The Subscription (Recurring Revenue) Model

Back in the day, subscriptions were generally limited to magazines or newspapers.

Today, the subscription (recurring revenue) model has exploded in the online space. The explosion has been good for online business, but now regulations are evolving at an unprecedented rate.

And the new developments require very specific steps and disclosures, such that partial compliance may not be enough to avoid a significant enforcement action, not only by the FTC, but also from state attorneys general.

Recent new developments by the FTC, California, and Colorado have created a combination of new requirements for businesses that rely on the recurring revenue model, and the related compliance risk is huge. Here's what you're now up against:

* FTC Enforcement Policy Statement (Effective 10-22-21),
* California Auto-Renew updates (Effective 7-1-22),
* Colorado Auto-Renew Law (Effective 1-1-22).

The compliance risk, particularly for small businesses, is increased by the fact that the FTC and state regulators have determined that enforcement of the new requirements is a relative high priority.

In addition, there exists a confusing “patchwork quilt” of laws regulating recurring revenue plans consisting of the federal statute enforced by the FTC: Restore Online Shoppers' Confidence Act of 2010 (better known as “ROSCA”) and various state statutes.

Different terminology also adds to the confusion. ROSCA refers to recurring revenue plans as “Negative Option Marketing” plans, while states generally use the term “Auto Renew Law” (or “ARL”).

Regardless of the terminology, Negative Option Marketing and Auto Renew Laws refer to the practicing of taking consumers' silence as tacit consent in various circumstances, including automatic subscription renewals and free-trial marketing.

FTC Enforcement Statement

In its Enforcement Policy Statement (which includes expansive policy directives while the rule making process continues on the same topics), the FTC announced three key requirements for Negative Option sellers.

1. Disclose clearly and conspicuously all material terms of the product or service, including how much it costs, deadlines by which the consumer must act to stop further charges, the amount and frequency of such charges, how to cancel, and information about the product or service itself that is needed to stop consumers from being deceived about the characteristics of the product or service.

2. Obtain the consumer's express informed consent before charging them for a product or service. This includes obtaining the consumer's acceptance of the negative option feature separately from other portions of the entire transaction, and not including information that interferes with, detracts from, contradicts, or otherwise undermines the consumer's ability to provide their express informed consent.

3. Provide easy and simple cancellation to the consumer. Marketers should provide cancellation mechanisms that are at least as easy to use as the method the consumer used to buy the product or service in the first place.

   Presumably, the FTC will continue to rely ROSCA to investigate negative option marketing and to seek remedies based on ROSCA violations including damages.

   The FTC also announced in its Enforcement Policy Statement what appears to be a clear sign that the FTC will be targeting a relatively new practice known as “dark patterns”, particularly where they are coupled with negative option marketing.

   According to the FTC, a “dark pattern” is a tactic used by sellers to trick consumers into making certain choices, including a purchase, and dark patterns are often used as a key component of negative option marketing. Examples of dark patterns include:

   • Hiding important payment information behind hyperlinks, “hoverovers” or in inconspicuous places or buried on pages beyond the initial offer page;
   • Making consumers wait on hold or listen to lengthy ads before they could cancel; and
   • Claiming that an offer is a “limited time” offer when it is not limited in time.

California Auto-Renew Updates

Effective July 1, 2022, California's ARL adds new renewal notice and online cancellation requirements.

1. ARL sellers that offer an initial term of one year or longer must deliver notices to their California subscribers 15 to 45 days before the renewal date reminding them that their plans will automatically renew unless canceled.

2. ARL sellers that provide California consumers with a free trial, gift or initial discount period lasting longer than 30 days must  provide similar notices to their California subscribers three to 21 days before the expiration of the applicable period.

   Regarding cancellation, California consumers must have the ability to cancel an ARL online “immediately” after account authentication by clicking on a button or link, or by sending a pre-formatted termination email message.

Colorado Auto-Renew Law

The new Colorado ARL imposes a new and unique renewal notice requirement on ARL sellers that goes beyond any currently existing U.S. state or federal law.

Specifically, if an ARL subscription renews monthly, the ARL seller must send a renewal notice keyed to each anniversary date of the effective date of the transaction. The notice must be provided 25-40 days before each anniversary date.

It's noteworthy, that these requirements apply only to new ARL transactions that were purchased on or after January 1, 2022 (prior transactions are not required to comply).

Takeaway

The “patchwork quilt” of overlapping federal and state requirements for the subscription (recurring revenue) model provides a difficult challenge for eCommerce retailers and digital marketing entrepreneurs regarding piece of mind for compliance, and these regulations are continuing to evolve at an unprecedented rate.

In addition, as these regulations proliferate, there are numerous, very specific requirements that ostensibly require strict compliance.

It's critical that ARL sellers review carefully existing ARL offers. Partial or substantial compliance is not enough. Compliance with all requirements, both federal and state, is required.

Routine compliance audits for subscription (recurring revenue) sellers are highly recommended.

Blog Post Update: Dec 7, 2023

FTC Sues Amazon Over Alleged Prime Violations

In June 2023, the FTC announced filing a compliant against Amazon's popular subscription, Amazon Prime.

The Complaint makes 2 claims.

    *  Amazon used “dark patterns” to trick consumers into enrolling in Amazon  Prime's auto-renewing subscription.

    *  Amazon knowingly complicated its cancellation process for Prime to prevent cancellations.

The lawsuit is based on two laws: (i) the federal ROSCA statute, and (ii) the FTC Act.

The suit is also based in part on “dark patterns” which is a concept that has not yet been enacted into “law”, although the FTC increasingly relies on it to support claims of deceptive advertising under the FTC Act.

FTC Enrollment Claims:

Prime used manipulative, coercive and deceptive user-interface designs known as “dark patterns” in its Prime enrollment flows, including:

    *  Forcing consumers to choose whether to enroll in Prime before allowing them to complete a purchase;

    *  Revealing the terms and conditions of Prime only once during the purchase process, and only in a small, easy-to-miss font;

    *  Making the option to decline enrollment difficult to locate; and

    *  Presenting asymmetric choices that made it easier to enroll in Prime than not.

FTC Cancellation Claims:

    *  The cancellation process was designed to deter consumers from unsubscribing;

    *  The cancellation process was difficult to find; and

    *  Subscribers were redirected to multiple pages for "saves" (various offers to continue the subscription).

FTC Chair Lina M. Khan: “Amazon tricked and trapped people into recurring subscriptions without their consent, not only frustrating users but also costing them significant money. These manipulative tactics harm consumers and law-abiding businesses alike.”

Takeaway

Many legal commentators are skeptical regarding the FTC's case.

If adjudicated (not settled confidentially), the outcome of this case will be significant for subscription marketers.

It could possibly define specifically what is legal regarding subscription signups and how far marketers can go to “save” subscriptions from cancellation.

Author Bio

Chip Cooper is an eCommerce Attorney and Digital Marketing Compliance Attorney practicing as Of Counsel to the Atlanta, Georgia law firm of Jones & Haley, PC. For more information, visit eCommerceAttorney.io
©2022 Chip Cooper. All rights reserved.