Best Practices for B2C Auto-Renewing Service Agreements
Auto-renewing, subscription-based contracts have long been in favor among health clubs and mobile phone vendors. But today, more businesses, including many software and mobile application providers, are also moving away from one-time purchase prices in favor of the auto-renewing subscription model. Auto-renewal can be beneficial to both the consumer and the business, as it reduces unnecessary and unwanted interactions in the relationship, making it more efficient for the business and less aggravating to the consumer. The subscription model can also be more financially beneficial to the business, and more practical for consumers who cannot afford larger one-time payments.
Auto-renewal provisions, however, add complexity for a business when drafting and enforcing their service agreements. While many states have laws addressing auto-renewal provisions specifically, and many more are implementing them, at present, auto-renewal provisions are inconsistently regulated. Thus, businesses and service providers must carefully craft agreement terms to ensure compliance with the relevant laws in the jurisdictions where their agreements are in play. Failure to do so may expose the business to suits for unfair and deceptive trade practices, including class action suits, or regulatory actions.
This article highlights some best practices a business should apply when drafting auto-renewing service agreements and the follow-up actions a business should take after entering an auto-renewal deal to minimize the risk of suit, whether individual or class action.
Drafting Effective Auto-Renewal Provisions
A recent class-action suit against Noom provides an excellent example of what not to do when drafting auto-renewal provisions. Noom is a successful, mobile weight loss application that has always used auto-renewing subscription-based pricing. New users enter a free-trial period. Suppose they do not cancel before the expiration of the trial period. In that case, they are automatically enrolled in a monthly plan, with an initial payment covering up to the first six months of service. The class action filed against Noom alleges that the auto-renewal process violates numerous unfair and deceptive trade practice laws and constitutes false advertising and common law fraud.
The allegations against Noom offer several guidelines for businesses looking to implement effective, enforceable auto-renewal provisions, with respect to both how provisions should be drafted and what follow-up contact with consumers needs to occur.
Provide prominent notice of auto-renewal terms
One of the most common requirements in auto-renewal laws is that a consumer be given sufficient notice. Typically, “clear and conspicuous” notice is required. While “clear and conspicuous” is frequently undefined, factors to consider include the font size used compared to other terms, whether terms are emphasized (e.g., bold or contrasting color), and how visually close the auto-renewal terms are to the user action. While Noom highlighted specific terms on the screen where the auto-renewal appeared, auto-renewal itself was not one of them. Effective auto-renewal terms will preferably be in a larger, emphasized font than the rest of the terms, and located in a place where the consumer cannot miss them when entering into the service agreement.
Avoid vague language
Noom’s auto-renewal provision states “If [after the trial period] you decide Noom is right for you…” monthly charges will begin, including a one-time, non-refundable payment for up to six months of service. This provision could easily be read to suggest that an affirmative decision from the consumer was necessary. Unfortunately, all that was required for a consumer to “decide” was inaction. It is therefore essential to specifically indicate what consumer actions (or inactions) activate the provision.
Limit the length of the auto-renewal period
As noted above, typically the initial payment in the Noom service was for six months. Several jurisdictions have specific requirements that apply when an auto-renewal provision exceeds 180 days (i.e. six months) or one year. Businesses should be aware that the length of time they include between auto-renewals may impose additional obligations on them.
Obtain affirmative consent and send users an acknowledgment of terms
Noom’s practices with respect to user consent are also at issue. In particular, shortly before auto-renewal began, Noom sent infrequent users notice that Noom would not be contacting them again absent a specific request from the user, essentially suggesting the relationship was ending without further user action.
It is always a good practice for a business to obtain specific, informed consent from the consumer prior to starting an auto-renewal. Many states require consent not only at the onset of the agreement, but also at one or more additional points during the contract life. And some states further require providing the consumer with an acknowledgment of the terms after execution. Thus, prudent businesses will provide prominent notice of auto-renewal terms during contracting, send a disclosure of the auto-renewal provision to the consumer immediately after execution, and also send renewed notices, at a minimum, sufficiently prior to the first auto-renewal charge to allow termination. All notices should be provided in a way that is difficult for the consumer to miss.
Provide a clear and simple cancellation process, including specific contact information
Noom only allowed for cancellation on a mobile device using its app. Worse yet, the extent of information given about cancellation was that a user could cancel by contacting their coach. No human coach was ever-present; there was only an automated chatbot. No other contact methods were given to users. This type of poorly executed cancellation process has recently been the subject of a $10 million settlement with the FTC.
Adequate auto-renewal provisions should include a specific, easily understandable cancellation process. A detailed process need not be overly extensive, so long as it does not obfuscate the cancellation process. Auto-renewal provisions should also provide clear and specific contact information for cancellation purposes, whether an e-mail address, phone number, mailing address, or all three.
These are only a few of the issues businesses must consider when drafting auto-renewing service agreements. As you draft your own agreements, make sure to so do with the help of an experienced professional familiar with the jurisdictions’ laws where your agreement will apply. A lawyer with expertise in drafting and enforcing service agreements can help assure that you are well-protected against suit by one of your customers, or indeed an entire class of them.