Companies offering negative-option subscription renewals that have managed to avoid litigation will likely face a rockier road going forward as states and the federal government add granularity to their rules combatting hard-to-end automatic renewals. 

Updated California rules that took effect on July 1 add compliance hurdles to companies’ renewal processes. Among other things, before the company can renew, it must send a series of notices reminding customers that, if they take no action, the subscription will renew, and the reminders must include an easy, no-questions-asked way for customers to say no. 

Given that level of detail, companies that might otherwise have gotten courts to dismiss cases against them when they’re subject to a lawsuit might not escape so easily, because the rules give plaintiffs and judges criteria to weigh against a company’s notification practices. 

“While [having a notification strategy] was effective with less-defined statutory requirements and less-robust case law, this strategy may prove increasingly difficult,” Kendall Waters and Erik Swanholt, attorneys with Foley & Lardner, say in an analysis. “More stringent and pervasive [rules] are creating a new landscape for litigators to navigate, and consumers may have more tools available to plausibly allege claims.”

Patchwork of rules

States have been especially active in their efforts to rein in the use of negative-option renewals, which are susceptible to abuse by companies that bury their terms in fine print and throw up cancellation hurdles, like requiring customers to get a representative on the phone.

Colorado, Delaware, Illinois, Idaho and Virginia are among the states that have boosted their rules, the Foley & Lardner analysis says. 

Starting next year in Idaho, for example, companies must walk through a detailed process to comply with notice requirements if the subscription term is 12 months or more. Among other things, customers must be able to cancel in the same way they subscribed, so if they clicked a button to get a service they must be able to click one to end it. 

“Clarity, consent, and convenience” is the theme of changes companies are seeing in states, Waters and Swanholt say.  

Federal spotlight

The federal government has been upping its efforts against the practice, too, most recently in a settlement between the Federal Trade Commission and RagingBull, an online stock trading site. The agency fined the company and its founders $2.45 million for alleged practices that include a subscription plan that amounts to a kind of entrapment. 

“Raging Bull’s … hard-to-cancel subscriptions [among other practices] cost consumers millions,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection. 

The agency accused the company of attracting customers by making unsubstantiated claims about how much customers could make trading on the site and then ensnaring them in costly subscriptions.

“Different services had different cancellation requirements,” the agency said, and “in many cases, the company’s customer service line had lengthy hold times, disconnections, and other issues that led to subscribers being charged for renewals they did not want.”

Under the settlement terms, the company can’t keep a customer on hold for more than 10 minutes and it must respond within a day to any customer leaving a phone message about cancellation, among other things. 

Class actions

Private lawsuits have been on the rise, too. Both The New York Times and The Washington Post are embroiled in class actions against their practices, and so are Amazon and YouTube, among other high-profile businesses. 

In a cautionary tale, a class-action settlement agreed to in February by Noom, the weight-loss app, requires the company to create a $56 million cash fund to compensate as many as two million people and distribute another $6 million in subscription fee credits.

The attention-grabbing settlement provides “excellent monetary and programmatic relief for Noom’s customers,” the plaintiff’s lawyer, J. Burkett McInturff of Wittels McInturff Palikovic, told the New York Post. 

Bottom line, automatic renewals, which are integral to the business model of recurring revenue companies, must comply with increasingly detailed rules at both the state and federal levels, which not only heightens companies’ compliance burden but makes the private litigation environment trickier.