LEGAL
Imagine having to surrender all revenues your business generated in California over a period of years in connection with customer subscriptions that automatically renewed on a periodic basis. This potential does not just exist in the realm of bad corporate dreams. It is a real-world risk that any business employing automatic renewals faces if it fails to strictly comply with California’s Automatic Renewal law. The potential for huge “bet the company” damages has created a prime target that contingency fee lawyers are finding increasingly attractive.
The California Automatic Renewal law (Business and Professions Code §§ 17600, et seq.) was enacted in 2010 ostensibly as a means to shield consumers from automatically renewed charges incurred without their explicit consent. More than twenty states have enacted similar consumer protection laws. However, California’s statute imposes stricter standards on businesses and extends greater leverage to plaintiffs with respect to securing higher payouts than most states. This is leading to an ever-increasing number of lawsuits alleging violations of the law, and some sizeable settlements.
The California law applies to most businesses – regardless of location – that make automatic renewal or continuous service offers to California consumers. Offers must “clearly and conspicuously” disclose that the subscription will continue until the consumer cancels, a description of the cancellation policy, the amounts of the recurring charges, the length of the automatic renewal term and any minimum purchase obligation. Consumers must affirmatively consent prior to any charge, and all of the required terms must be made available in a form capable of being retained by the consumer as a record.
Violation of the law’s strict details triggers an onerous penalty: any good or service provided through a noncompliant contract shall for all purposes be deemed an “unconditional gift,” meaning that any revenue derived from each and every renewed charge is considered an unjustified benefit that must be completely disgorged.
The harsh penalties of this provision create potentially extraordinary sums owed in restitution to California consumers, and recently have yielded some hefty settlement payouts. For instance, in 2013 and 2014, class actions brought under the California Automatic Renewal law targeted popular music and video streaming companies, with one resulting in a multimillion dollar settlement with a satellite radio provider. Earlier this year, another court approved a class action settlement agreement that mandated a large Internet company provide a substantial payout to a class of nearly 1.2 million consumers.
Settlements like this have caught the attention of plaintiffs’ lawyers who are generating an increasing number of potentially debilitating lawsuits for businesses that interface with California consumers, imposing high costs for both emerging companies and established corporate heavy hitters in industries as widely varied as video gaming, personal information security, online dating, personalized cosmetic deliveries, and monthly cooking services. Businesses susceptible to liability under California’s Automatic Renewal law should also be wary of federal standards for “negative option marketing.” The FTC places automatic renewal offers in this category and requires that sellers clearly disclose the terms of such offers prior to obtaining consumer subscriptions. Failure to do so may result in enormous consequences, as evidenced in a 2012 FTC judgment obtained against a defendant for $359 million.
Given the steady rise in automatic renewal class action litigation, companies offering automatically renewable goods or services to California consumers should take extra precaution to adequately protect themselves. This requires that business entities susceptible to this class of lawsuits thoroughly examine their online and hardcopy contract language, and take the steps necessary to certify that their renewal policy language complies with the terms of applicable statutes.
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