TL;DR. No news on the status of the FTC Negative Option Rulemaking … and even Vegas won't venture to guess an over/under effective date given the utter mishigas this process has become. But if we were to guess, we think it is likely to be issued by the end of the year, possibly as early as Q3, given the possibility of an administration change in the new year. Meanwhile, a handful of statehouses were awfully busy the first half of the year, with five states either enacting new laws or amending existing auto renewal laws, one of which (SC) is already in effect, two (TN & VA) becoming effective next week (July 1), and two (MN and UT) coming online January 1, 2025. We also report on bills in CA, HI and IL that are slowly making their way to the finish line.
FTC Negative Option Rule Rulemaking
No new news on the FTC's Negative Option Rulemaking front. As reported on our May 6 blog post, the ALJ had closed the record on testimony involving the FTC's assessment of the impact the revised rule would have on the U.S. economy and the estimated compliance costs for companies. As we reported, the ALJ found that (i) the new rule will impact the US economy by more than $100 MM, and (ii) the record did not establish what the record-keeping and disclosure costs associated with the proposed rule would be for affected merchants. The former is important because agency rulemakings meeting the $100 MM threshold are considered “major” and require more intensive reporting requirements to Congress, which includes a report from the GAO on the agency's compliance with the rulemaking process, as well as heightened scrutiny by Congress. A major rule can only go into effect 60 days after the GAO sends its report to Congress or the agency publishes the rule in the Federal Register, whichever is later. And even then, Congress can challenge or reject the rule. We are not aware of any of this happening to date, so stay tuned.
Enacted State Laws
South Carolina. Governor Henry McMaster signed SB 434 into law on May 20, 2024, which became effective that same day. This bill amends two sections of SC code, Chapter 78, Title 38 and Chapter 6, Title 37, to require notices to be sent to consumers prior to renewal of auto renewing contracts. The former code provision is generally inapplicable for this audience as it relates only to automobile service contracts (that is, unless your cousin Billy sells extended warranties for Dodge Darts). But with regard to the latter, the bill also amends the Consumer Protection Code to require sellers to provide a notice to consumers subject to an auto-renewing service contract that renews for a period of longer than one month that continues for more than six months (seemingly excluding monthly renewed/billed programs), informing the consumer of the renewal, the amount that will be charged if not cancelled, and how they may cancel by a toll-free telephone number, electronic email address, postal address (if the seller directly bills the consumer), or other cost-effective, timely, and easy-to-use mechanism.
Tennessee. Governor Bill Lee signed SB 1894 into law on May 1, 2024, which is effective July 1, 2024, and applies to contracts entered into, modified, or renewed on or after that date. This bill amends current law 47-18-133(a) to require the entity billing a consumer for an automatic renewal or continuous service offer to send consumers a notice of an upcoming renewal/charge if the renewal will be more than 60 days after the initial enrollment (another win for monthly subscriptions!). Interestingly, this is the only pre-bill notice the law requires, as there is no annual or other renewal notice requirement either in the bill or existing law. The bill also adds a new definition for “affirmative consent” to mean “a clear, affirmative act signifying a consumer's freely given, specific, informed, and unambiguous agreement to the automatic renewal offer terms or continuous service terms; and (B) Includes a written statement, including a statement written by electronic means, or an unambiguous affirmative action.” A seller that fails to obtain a consumer's affirmative consent will be required to refund the charge to the consumer, upon request, but only if such request was made within 7 days of the charge.
Utah. Governor Spencer Cox signed Utah HB 174 into law on March 13, 2024, effective January 1, 2025. The bill creates a new law at Chap. 70 Section 13-2-1(2)(bb) titled “Automatic Renewal Contracts Act,” that applies to contracts that renew at the end of “a defined paid period for a subsequent paid term of more than 45 days,” which would also appear to exempt monthly renewals. The law requires a seller to “clearly and conspicuously” disclose the terms of the auto renewal, borrowing, like so many other states, from California's definition of that term. Sellers must send consumers a notice of the renewal between 30-60 days prior to the date the consumer must cancel to avoid the renewal. If the seller offers a “trial period offer,” which is defined as “an offer to provide a period of time to sample or use a product or service without payment” (read: must be free, does not apply to intro or teaser pricing), the seller must send consumers a notice no less than 3 days before the end of the trial informing them of the date by which they must cancel to avoid the charge and the method(s) that may be used to cancel. The law grants the Attorney General express enforcement authority, with no mention of a private right of action.
Virginia. Governor Glenn Youngkin signed HB 744 into law on April 4, 2024, effective July 1, 2024. This bill amends existing § 59.1-207.46 to require a supplier that makes an automatic renewal or continuous service offer that will automatically renew after a period of more than 30 days (exempts monthly billed programs) that will extend for a period longer than 12 months (annual renewals) to send consumers a renewal notice between 30 and 60 days before the cancellation deadline or the end of the current contract term. The notice must conspicuously disclose (i) that the contract will automatically renew, unless cancelled, (ii) the date by which the consumer must cancel, (iii) the method(s) to cancel, and (iv) a copy of the automatic renewal or continuous service offer provisions.
Minnesota. Governor Tim Walz signed SF 4097 into law on May 21, 2024, effective January 1, 2025, and applies to contracts entered into, modified, or renewed on or after that date. Before reading this full description of the new law, which is a doozy…we should point out that one of the exemptions from compliance in this bill are for “contracts governed by another state or federal statute or regulation specifically intended to regulate automatic renewal or continuous service.” For real…it actually says this (see line 117.19 here)! So … arguably, if the FTC's amended Negative Option Rule goes into effect (which it likely will, in some form), it would seem to moot this new Gopher State law…which is a good thing, because as we say, Its. A. Doozy! And Fun Fact…Minnesota actually has three recognized nicknames, The Gopher State, The Land of 10,000 Lakes, and The North Star State!
· Application. The new law applies to “indefinite subscription agreements” that contain either an “automatic renewal” provision (a plan with a defined term that auto renews for a subsequent term) or “continuous service” provision (continues until cancelled).
· Offer Terms; Acceptance. Requires clear and conspicuous disclosure of the offer terms (using the California definition) and consumer acceptance of the offer before charging the consumer. Interestingly, and somewhat perplexing, under the heading “Right of First Refusal” in a section titled “Prohibited Conduct,” the law prohibits the agreement from requiring consumers to permit the seller to match any offer the consumer has received. We have absolutely no idea what this means.
· Confirmation Notice. Must provide a confirmation of the order in a manner that may be retained by the consumer (email is explicitly permitted), that (i) reiterates the offer terms, (ii) if a free trial is offered, describes how to cancel to avoid being charged, and (iii) lists the options to cancel, which must be “easy to use, cost-effective, and timely.”
· Notice of Material Change. Must provide a notice of a material change to the terms of the offer that may be retained by the consumer, with instructions on how to cancel.
· Free Trial. If the offer includes a free trial lasting more than 30 days, the seller must send consumers a notice between 5-30 days prior to the end of the trial with the option to cancel to avoid the charge.
· Reminder Notice. For a “continuous service” offer, sellers must send written notice of the continuous service at least once per calendar year by postal mail or email, reiterating the offer terms and how to cancel.
· Cancellation. The bill has some funky provisions regarding cancellation that are without peer in any other state laws, with some sections notably mirroring certain proposals in the FTC's amendments to the Negative Option Rule, as noted below.
o First, consumers must be allowed to cancel using any of the ways described in the confirmation notice.
§ If an offer is made via a website and the seller has a website with profile or subscription management capabilities, it must allow consumers to cancel on the website. This option must be “clear and conspicuous,” using plain language, only require a consumer to input information that is necessary to process the termination, and not include “undue complexity, confusion, or misrepresentation.” The termination option must include a checkbox, submission button, or similarly common and simple mechanism to be used to cancel.
o Second, upon receiving a notice of termination from a consumer, a seller may not (i) “make any misrepresentation or undertake any unfair or abusive tactic to delay, unreasonably delay, or avoid the cancellation or termination of the agreement,” or (ii) “make or provide additional benefits, contract modifications, gifts, or similar offers to the consumer until the seller has obtained permission from the consumer, granted by the consumer after notice of cancellation or termination was given to the seller, for the seller to engage in any such activity.” While (i) tracks similar provisions in some other state laws and the FTC's proposed revisions to the Negative Option Rule, (ii) appears to require sellers to obtain a consumer's permission to hear a save attempt, akin to the FTC's Negative Option rule proposal. This conclusion is supported by an immediately following provision, “A seller can only seek a consumer's permission under this paragraph once per cancellation or termination attempt. A consumer's grant of permission under this paragraph is limited to the immediate cancellation or termination attempt and does not apply to subsequent attempts,” which also tracks the FTC's proposal.
§ But note, this prohibition does not preclude a seller from: “(1) asking the consumer the reasons for cancellation or termination, provided that a consumer is not required to answer as a condition of cancellation or termination; (2) informing the consumer of any consequences of canceling or terminating the subscription; (3) verifying the identity of the consumer; or (4) describing options to maintain an ongoing relationship with the seller, including but not limited to for downgrading, pausing, or suspending the subscription.”
· Last, the timing of the termination following a consumer's request will depend on what type of provision is in the “indefinite subscription agreement.”
o If the agreement is subject to automatic renewal (a plan with a defined term that auto renews for a subsequent term) the termination is effective at the end of the term in which notice of termination is provided by the consumer, unless the consumer specifies a termination date occurring at the end of a subsequent term, in which event the termination is effective as of the date specified by the consumer, if the option is available. Odds are the latter won't really apply in today's marketplace.
o If the agreement is subject to continuous service (continues indefinitely until cancelled), the termination must take effect no later than 31 days from the date of a verified consumer's notice of termination unless the consumer specifies
a future termination date, in which event the termination is effective as of such date.
Currently Pending Bills With Movement:
California AB 2863. Introduced February 15, 2024, currently before the Senate Judiciary Committee. If enacted, would become effective January 1, 2025. Highlights include:
- Defining “free to paid” offers and including that term in the existing definition of “automatic renewal” at Bus. & Prof. Code 17601(a)(1).
- Require sellers to allow consumers to cancel an auto renewing subscription in the same medium as they enrolled or as the consumer is accustomed to interacting with the seller. If the enrollment was via the phone, the seller must provide a number that may be retained by the consumer and be clearly and conspicuously displayed on the seller's website.
- Require notice of a change (not just increase) in a pre-authorized amount to be charged for a subscription, to be sent between 7 and 30 days before the change, with instructions on how to cancel.
- Clarify that the current law's prohibition on obstructing or delaying a consumer's cancel request would not prohibit a seller from offering a discount or other consumer benefit or informing a consumer of the effect of the cancellation, provided the consumer remains able to cancel or terminate the automatic renewal or continuous service. So that's good!
Hawaii HB 2045. Introduced January 19, 2024 and if enacted, would take effect July 1, 3000. Yup, not a typo…you read it right…3000 (see line 3 on page 4 here). That's 976 years from now, so plenty of time for compliance. Would amend current law from applying to contracts with a specified term of “more than one month” to “a month or more” with the same change for renewing terms, effectively capturing monthly billed subscriptions A notice of a material change must be sent no less than 30 days before the effective date of the change.
Illinois SB 2764. Introduced January 16, 2024. Passed both houses and sent to the Governor on June 20, 2024. Would amend existing 815 ILCS 601/10 to require any seller that sells or offers to sell any products or services to a consumer pursuant to a contract that includes a free gift or a trial period of the product or service that lasts 15 days or longer, where such contract automatically renews unless the consumer cancels the contract, to notify the consumer no less than 2 weeks before the cancellation deadline.
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