California and New York implemented automatic renewal laws (ARLs) by enacting stringent negative option contracts requirements, including a first-ever cancellation requirement. Given the increased emphasis on ARL compliance by plaintiffs and public departments in both states, retailers should ensure that their practices adhere to these heightened standards.
New York is the latest state to enact strict laws prohibiting the inclusion of automatic renewal and continuity of service clauses in paid subscription or purchasing agreements with consumers as of February 2021. New York joins many other states, including California, D.C., Hawaii, Illinois, New Mexico, Oregon, Vermont, and many others, enacting similar legislation regulating the use of auto-renewal clauses in contracts with consumers.
This article focuses on state regulations and the latest developments of California and New York states ARL requirements while broadly discussing applicable federal laws in the area of consumer protections.
California Enhances ARL Rules
California has tightened the reigns on its automatic renewal law for the second time in four years by adding new notice and cancellation requirements. Governor Gavin Newsom signed A.B. 390 into law in October 2021. You can read the bill's exact text here for more information about the process.
This law amends California's ARL in three significant ways that business owners and executives should note:
Change 01. Cancellation Requirements
Historically, the California ARL required retailers to provide consumers with an online cancellation option. Amended laws eliminate the previous version's flexibility regarding how customers may cancel their subscriptions online. Instead, they require online cancellation to be available through an account link or termination email without obstruction to the termination.
Change 02. Free Trials
The new law requires retailers to notify customers of impending renewals for subscriptions, including a free or discounted trial period of at least thirty-one (31) days. For subscriptions subject to this notice requirement, the retailer must notify subscribers at least twenty-one (21) days before the end of the free or promotional period and no later than three (3) days before renewal.
Change 03. One-Year Terms
Regardless of any discounted pricing, the new California law requires notice for subscriptions with a starting term of one (1) year or longer. The reminder must be sent between fifteen (15) and forty-five (45) days before the automatic renewal or continuous service offer renewal.
New York Also Enacts Changes to Automatic Renewal and Continuous Service Law
New York's law broadly governs any contract for goods or services as well as any contract with paid subscription or renewal. It retains an existing law that applies to service contracts for the service, maintenance, or repair of real property with an auto-renewal period greater than one (1) month.
The following five (5) points serve as a primer on compliance with New York's newly enacted ARL as well as general legal information for clarity:
Change 01. Affirmative Consent
Before the consumer is charged for the services or product purchased, they must affirmatively consent to the ARL provision. It is widely accepted that a checkbox next to the automatic renewal clause indicating agreement may suffice. However, the checkbox should not be pre-checked.
Change 02. Acknowledgment
Consumers should also receive a notice of the automatic renewal terms and cancellation policy. It is recommended that this acknowledgment be sent via email immediately upon receipt of the order or included in the first delivery.
Change 03. Cancellation
The consumer should be provided with an intuitive method of contract cancellation. This implementation could be a toll-free number, email address, or a physical mailing address to contact a company. If the consumer purchases the product or service online, they must have the option to cancel the purchase online.
Failure to adhere to New York law may result in civil restitution, injunctive relief, up to $500 for a violation, and up to $1,000 for multiple offenses arising from a single incident. The law provides for an exception to liability if the retailer can demonstrate that it made a reasonable effort to comply with the new law and the violation resulted from a bona fide error.
Federal Regulations Promulgate California and New York Laws
The Federal Trade Commission (FTC) Act's Section 5 is the primary federal statute that governs the use of ARL provisions. The FTC's guidance on negative option features advises businesses to adhere to five fundamental principles for compliance. You can also download and read a PDF copy of Section 5 here.
The five principles are as follows:
- Principle 1. Disclose material terms, including existence, total cost, third-party billing terms, and how to cancel
- Principle 2. Make disclosures visible by placing them in prominent locations
- Principle 3. Disclose material terms of the offer to consumers before payment
- Principle 4. Obtain consumers' affirmative consent to the offer rather than relying on a pre-checked box
- Principle 5. Avoid impeding the effective operation of promised cancellation procedures
Automatic renewal clauses may also be governed by the Restore Online Shoppers' Confidence Act (ROSCA). This statute makes it illegal to charge customers for products sold via negative online options. This FTC web page also offers the exact legal ROSCA text.
Contact Us for ARL Legal Advice
We help our California and New York clients stay ahead of the curve. HAN LLP's Corporate & Commercial practice group continuously monitors legal developments relating to California and New York ARLs. If you have compliance questions, contact us here confidentially to set up a meetin