“30-day free trial,” “Cancel anytime,” “Risk-free” – if you’ve read or heard these terms associated with a subscription-based program, you may want to ensure that you are up to speed with the regulations governing automatic renewals.  Programs with automatic renewals have long been a source of regulatory scrutiny, as they can trigger consumer complaints when cancellation is challenging or if the terms of such programs are unclear.  Today, automatic renewals are back in the press as the subscription-based weight-loss app Noom, Inc. (Noom) has agreed to pay $62 million in a preliminary settlement to resolve claims that it offered a deceptive automatic renewal scheme to about two million consumers across the United States.  In addition, several states are currently considering revising their laws or have revised their laws to clarify and broaden the requirements for these programs.  Given this, any company offering such a program should consider a refresh of the terms to ensure it remains in compliance.  Otherwise, these programs risk class action lawsuits – as faced by Noom.

Noom settlement

The Noom case started at the height of the pandemic, in May 2020, when a group of consumers filed a class action suit against Noom in the U.S. District Court for the Southern District of New York.  The plaintiffs alleged that the company used a deceptive automatic renewal scheme that lured users into expensive subscriptions that were hard to cancel.   Specifically, the complaint argued that users who initially signed up for a “risk-free” or low-cost trial, and subsequently tried to cancel their subscription before the expiration of the trial period, were unable to do so because of Noom’s complicated cancellation policy, which required users to cancel through a virtual coach, rather than directly by other means such as the app, email, or website, which meant that their subscription converted to an auto-recurring membership.  Notably, plaintiffs alleged that they were unable to stop the trial membership from converting to an automatically renewing subscription unless they had a smartphone; and, when they were unable to cancel, the assessed charge was an advance payment for “multiple months of membership.”  Plaintiffs alleged that this “difficult by design” subscription practice forced users to pay nonrefundable renewal payments.

If the $62 million preliminary settlement is approved by the court, Noom would pay $56 million in cash and offer $6 million in subscription credits.  The plaintiffs claim that “the cash portion of this settlement is the largest-ever cash recovery for consumers in an autorenewal case, far exceeding payments in past private and public cases.”  Noom also agreed to make changes to its automatic renewal practices.  Such changes include providing clear disclosures about the company’s automatic renewals, email reminders before the trial periods expire, and an easily accessible “cancel” button located on a user’s account page.

Regulatory review

Noom is far from the only business that employs the use of automatic renewal subscriptions.  In today’s society, automatic renewal subscriptions are the norm, providing not only consumer convenience, but also a more certain revenue stream for businesses.  Given the common practice of such subscriptions, regulators have become more and more concerned about the explicit consent of consumers, particularly as it relates to automatic renewals that include a free trial.  In an effort to protect consumers in this evolving area, many states have, or are considering the expansion of, laws governing auto-renewals.

The Federal Trade Commission recently issued a release about automatic renewals in an effort to deter deceptive subscription practices.  The FTC’s policy statement on the issue warns companies to refrain from using “dark patterns” that trick a consumer into being trapped by a subscription service.  The FTC stated that companies will face legal action, including civil penalties, if their subscription programs fail to (1) clearly and conspicuously disclose all material terms of the product or service, including how to cancel, deadlines a consumer must act by to stop further charges, and the amount and frequency of such charges; (2) obtain the consumer’s express informed consent before charging for products and services; and (3) provide a simple and easy method of cancellation that is at least as easy to use as the method of initial purchase.

In addition, several states have laws currently on the books regarding these programs, including California.  California’s existing automatic renewal law requires businesses to, among other things: (1) clearly and conspicuously present the terms of any automatic renewal; (2) obtain the consumer’s affirmative consent to the automatic renewal’s terms before charging for an automatic renewal; (3) provide consumers with an acknowledgement of the automatic renewal’s terms and cancellation policy in a manner capable of being retained by consumers after purchase; (4) provide consumers with an easy way to cancel the automatic subscription; (5) allow consumers who sign up online to terminate the automatic renewal exclusively online; and (6) provide notice of material changes in the terms of the automatic renewal before implementation of said material changes.  Cal. Bus. & Prof. Code § 17602.

Recent amendments to California’s current automatic renewal law will require businesses to also: (1) send an additional notice explaining how to cancel three to 21 days before the expiration of free or promotional trial subscriptions that last more than 31 days; (2) provide an option for subscribers who signed up online to immediately cancel subscriptions online at will; (3) send a reminder notice 15 to 45 days before a subscription with an initial term of one or more years renews; and (4) include a link or other electronically accessible method directing consumers to the cancellation process, if notice is sent electronically.  2021 Cal. Assembly Bill No. 390.

Colorado and Delaware also have automatic renewal laws that went into effect this year.  These laws mirror California’s current law and generally require: (1) clear and conspicuous disclosure of key terms; (2) consent to automatic renewal terms; (3) notice of renewal reminders 25 to 40 days before any automatic renewal in Colorado, and 30 to 60 days before any cancellation deadline in Delaware; and (4) an easy mechanism for canceling the subscription.

Takeaway: Businesses offering automatic subscriptions should stay up to date on this rapidly evolving area of the law.  When developing automatic subscription policies, companies should provide consumers with clear information about the business’ automatic renewal program, especially concerning renewal dates, cancellations, and the expiration date of any free trials.  Consumers should also be given an easily accessible way to cancel automatic subscriptions.