions could have a significant impact on companies affected by the ARL. Most, if not all, companies in this space engage in a degree of special pricing or otherwise provide for free gifts and product trials to entice consumers. As a result, many – if not all – ARL companies must examine whether their affirmative-consent mechanisms address promotional or discounted pricing. Additionally, free gifts – not just free trials – will now trigger a disclosure in the post-purchase acknowledgement so that a consumer has the option and ability to cancel before payment is required.

In many ways, the new ARL is not unexpected given California's aggressive approach to regulatory frameworks. However, multiple material provisions from the original bill that were removed suggest what could lie ahead in upcoming legislative sessions – these include a requirement for separate consumer affirmative consents for automatic renewals and free gifts/trials; a multi-day notice period prior to a first service charge; and making cancellation "as easy as" signing up for a service. 3 The evolution of e-commerce will play a significant role in how potential future regulatory provisions are received in the California legislature. In the meantime, companies affected by the ARL should closely examine their e-commerce processes to ensure early compliance with these new provisions.

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1 In recent years, courts have consistently ruled that the ARL does not provide a private cause of action. We analyzed this important development in a Litigation Alert on March 16, 2017, which can be accessed here.

2 The concepts are closely intertwined, but the statute defines them separately based on whether they are time-limited in nature. An "automatic renewal" is defined as a "plan or arrangement in which a paid subscription or purchasing agreement is automatically renewed at the end of a definite term for a subsequent term." Similarly, a "continuous service"; is a "plan or arrangement in which a subscription or purchasing agreement continues until the consumer cancels the service."

3 The State of Vermont has already taken action in this regard. Starting July 1, 2019, an amendment to Vermont's Automatic Renewal Provisions in Consumer Contracts law goes into effect. Among other things, Vermont House Bill 593 will require a Vermont consumer to make some kind of "affirmative action to opt in" to an automatic-renewal provision. This opt-in consent is "in addition to accepting the contract."