by | Nov 6, 2024

New Automatic Renewal and Continuous Service Requirements Law 

Companies offering automatic renewal or continuous service terms to consumers that are located in California should review their practices and contracts to ensure compliance.

California has introduced new regulations surrounding auto-renewal clauses in consumer contracts, and businesses must act quickly to ensure compliance. This client alert breaks down the key changes and what they mean for your services contracts moving forward.

On September 24, 2024, Assembly Bill 2863 was signed, requiring key changes that businesses offering automatic renewal and continuous services must comply with by July 1, 2025. Businesses are working to revamp their services contracts, website user agreements and websites to make the necessary changes. The new law impacts companies that have subscribers in California.

California’s AB 2863 law is intended to prevent “dark patterns,” which are practices that that make it hard for customers to cancel their subscriptions. That consumer-protection focused law impacts changes to user consent, notice, and cancelation requirements.

This new regulation requires any business with a subscription model to take a close look at their practices, user experience, and service agreements, including End User License Agreements and Terms of Service. For service providers, these changes require careful adjustments to ensure compliance and avoid penalties.

The Automatic Renewal Law touches many industries, from software as a service subscription (SaaS) businesses, to steaming entertainment services, subscription boxes such as meal kit delivery services, beauty product subscription boxes, and clothing rental services, to any online platform with subscription offers, virtual fitness and health platforms, and non-tech companies like gyms.

Key Provisions Under the New Law

Expanded Definition: Free-to-Pay Conversions Now Covered

The new legislation broadens the scope of “automatic renewal” and “continuous service” agreements to include “free-to-pay conversion” offers. These involve giving consumers a product or service free for a trial period, after which charges begin if the service isn’t canceled before the trial ends. Businesses must now more clearly communicate these terms upfront and offer straightforward cancelation options.

New Requirements for Express Consumer Consent

Under the new law, businesses must now obtain express affirmative consent from consumers for automatic renewal or continuous service terms. This consent must be clear and cannot be undermined by contradictory or misleading information within the service contract.

Compliance Tip

Ensure that the consent is transparent and you retain records of the consent for at least three years, or one year after contract termination.

Notice and Reminder Obligations

Businesses offering automatic renewal or continuous service must meet new notification requirements to keep consumers informed at various stages of the agreement/service.

Initial Notice

Before confirming the customer’s billing details, businesses must now send an initial notice that includes:

  • The price or range of charges.
  • The frequency of charges.
  • The steps required to cancel the subscription.

Annual Reminder

Regardless of your contract’s renewal terms, in other words no matter whether the contract subscription renews monthly, annually, every 2 years and so on, the service provider needs to remind the client every year about the automatic renewal in service agreements. We have many clients asking if this applies to SaaS platforms, the answer is YES. In the reminder to customers, be sure to include:

  • How often they will be charged.
  • Clear instructions on how to cancel the service.

Fee Change Notifications

If there’s a change in the cost associated with the renewal, businesses have to notify customers at least seven days (and no more than 30 days) before the new fee starts to take effect. The fee increase notice needs to include clear instructions on how to cancel the agreement.

Expanded Consumer Cancelation Rights & Cancelation Options

The law introduces more flexible cancelation methods for customers. That means online platforms and SaaS businesses need to let customers cancel using the same medium they used to subscribe to the service. For example, if a customer subscribed through the website, they should easily be able to cancel online. The specifics on whether the cancelation option is clear under the new law is something that the business should discuss with their lawyer.

Compliance Tip

If the business offers a toll-free cancelation phone line, calls need to be answered promptly, and voicemails regarding cancelations need to be addressed within one business day.

Discounts and Retention Offers To Curb Cancelations

Yes, tech businesses can provide discounts or other types of incentives in order to dissuade the customer from canceling their subscription. But if the consumer declines the offer, the business needs to immediately cancel the consumer’s subscription as requested.

New York’s Automatic Renewal Law (ARL)

2021, New York further reformed its ARL for targets subscription services and imposed even stricter requirements for automatic renewal provisions, requiring businesses to make the terms of automatic renewal subscriptions more clear and conspicuous, making the terms easier to understand and visually distinct from the rest of the agreement. This is a good time to ensure you’re compliance with New York’s ARL.

How Businesses Ensure Compliance With California’s Automatic Renewal/Continuous Service Law.

There will be harsh penalties for tech companies that don’t review and amend their service agreements, notifications, and cancelation policies to comply with AB 2863. To be compliant, subscription based businesses need to offer clear and conspicuous information and cancelation processes, as well as annual reminders and potential updates to terms of service or EULAs.

For companies offering automatic renewal or continuous services that customers in California can purchase, you need to act now. Talk to your legal counsel to ensure that your service agreements comply with the new  “click to cancel” law and that your consumer consent and notification processes are fully updated.

 

About the Author

Jana Gouchev

Jana Gouchev is the Managing Partner of Gouchev Law and a prominent corporate lawyer on the leading edge of technology law and complex commercial transactions. She delivers legal and commercial insight that propels companies forward. Jana's practice is focused on Corporate Law, Data Privacy and Information Security, Tech Law (consulting, SaaS, and AI), Complex Commercial Contracts, Intellectual Property, and M&A.

Jana is passionate about working with change-makers. Hailing from an AmLaw 50 firm, Jana is the right-hand counsel to executives of the world’s most innovative brands. Her client roster includes Estee Lauder, Hearst, Nissan, Squarespace, tech consulting firms, and SaaS companies. Jana is featured in Forbes, Bloomberg, The New York Law Journal, Law360, Modern Counsel, Inc., and Business Insider for her legal insights on including Tech Law, IP and Mergers and Acquisitions.

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