The Latest Update on Auto-Renewal Laws: What Membership Business Owners Need to Know
She thought she was just showing her support.
Lydia* had agreed to check out a new freelance-specific CRM a ‘friend’ had created. She was offered a 3-month free trial and figured she’d give it a go.
But those 3 months flew by.
She forgot all about the trial until her 3 months were up, and the credit card on file was charged as an auto-renewal subscription.
If you’ve ever been there, you know what a terrible feeling it is to see a charge like that go through. And because there was a no-refund policy in place, Lydia considered legal options.
Unfortunately, there has been a recent increase in lawsuits filed concerning subscription and auto-renewal programs because of situations like Lydia’s. Most of them are a result of failure to comply with federal and state disclosure, consent, and acknowledgment requirements.
If you’re a business owner who provides a subscription service like a membership, it’s crucial to be aware of these laws and take steps to ensure that your program complies!
**Okay, before we go any further: everything I share is legal education and information. It’s not business, financial, or legal advice, and it doesn’t create an attorney-client relationship between us. Please chat with an attorney in your area to make sure you’re protecting your business.**
The ins and outs of auto-renewal laws
Existing auto-renewal laws vary from state to state, but if you live in California, you likely know we’ve had the most restrictive auto-renewal laws in place for quite some time already.
Much of it is considered good practice, and I would strongly suggest incorporating the policies into your own membership practice regardless of where you do business. (And especially if you do business with any Californians.)
We’ll also get to new changes made effective as of July 1, 2022.
Here’s what you need to do to ensure you’re following strict auto-renewal laws and keeping yourself out of legal trouble:
Make the terms of your offer clear and conspicuous
It’s unlawful under the Business and Professions Code §17602 (aka The Auto-Renewal Law) in California to fail to present the terms of your offer in a clear and conspicuous manner.
In other words, your terms must be clearly stated and obviously visible before the offer is fulfilled.
Your terms must also be “in visual proximity” to the merchant’s request for consent, meaning the terms can’t be on a separate page or section from where you request the client to give consent.
Don’t charge a client without their consent
This one sounds obvious, but it’s important to point out.
Before you charge your client’s preferred method of payment—whether credit or debit card or bank account—you must first obtain their affirmative consent to be charged.
A great way to do this is by including a text box where they enter their payment information to be sure you’ve been granted consent.
Provide information to your client in a format they’re able to keep
Your client has to have access to an acknowledgment with the following information:
- The offer terms
- Your cancellation policy
- Instructions on how to cancel
And the format you use to share that information must be one that your client is able to retain and refer back to.
Clearly detail a cancellation policy for all free trial offers
For any offer, including a free trial period, you must provide your client or consumer with information on how to cancel and allow them to cancel before payment.
In addition, the acknowledgment detailed above must include a toll-free telephone number, e-mail address, and postal address if the seller directly bills the consumer or another cost-effective, timely, and easy-to-use mechanism for cancellation.
Bottom line: it has to be easy for your client to cancel.
Auto-Renewal Law Updates effective July 1, 2022
Now, this update is important.
This is the part that would have protected our friend Lydia from her unwelcome subscription charge.
Provide clients with reminder notices
If your membership service includes an auto-renewal option for California residents and their initial service term was for 1 year or longer (think annual renewals), you must deliver reminder notices 15-45 days before their renewal date.
Notify clients of the end of their free trial
If you’re a business owner who offers a free trial, gift, or initial discount periods that last longer than 31 days, you must also provide reminder notices to California subscribers.
Those reminders need to be delivered 3-21 days before the expiration of the free or discounted period.
Offer ‘immediate’ cancellation to your clients
Online sellers of automatic renewal plans have to offer subscribers the ability to cancel automatic renewal features online “immediately” (after account authentication).
You can offer your consumers this option through a button or link on the account authentication page or send a pre-formatted termination email message.
If Lydia had access to any of those new changes outlined by California’s Automatic Renewal Law, she likely wouldn’t have had that unwelcome charge on her card.
And as much as auto-renewals seem like a great way to guarantee income from a business owner’s perspective, the truth is—
Clients won’t continue their relationship with you if they feel they’ve been ‘tricked’ into paying anyway, right?
You’ve made it to the end, so you obviously care about running your membership program the right way.
Whether or not you do business in California or with Californians, I hope you’ll consider these policies best practices for your business, too.
And if you need help getting your membership terms and conditions just right, check out a customizable template for your membership program.
*Names have been changed for privacy reasons.