Yet more changes in 2022 to California's laws regulating automatic renewals: do your current practices meet the new standard?

New amendments to two California laws are likely to have significant impacts on businesses offering subscription-style products and services to consumers.

When it was enacted in 2010, California’s Automatic Renewal Law (ARL) became the tip of the spear across the country in state-law oversight of subscriptions that automatically renew unless cancelled by the consumer.  The ARL was the most robust state analogue to the federal Restore Online Shoppers’ Confidence Act (ROSCA).

Since the ARL was enacted, the use of automatic-renewal subscription plans – particularly in the e-commerce environment – has only grown, and substantially so. In 2018, California amended the ARL to address other features and issues with automatic renewals, such as online cancellation and free gifts and trials. Since then, the automatic-renewal space has continued to rapidly evolve, spurring California’s legislature to take another look at strengthening its regulations. The new amendments are reflected in the ARL, but also in the state’s Song-Beverly Consumer Warranty Act. The Song-Beverly Act amendments took effect on January 1, 2022, while the ARL changes are operative starting July 1, 2022.

Key provisions of the ARL: 5 major requirements

The bedrock requirements of the ARL are reflected in five major requirements. These relate to (1) clear and conspicuous offer terms; (2) affirmative consent to an automatic-renewal agreement; (3) a post-transaction acknowledgement; (4) an easy-to-use cancellation mechanism; and (5) a notice of material changes to offer terms.^[1]

The 2018 amendments built on this regulatory regime by building in an online cancellation option for subscribers who signed up online.^[2] And it also extended affirmative consent to include offer terms made at a promotional or discounted price.^[3] And the amendments set forth new disclosure requirements for free gifts or trials.^[4]

ARL's changes become effective July 1, 2022

California Assembly Bill 390 (AB 390) was signed into law by Governor Gavin Newsom in October 2021. AB 390 adds important new renewal notice and online cancellation requirements as of July 1, 2022.^[5]

1. Renewal notice requirement and contents. For a consumer who accepts a free gift or trial longer than 31 days or a renewal with an initial term of one year (or longer), the amended ARL will now require a notice that clearly and conspicuously states: (a) that the automatic renewal will automatically renew unless the consumer cancels, (b) the length and any additional terms of the renewal period, (c) one or more methods by which a consumer can cancel, (d) if sent electronically, a link that directs the consumer to the cancellation process, or another reasonably accessible electronic method, and (e) contact information for the business.
2. Timing of renewal notices. The amended ARL also sets forth specific time periods when these renewal notices must be provided. These can be operationally complex in light of differing timing requirements in other states:
   • 15- to 45-day renewal notice for annual (or longer) subscribers. Businesses selling automatic renewal plans with the one-year-or-longer initial term must deliver notices to their California subscribers at least 15, but no more than 45, days before the renewal date reminding them that their plans will automatically renew unless canceled.
   • 3- to 21-day notice before the end of a free trial / gift / discount period. Businesses selling automatic renewal plans with a longer-than-31-days free gift or trial must provide notices to their California subscribers 3 to 21 days before the expiration of the applicable period for what the law calls the “free gift or trial, or promotional or discounted price[.]”
3. Immediate cancellation option. Online sellers of automatic renewal plans will also be required next year to offer subscribers the option to cancel online immediately. Importantly, this requirement requires cancellation “at will” and prohibits “further steps that obstruct or delay the consumer’s ability to terminate” the renewal. This method shall take the form of either: (a) a prominently located direct link or button within the customer’s account or profile, or within device or user settings, or (b) an immediately accessible termination email formatted and provided by the business that a consumer can send to the business without additional information. (But a business may require a consumer to enter account information or otherwise authenticate online before termination online if the consumer has an account with the business.)
   
   

The Song-Beverly Act’s changes became effective January 1, 2022

The governor also signed California Assembly Bill 1221 (AB 1221) into law on October 4, 2021. AB 1221 amends sections of the Song-Beverly Consumer Warranty Act – which provides consumers with additional legal remedies related to manufacturer warranties – by imposing new disclosure and cancellation requirements on service contracts that, like traditional automatic renewal subscriptions, are continuous in nature.^[6]

The following requirements apply to service contracts entered into on or after January 1, 2022:

1. Clear and conspicuous. Businesses shall disclose to the buyer in a clear and conspicuous manner that the service contract shall continue until canceled by the buyer or service contractor and require the buyer’s affirmative consent to this provision.
2. Disclose alternatives. Businesses shall disclose to the buyer all alternatives that the seller offering the service contract offers, including any fixed-term service contracts or other service contract basis that does not continue until it is canceled.
3. Cancellation. The business must provide a cancellation method which is (a) a toll-free telephone number; (b) an email address; (c) a postal address; and (d) if one exists, an internet website the buyer can use to cancel the service contract. Underscoring the use of the conjunctive “and,” the law further cautions that cancellation shall not require the use of more than one of these methods to be completed and shall be effective immediately upon receipt of the request for cancellation. If the service contract was entered into online, businesses must allow the buyer the option to cancel exclusively online, without engaging in unnecessary steps to obstruct or delay the buyer’s ability to cancel.

Do your current practices meet the new standards? 5 key takeaways

The new amendments to the ARL and, now, an expansion of automatic renewal regulation through the Song-Beverly Consumer Warranty Act are important signals of California’s intent to remain the country’s leader in this space. These latest changes are also another reminder for companies doing business in one of the world’s largest economies to check whether their current practices meet the new standard taking effect in just a matter of months.  While there are already a handful of states that have similar auto-renewal statutes, additional states are also actively considering their own legislation and will likely follow California’s lead.

There are important takeaways from the ARL’s and the Song-Beverly Act’s new provisions. The first is that the State of California is continuing to expand its regulatory reach beyond the initial transaction between a company and its consumer. In other words, when a consumer signs up, simply providing adequate disclosures does not complete your duties. Even if a company’s pre-billing information disclosures meet the mark, it has to stay engaged with its customers to ensure they remain aware of their automatic renewals.    

Second, cancellation continues to be a source of concern for regulators. A simple and easy-to-use cancellation mechanism is a core feature of the original ARL (as well as the federal ROSCA), and it also appeared in the July 2018 amendment. In this third iteration of the ARL, the law is again muscularizing the requirements related to cancellation by ensuring that customers can cancel “at will” and without any steps that “obstruct” or “delay” the ability to cancel. The Song-Beverly amendments reflect this similar change.

The precise meaning of “at will,” “obstruct,” or “delay” are unknown at this point and will likely be a fluid requirement that hardens over time in case-specific circumstances. On its face, the law does not proscribe attempts to “save” a consumer during the cancellation process, but the law has drawn a line against what it calls “obstruct[ive]” efforts that functionally prevent a consumer from cancelling.

Third, the amendments – specifically, through AB 1221’s changes to California’s Song-Beverly consumer warranty law – show that California is looking beyond “traditional” automatic renewals. AB 1221’s expansion of disclosure and cancellation requirements to service contracts likely portends additional regulation to cover other varieties of business-to-consumer agreements that renew.

Fourth, businesses whose business models incorporate automatic renewal of subscription, memberships, service contracts should review their contracts, whether they are signed agreements or online terms of service, in order to mitigate the risk of enforcement and class actions in an environment of increased regulation.

Fifth, businesses should monitor legislative developments in other states to ensure that their contracts and terms comply with the current ARL requirements in those jurisdictions where they conduct business.  In connection with this review, businesses must ensure that their operations infrastructure is able to support the varying notice and cancellation requirements, which often differ from state to state.

An earlier version of this alert appeared on Law360 on December 15, 2021.