The Federal Trade Commission (FTC) has made clear its focus on automatic renewal programs with high-profile lawsuits in recent weeks, alleging violations of the Restore Online Shoppers' Confidence Act (ROSCA). Below are some takeaways for companies selling products and services on an automatically renewing basis. Reminder: These are only the FTC's positions, and some companies are vigorously defending their practices. Thus, courts might very well disagree with the FTC.
What Can a Company Do during the Cancellation Process to "Save" or Retain Customers? What Is a "Difficult" Cancellation Process under ROSCA?
The FTC has taken aim at cancellation processes that it believes are too difficult, calling this a "dark pattern." The FTC has taken the position that a cancellation mechanism violates ROSCA when:
- The FTC has challenged multiple companies, even when they offered online cancellation, where the cancellation button was difficult to find. Notably, ROSCA does not require an online cancellation mechanism (although many state laws do), but the FTC read this requirement into the statute.
- It requires customers to navigate multiple steps or presents multiple "save" attempts. The FTC seems to consider five or six steps to be too many steps or clicks. Courts have found that a multi-step cancellation process can potentially violate ROSCA's requirement to provide a "simple" cancellation mechanism.
- It delays cancellation requests by requiring a customer service agent to disposition the cancellation, thereby causing a customer to be charged for a new renewal period even when they meet the cancellation deadline. Similarly, where customers must wait on hold for lengthy periods, or if they can reach customer service representatives only during very limited hours, the FTC considers this too "difficult" to comply with ROSCA.
What Are the "Material Terms" of the Transaction That Should Be Disclosed?
For many years, the FTC has alleged that the fact of the automatically renewing charges, the amount and frequency of those charges, and the cancellation mechanism must be clearly and conspicuously disclosed to comply with ROSCA.
- Recently, the FTC has begun to challenge companies for failing to disclose the fact that a service automatically renews—even where this should be evident based on the type and nature of the service. It is unclear whether common sense will prevail and courts will reject these allegations.
- More recently, the FTC argues that "early termination fees" are a "material term" that must be disclosed. The FTC has begun taking an expansive view of what constitutes an "early termination fee." (More on these below)
How Should the Material Terms Be Presented?
- The FTC often challenges enrollment funnels where it believes the continuity terms are "hidden," or where material terms are located behind a hyperlink or "tooltip" or hover-over icon: ⓘ.
- The FTC has taken action against enrollment funnels that present disclosures below the call-to-action button used to complete an order—even where the autorenewal disclosure appears in dark font set apart from other disclosures. At least one court agreed with the FTC's position, but other courts have disagreed with this position in the class action context, creating some uncertainty in the law.
What's the Deal with Early Termination Fees?
- The FTC is increasingly challenging "early termination fees," where companies require customers to pay a fee if they cancel their subscription early before the end of a specified term. For example, some companies offering annual subscriptions that are billed monthly will charge customers who cancel before the end of the annual term. The FTC has alleged that this is an early termination fee, and the existence, amount, and conditions in which the fee will be charged must be clearly and conspicuously disclosed during the enrollment path—it must not be disclosed only via hyperlink or tooltip, or in long-form terms and conditions.
- The FTC disfavors anything it considers a "fee" or "penalty" that discourages customers from canceling their subscription early.
- Companies should take care in how they present early cancellation fees. For example, the FTC might treat a minimum term obligation or commitment differently than it treats an early termination fee, as long as the obligation is clearly and conspicuously disclosed and is not used to hinder customer cancellations.
Companies should also remember that other enforcers remain active in this area, including class action plaintiffs, the California Automatic Renewal Taskforce (CART), and state attorneys general.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.