The federal government’s failure to pass any useful internet laws in the last 15 years is inexcusable. Predictably, states are rushing to fill the void with California leading the way. The California Automatic Renewal Law represents a perfect example of this trend and the madness that can result.
Who Will Save The Children?
The California Legislature did not restrict the California Automatic Renewal Law to children, but the same mentality gives rise to it – someone must protect innocent consumers from evil online businesses. While I am all for putting an end to shady online practitioners who double bill credit cards and such, creating questions about the legality of automatic renewals is going a bit too far.
The California Automatic Renewal Law applies to all consumer transactions involving automatic billing. For instance, a membership website that automatically charges you a monthly or annual fee must comply with the law. The law does not apply to business to business transactions at this time or consumers not living in California.
Much like California privacy law, this law takes a unique approach to compliance. The compliance requirements for this law are just a bit much. An online business must provide “clear and conspicuous” notice of the automatic billing. This notice must be located next to the registration or purchase button and must stand out from the surrounding graphics and text in some enhanced manner. The customer must affirmatively agree to the automatic renewal, which means they must “check a box” agreeing to the billing policy much like one checks the box with a clickwrap agreement.
Once the person signs up, you must provide the consumer with a statement detailing:
- The renewal terms,
- The cancellation policy,
- How to cancel, and
- A link to an area where the person can easily cancel.
The online business typically delivers the statement as an email message.
The penalties associated with the Automatic Renewal Law are rather odd. If you violate the law, the consumer must be refunded all their money from their first payment to the last, even if that means a refund covering years of charges. It is an annoying remedy, but not one that will put most companies out of business. Given this, most websites have ignored the law. This strategy may no longer be wise.
Class Action Lawsuits
California enacted the Automatic Renewal Law in 2010. Several commentators have suggested the law is an addition to the California Online Privacy Protection Act, but this is incorrect. Regardless, few individual lawsuits have been filed under the law since potential damage claims are so small. Plaintiff lawyers may talk about justice, but we all know they are only interested in “justice” if there is also a healthy financial return accompanying it. Well, a few creative law firms may have found a way to turn a nice profit using this law – class action lawsuits.
A class action lawsuit occurs when a court condenses hundreds or thousands of lawsuits involving one company and one underlying legal claim into a single case. Although the potential damage award for an individual claim is small, the accumulation of thousands of plaintiffs in the litigation makes it worthwhile for a law firm to pursue.
Assume I have a membership website and charge people $10 a month to be a member. I automatically charge the members each month, but fail to comply with the Automatic Renewal Law. Is a lawyer likely to sue me if his client has been a member for a year? No. The potential damages would be $120.00 [$10 x 12 months]. It doesn’t make financial sense.
Now let’s consider the same scenario, but I have 100,000 members. For simplicity purposes, we’ll further assume each person has been a member for a year. The total damages available in a class action brought on behalf of these 100,000 members would be twelve million dollars [$120 a year x 100,000 members]. The law firm handling the matter would be entitled to a third of that – $3.3 million. Think a lawyer would be interested in pursuing this type of case? The answer is yes, and class action litigation brought under the law is already underway against:
- Dropbox, and
The courts have yet to resolve any of these cases.
We are quickly reaching a point where particular pages on websites and apps will contain more legal language than useful content. Who in their right mind believes this makes sense?
California Automatic Renewal Law And Your Business
You must comply with the California Automatic Renewal Law if you automatically renew customers. Fail to take this step, and you risk being swept up in the coming wave of class action lawsuits. Contact me for a free consultation to learn more.
Richard A. Chapo, Esq.