The Growing World of Automatic Renewal Laws
With the proliferation of automatic renewal clauses in consumer contracts, new laws, generally called automatic renewal laws (ARL) governing them, have sprung up in the states.
Many newer ARLs are notable for the breadth of activities they regulate. That was not always so. Many states have narrow ARLs that govern only particular industries like health clubs and buyers’ clubs.
Many newer ARLs apply broadly to all manner of continuing or renewing contracts for (l) goods, (2) services, or (3) both. They are also subject to exceptions and exemptions, sometimes based on the duration of the original or renewal terms or whether specific agencies already regulate a business. Generally, broad ARLs are broad enough to create challenges and risks for businesses offering consumer contracts on a renewing basis.
Although some ARLs distinguish between automatic renewal and continuous service contracts, there is little practical difference between the two. California defines an automatic renewal contract as automatically renewed at the end of a definite term for a subsequent term. It defines a continuous service contract as continuing until the consumer cancels the service. As a practical matter, differentiating between them is usually unnecessary because legal requirements apply equally to both.
Although ARL requirements differ from state to state, they generally contain a combination of the following:
Clear and conspicuous disclosure of the automatic renewal terms, including pricing
Visual proximity of the automatic renewal terms to the request for consent
Affirmative consent from the consumer
An acknowledgment with information on cancellation procedures
Notice of material changes in specific contract terms
Reminders about the contract’s approaching renewal
Some states specify the size and clear and conspicuous font; others mandate precise cancellation options for specific contracts, like online cancellation options. While reminders are generally tied to cancellation deadlines, they are tied to renewal dates in some states. In some states, they are not required at all. Some states have altogether different requirements; for example, Vermont requires a double opt-in; separate consent to the contract and the renewal specifically.
Because each ARL represents a variation on a common theme, a national compliance strategy demands a close review of each law.
ARLs generally have one or more enforcement mechanisms, including enforcement by
Consumers under a private right of action in the ARL
Consumers under an unlawful or unfair business practice provisions in consumer-protection statutes
Attorneys general and district attorneys
ARLs generally carry one or more of the following consequences for violating them, including Court orders:
Declaring that the contract is void or voidable
Requiring injunctive relief that mandates or prohibits certain practices
Court orders requiring restitution to consumers
Declaring goods purchased during the contract term to be unconditional gifts and requiring reimbursement of money paid for them.
Several states have a form of good faith defense. These generally exempt businesses from liability if they can show that the violation resulted from an error (like accidentally failing to process a cancellation) and that they have made amends (like refunding the cost of the contract that the customer paid after trying to cancel). While the requisites differ from state to state, businesses in substantial compliance may be able to invoke this defense.
Although state ARLs impose the most specific requirements, they are not the only laws to consider when offering to renew or continue consumer contracts.
Businesses should always be mindful about complying with generic consumer-protection statutes, like those requiring accurate disclosures or prohibiting false advertising.
Section 5 of the Federal Trade Commission (FTC) Act prohibits unfair or deceptive business practices at the federal level. The Restore Online Shoppers’ Confidence Act requires clear disclosure of, and express consent to, the material terms of online consumer contracts. Considering automatic renewal to be a negative option feature, the FTC has outlined principles to guide marketers in their use.
In 2021, Colorado and Delaware passed new ARLs that took effect on January 1, 2022. They are the sixth and seventh states (North Dakota, Vermont, Virginia, New York, and the District of Columbia) to enact new broad ARLs since 2019.
Colorado requires (1) clear, and conspicuous disclosures, (2) written acknowledgments provided to consumers, (3) notices of material changes to the contract terms, and (4) reminders of approaching renewals. Reminders of approaching renewals are relatively standard features of broad ARLs. The timing in the Colorado ARL is different. Those reminders are required on basically an annual basis regardless of the renewal term length. Colorado also requires express consent to renewal terms more extended than a year, without saying when the consent must be provided for renewal. While several ARLs create a private right of action, Colorado vests its attorney general with exclusive authority to enforce the statute.
Delaware’s ARL is less burdensome than other ARLs. Like many states, Delaware requires (1) clear and conspicuous disclosure of automatic renewal terms; (2) renewal reminders for some renewals extending the contract beyond 12 months; and (3) a cost-effective, timely, and easy-to-use cancellation mechanism, including online cancellation for online agreements. The law applies only to merchandise rather than goods and services. It allows consumers to sue under existing consumer-protection laws and includes a good faith defense. It requires consumers to allow businesses to cure any alleged violation before filing a suit.
The development of ARLs includes amendments by California and Illinois. In both cases, the states adopted ARL provisions that have become common in more recent statutes.
California’s amendment will (1) require businesses to provide renewal reminders to consumers who agreed to an initial contract term of one year or more, (2) require renewal reminders for free or discounted trials that last more than 31 days, and (3) add detailed requirements about ease of access to online cancellation links.
The Illinois amendment requires businesses to provide an online cancellation option for online agreements.
Compliance with ARLs can be complicated by ambiguous statutory language that leaves broad latitude for conflicting interpretations. Two 2021 federal court rulings on California’s ARL highlight this.
California’s ARL requires businesses to provide an acknowledgment that includes the automatic renewal offer terms or continuous service offer terms, cancellation policy, and information regarding how to cancel in a manner capable of being retained by the consumer. The law does not say precisely when this acknowledgment must be provided. It says this requirement may be fulfilled after completing the initial order. Is that immediately after completing the initial order or weeks or months later?
The two federal courts held that acknowledgments sent months before renewal, many months after purchase, satisfied the acknowledgment requirement.
But state courts and regulators will not necessarily follow their interpretations of this state statute.
The California Auto-Renewal Task Force (CART), a group of California district and city attorneys, has entered several settlements requiring immediate post-purchase acknowledgments. Failure to follow CART’s interpretation, whether correct or not, could be costly, as demonstrated by a $2 million settlement with CART in 2021.
The continuing evolution of ARLs can also be seen in the laws proposed on the subject. Broad ARL bills were introduced in eight states other than Colorado and Delaware in 2021: Alabama, Indiana, Kentucky, Massachusetts, Missouri, New Hampshire, Texas, and West Virginia. Bills to amend existing broad ARLs were introduced in three states other than California and Illinois in 2021: Florida, North Carolina, and Oregon.