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‘Negative Options’ in Consumer Subscriptions Are Risky

May 18, 2021, 8:00 AM

Subscriptions and automatic renewals are quickly proving to be one of the most important consumer protection law issues of the year. These types of transactions have emerged as a leading area of risk for consumer-facing businesses, including many businesses that have not historically focused compliance efforts on these issues.

Federal and state laws have long imposed limitations on commercial transactions in which sellers treat a customer’s failure to take an affirmative action, either to reject an offer or cancel an agreement, as assent to be charged for goods or services. This category of transactions is known as “negative options,” and can include subscriptions, automatic renewals, membership clubs, trial offers that result in automatic payments, and more. In recent months, however, the legal risks related to negative options have increased significantly.

One trend underpinning this dynamic is the increasing embrace by consumers of subscription-based spending on a widening variety of products and services. Subscriptions are no longer the realm of fitness centers and streaming video services. Mobile apps, cars, massages, and just about everything else a consumer desires can now be had on a subscription basis. According to a recent study, 71% of adults across 12 countries have subscription services, up from 53% just a few years earlier.

The plaintiffs’ bar has clearly noticed this, and recent court decisions suggest that a wide range of companies could soon find themselves facing dramatically increased class action risk in this area.

Class Action, Enforcement Risks

For example, in February a federal district court held that California’s automatic renewal law could apply to a national retailer’s loyalty program, which automatically renewed. Although the defendant in this case argued that its loyalty program was not a “subscription,” and therefore outside the ambit of the state statute, the court defined “subscription” broadly to mean “an arrangement for providing, receiving, or making use of something of a continuing or periodic nature on a prepayment plan.”

This is significant because it suggests that California’s automatic renewal law applies to a wide range of products and services beyond just traditional subscriptions.

Federal and state government enforcers also appear to be ramping up enforcement in this area. Attorneys general in Colorado, Washington, and elsewhere have recently concluded significant enforcement related to automatic renewals.

Moreover, this comes on the heels of the FTC’s announcement in September 2020 that it reached a $10 million settlement with an online learning company that allegedly violated the Restore Online Shoppers’ Confidence Act (ROSCA). According to the FTC, the company failed to clearly disclose that memberships would automatically renew, charging consumers’ credit cards without their express authorization, and making it difficult for consumers to stop those recurrent charges.

State legislatures are also dialing up the pressure. New York enacted a new automatic renewal law, effective Feb. 9, that adds considerable requirements for companies selling products or services on a subscription-like basis, including automatic renewal plans. And New York is far from alone. So far this year, legislation has been introduced in at least 12 states to enact new automatic renewal laws or strengthen existing restrictions.

Given these developments, corporate counsel should carefully evaluate their exposure to negative option laws. In doing so, it is important to look beyond traditional “subscriptions,” and consider whether any of an organization’s transactions could be construed as a negative option. For all negative option transactions, counsel should carefully evaluate compliance in all relevant jurisdictions.

To that end, do not assume that existing consents are sufficient—changes in case law and statutes make compliance in this area a moving target. The data show that subscription-based models can be powerful growth drivers, but they also present increasing risk.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Brian J. Boyle is a partner in McDermott Will & Emery’s Antitrust group. He advises clients on consumer protection and antitrust law and is experienced in complex litigation and investigations, compliance, and government strategies.

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