Subscription Model Regulation Trends and Takeaways
Subscriptions are an indispensable tool for recurring-revenue business models, including among clients in the manufacturing sector offering product or service subscriptions, yet their growing popularity has been a target for regulators and litigants alike. 2022 is poised to continue shaping this emerging landscape, featuring further regulatory frameworks, federal and state enforcement, and continued potential for private litigation. Keeping a pulse on the shifting regulatory framework and main consumer protection themes in this space can help manufacturing companies with subscription model offerings prepare for the road 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 escalate enforcement activity against subscription auto-renewal offerings, more formally referred to as “negative options.” Negative options include offerings where 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 continuing acceptance of the offer.” The FTC categorizes some of these offerings as “illegal dark patterns that trick or trap consumers into subscription services.” While recognizing that assessments are individualized, the FTC has provided basic guidelines for avoiding “illegal dark patterns,” including:
Clearly and conspicuously disclosing material terms, including the existence of the negative option offer, the offer’s total cost, and how to cancel the offer;
Disclosing these material terms before consumers agree to the purchase;
Obtaining consumers’ express informed consent to such offers; and
Avoiding unreasonable barriers to cancellation.
Recent FTC enforcement actions provide more guidance on how manufacturing companies can implement compliant negative option features. In the late spring of 2022, the FTC announced a settlement with an online platform based, in part, on the company’s provision of subscription plans that were difficult to cancel. While case-specific, that settlement order again underscored key compliance features approved by the FTC. Consumers’ affirmative consent should be obtained separately from any other consent. For online and written offerings, the consumer must affirmatively accept the negative option feature (including by check box, signature, or another comparable method). For disclosures to be “clear and conspicuous,” companies should give disclosures, in the same manner as the original communications, which are easily noticeable, unavoidable, and understandable. While companies should provide order confirmation for the renewed subscription, that notice should contain only the essentials and should not include marketing materials. To make cancellations easy, consumers who subscribed orally should not be placed 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 guidance, state auto-renewal laws increasingly require businesses to notify consumers clearly and conspicuously about what consumers are signing up for, obtain consumer’s affirmative consent to subscribe, provide acknowledgment of the order, and offer a simple means of cancellation. However, the evolving patchwork of state statutes often impose 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 auto-renewal statutory frameworks:
California: California has new requirements for its auto-renewal laws that will take effect in mid-2022. California already required “clear and conspicuous” notice of the subscription offer’s terms, a consumer’s affirmative consent to those terms, and a straightforward means for cancellation.
The amended law introduces reminder notice and online termination requirements and goes into effect on July 1, 2022.
In certain instances, companies must send reminder notices that clearly and conspicuously state the following:
The subscription will automatically renew unless the consumer cancels;
The length of the renewal period and any additional terms;
Methods for consumer cancellation;
For electronic notice, either a link to cancel or another reasonably accessible electronic method to facilitate cancellation; and
Company’s contact information.
For free trial periods longer than 31 days, generally a company must 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 cancellation method must allow cancellation at will and without engaging in any further steps that hinder or delay the consumer’s ability to terminate immediately. This requirement is more stringent than those in other jurisdictions. Companies should offer at least one of the following:
a “prominently located direct link or button,” or
a pre-written and immediately accessible termination email that a consumer can send to the company without having to add information.
Colorado: Colorado’s recent law also requires clear and conspicuous terms; a written acknowledgment with the offer terms, cancellation policy, and cancellation guidance; and a simple means for cancellation. Businesses must include an online link that provides consumers with detailed automatic renewal offer information.
Delaware: Delaware’s 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 conspicuous terms, including disclosure of automatic renewal terms, renewal reminders, and a simple means for cancellation. Before filing any lawsuit, Delaware requires consumers to give notice to the seller and an opportunity to cure.
Illinois: Illinois’s statutory regime now applies to all automatic renewal programs rather than just annual programs. Illinois requires notice, cancellation, and affirmative consent requirements comparable to other states’ requirements.
Idaho: Effective January 2023, Idaho will impose certain notice and cancellation requirements for subscriptions with a term of 12 months or longer. Idaho requires clear and conspicuous disclosure of automatic subscription renewal terms and cancellation methods. Cancellation methods must include free online cancellation of the subscription and cancellation in the same manner that the consumer used to subscribe. Businesses must provide consumers with a renewal notice 30-to-60 days in advance of renewal, which must describe the goods, state the price, inform the consumer regarding renewal, and provide at least two cancellation methods.
Virginia: Virginia now requires clear and conspicuous disclosures before the renewal terms for automatic renewals, the consumer’s affirmative consent to the agreement containing the automatic renewal offer terms before charging the consumer, and an acknowledgment of the automatic renewal or continuous service offer terms, cancellation policy, and information regarding how to cancel in a manner that is capable of being retained by the consumer.
Auto-Renewal Subscription Litigation Trends
As state legislatures direct more attention to enacting and amending auto-renewal laws, private litigants have followed suit. This includes costly class action litigations and settlements against companies offering subscription models for either products or services. However, other companies have avoided consumer auto-renewal litigation successfully at the motion to dismiss phase, establishing that the company provided requisite notice as a matter of law. While this strategy was effective with less-defined statutory requirements and less-robust case law, this strategy may prove increasingly difficult as states provide granular statutory requirements for compliance. More stringent and pervasive state regulations, and increasing FTC guidance, are creating a new landscape for litigators to navigate, and consumers may have more tools available to plausibly allege claims.
Key Subscription Model Regulation Takeaways
Clarity, consent, and convenience are prominent features for model subscription programs. The FTC’s enforcement policy statement and recent settlement order are helpful frameworks for manufacturing companies offering product or service subscription models. Nationwide companies should consider regulatory schemes in high-impact states like California, which not only has a considerable consumer population but traditionally is also a forerunner in the consumer protection space. Businesses with a more targeted reach should also consider relevant statutory requirements in their key states. Some credit card companies, like MasterCard, are also starting to impose notice requirements on private companies. Government regulations and private actor requirements continue trending toward conspicuous and clear disclosures and consent.