Smart businesses aspire for transparency in their interactions with their customers and employees. In practice, complete transparency can sometimes be difficult to achieve. Unfortunately, not doing so can have significant negative repercussions.
Recently, a lack of transparency in the terms and conditions of renewals in some subscription-based businesses is resulting in numerous lawsuits filed in California against businesses both within and outside the state. Consumers are bringing these lawsuits based on companies not meeting the requirements of California’s auto renew law (Cal. Bus. & Prof. Code § 17600 et seq.). Companies hit with such lawsuits include Hulu, Spotify, DropBox, Birchbox, and Fabletics (founded by Kate Hudson).
The California law applies to auto-renewal agreements and the specific ways that they are handled by the subscription business. The law requires that subscription companies disclose their subscription terms, including cancellation details, “clearly and conspicuously” before the subscription or purchasing agreement is fulfilled. This requirement is defined under the law as follows:
“Clear and conspicuous” means in 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.
Furthermore, the terms and conditions “should be available visually or temporally in close proximity to the offer’s request for consent.” Those terms must state:
That the subscription or purchasing agreement will continue until the consumer cancels the agreement
The cancellation policy in full detail
The recurring charges that are charged to the consumer’s credit card, debit card or payment account with a third party as part of the auto-renewal arrangement, and if the amount could change, what that amount will be, if known
The length of the automatic renewal term or that service is continuing, unless the consumer has selected the term
The minimum purchase obligation, if any
Businesses must provide consumers with an acknowledgment, which can be provided after the initial order is complete, that can be retained by the consumer and that includes:
The automatic renewal of continuous service offer terms
The cancellation policy
A cost-effective, timely, and easy-to-use mechanism for cancellation, like a toll free number or email address, and information about how to cancel
Given that the success of a subscription business is predicated on customer loyalty which leads to a consistent recurring revenue stream, most merchants do not intentionally try to deceive their customers about their terms of service. Most state their terms clearly and plainly. But having good intentions may not make a difference in a situation where the law has such specific requirements.
Whether you believe your terms of service and auto-renew policies meet the California law’s requirements or not, this may be a good time to review them to ensure they’re as transparent as possible and best serve your customers’ needs and expectations.