Help Merchants Avoid Subscription Legal Headaches

Automatic renewal programs represent a cash cow for countless subscription businesses, especially when consumers renew those subscriptions at higher prices. But automatic renewals can also be a source of huge liability for businesses that mislead consumers regarding renewal pricing, or fail to provide them with clear and conspicuous notice regarding the complete terms and conditions of the automatic renewal program. ISOs and merchant level salespeople serving businesses that rely on automatic subscription renewals can help their merchant customers by informing them of this potential pitfall.

McAfee Inc. recently learned this lesson the hard way. The company agreed to pay $80 million to resolve a California district court class action lawsuit that said it charged automatic renewal customers higher prices than it charged other customers who purchased subscriptions to the exact same anti-virus software products. If true, this would have been a violation of its contractual promises and express representations to automatic renewal customers that they would pay the same, then-current price for such products as any other customer purchasing a subscription.

Accuracy, visibility

So how can a business avoid this problem? Beyond the obvious – making sure a company’s advertising claims and other representations to consumers accurately depict its business practices, including the terms of the automatic renewal offer and the customer’s cancellation rights – adhering to the California statute, which happens to be the most stringent in the United States. That way, even if you don’t sell to consumers in California, you will effectively ensure your business complies with the requirements of the Federal Trade Commission Act (FTC Act), the Restore Online Shoppers’ Confidence Act (ROSCA), and individual state laws.

California’s Automatic Renewal Law requires businesses to provide clear and conspicuous notice to consumers regarding the terms and conditions of any automatic renewal offer prior to their completion of the subscription or purchase transaction.

To satisfy this requirement, a business must ensure its contract with the consumer discloses the complete automatic renewal terms and cancellation rights in a more conspicuous manner than the rest of the contract: namely, “in a larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks, in a manner that clearly calls attention to the language.”

Alleged violations

Let’s take a closer look at how McAfee got itself in trouble. According to the lawsuit, any consumer who purchased a one-year McAfee software subscription was automatically enrolled by default in the auto-renewal program, regardless of where he or she bought the product (for example, directly from McAfee’s website or from a retailer such as Amazon).

McAfee was said to induce such participation by telling customers that the cost to automatically renew their McAfee anti-virus software subscriptions would be no more than McAfee’s normal, then-current price charged to other customers for the same products. The renewal fee was then automatically charged to the customer’s payment card on file each year thereafter unless the customer took an affirmative step to cancel his or her enrollment in the automatic renewal program. Rather than charging automatic renewal customers the same price as other customers, however, McAfee was accused of charging those customers more.

For example, the operative complaint alleged that “customers who had their McAfee AntiVirus Plus subscriptions auto-renewed by McAfee on January 1, 2014, would have been charged $49.99 by McAfee for their renewed one-year subscription. To all other customers that day, McAfee offered the same one-year McAfee AntiVirus Plus subscription for just $34.99, whether the customers were purchasing a new subscription or manually renewing an existing subscription, and whether they made their purchase or manual renewal on McAfee’s website or via their McAfee Software.”

The lawsuit further alleges the prices McAfee charges auto-renewal customers are not only higher than the prices McAfee charges other customers, they are also higher than the suggested “list” prices McAfee provides to retailers of McAfee software.

Based on this conduct, plaintiffs sued McAfee for breach of contract, unlawful, unfair, and fraudulent business practices, false advertising and violating California’s Automatic Renewal Law, among other causes of action.

Under the terms of the settlement, McAfee will pay $11.50 (in the form of cash or as credit toward future purchases of McAfee products) to each consumer in the United States who paid for the automatic renewal for McAfee software between January 10, 2010, and February 10, 2015, and whose first auto-renewal charge was greater than the price paid for the initial subscription license. In the aggregate, such payments are estimated to exceed $80 million. The settlement also requires McAfee to change its policy regarding auto-renewal transactions and its advertising of past reference prices.

Prior consent

In addition to the clear and conspicuous disclosure requirements, California’s Automatic Renewal Law requires businesses to obtain the consumer’s affirmative consent to the agreement (for example, scrolling through the text of the agreement, and selecting the “I Agree” button) prior to completing the subscription or purchase transaction, and provide the consumer with an acknowledgement that includes the automatic renewal or continuous service offer terms, and cancellation policy and instructions for canceling, in a manner capable of being retained by the consumer. If the offer contains a free trial, the acknowledgment must also disclose how to cancel to avoid paying for the goods or services.

If there is a material change to the terms of the automatic renewal offer (such as pricing), a business must provide the consumer with prior notice of the change and how to cancel before the change takes effect in a clear, conspicuous manner.

Failure to comply with any of these requirements may result in restitution damages of all of the renewal revenues collected from California customers, regardless of whether they actually wanted and used the service, were actually deceived or suffered any damages.

Best practices

It bears emphasis that California’s Automatic Renewal Law applies to any contract entered into by any consumer in California that provides for automatic renewal by a recurring charge to his or her credit card or bank account, regardless of where the business is located. Again, while state laws vary dramatically, compliance with the California law will effectively ensure your business satisfies the requirements of other state laws, as well as the FTC Act and ROSCA.

In addition to satisfying California’s notice, consent and acknowledgement requirements at the front end of the subscription relationship, we believe the best practice is to send consumers an additional email notice in advance of the automatic renewal date. That notice needs to prominently disclose the renewal price and renewal date, and advise the consumers their subscriptions will be automatically renewed at that price on that date unless they cancel or disable the automatic renewal function beforehand.

Although the practice is not required under California law and may cause businesses to lose some automatic renewal subscriptions, it offers the benefit of further protection against being the subject of a class action lawsuit and paying millions of dollars in restitution damages or settlement.

The information contained in this article is for informational purposes only. Please consult an attorney before relying upon it for your specific legal needs. Theodore F. Monroe is an Attorney whose practice focuses on the electronic payment and direct marketing industries. For more information about this article or any other matter, please e-mail Monroe at [email protected].