Online subscriptions are increasingly the sales channel of choice for both brands and consumers alike.
According to Jana Vyleta, a health and personal care analyst at market research firm Mintel, the model is especially popular for dietary supplement companies—it cuts the competition to get on retailer shelves, better ensures consumer compliance, and eases the education process by not relying on the square footage of a small box or bottle.
But there are common legal pitfalls companies should keep in mind in this emerging space.
“It is a timely thing to consider, because it is a growing way to do business. There are regulations in place and regulations coming, so it’s a good thing for companies to think about,” said Maria Jhai, a litigator with Munger, Tolles & Olson LLP.
Her experience in the subject includes representing a meal delivery service, securing a favorable settlement in a putative class action under California’s Automatic Renewal Law.
One example of a new law kicking in soon is an update to California’s Auto-Renewal Law, which will go into effect July 1.
The amendment, California Senate Bill No. 313, will require companies who offer automatic renewal of goods or services online to provide a way for consumers to cancel the subscription exclusively online, without the need to go to an office in person, mail something, or make a phone call.
But what does the existing regulatory landscape look like? Jhai shared some highlights on what companies in the space need to know.
The information below is provided for informational purposes only, and should not be construed as legal advice on any subject matter. Edited for length and clarity.
There’s a patchwork of laws
"There are laws that have been in place—California’s went active in 2010 or 2011 initially. There are also a couple federal laws, including beefed up federal regulations that allow the FTC to prosecute a company’s compliance with disclosures."
"About half of the states have some sort of state law that regulate automatic renewal disclosures. They don’t all apply to companies that sell vitamins. For instance, some of them have regulation specific to health club memberships, or maybe it’s just services and not goods, so it varies."
Follow the strictest standards (which you’ll find in California)
"If you’re a company that sells online, and you have a website that reaches all 50 states, then you need to know if you have customers potentially in each of the 50 states. You’re accountable for what each of those state’s laws are.
"You can make it simpler by meeting the standard of the state with the strictest requirements. There are just a few, like California for example. There’s a huge number of consumers in California, and the state also has one of the more robust statutes that protect consumers and require specific disclosures if you’re selling a subscription-based product or service.
When it comes to online shopping, dietary supplements join the likes of personal care products like razors and oral care, where consumers are more likely to hit ‘subscribe,’ according to an analyst from market research firm Mintel. READ MORE
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"Not all states do this, but California allows consumers to bring in action to enforce the law. So you can have a consumer class action in California."
"In terms of federal law, the FTC has this act called the Restore Online Shoppers’ Confidence Act, which allows the FTC and state attorney generals to target companies’ renewal policies. There are specific requirements under federal law, where you’re not going to get a federal consumer class action, but you can get a compliance action by the FTC.
"There are some particular requirements and it’s good to be aware of the details of the laws, but there’s also a common sense gist of the whole scheme, which is [making sure] consumers are aware of the terms of an offer that’s going to automatically renew before they end up paying for it.
"It all boils down to conveying that message to consumers before they purchase."
When offering free trials or a discount period, be clear with when it’s going to end, and the price change
"There are some laws around free trials. California’s law, again, is a good example. What that law does is it lists certain things that you have to tell the consumer. It tells you when you have to tell them that, and how.
"That’s the baseline. Right now, what’s embedded in that is, let’s say you have an initial discount price, and that price is going to go up, or you’re offering a free trial, you have to disclose to the consumer what the price is going to be when the period ends.
"You have to disclose it in visual proximity to the request for consent. So this is right away—when the person is signing up, you have to let them know that the price is going to change and when it will change by, but you have to get their affirmative consent to that price before you charge them."
How you communicate these disclosures matters
“The laws [on how to communicate disclosures] can be specific, like you need to do it in a clear and conspicuous manner. For example a larger font size, or contrasting color, or set off—something that would draw the consumer’s attention to it.
"Also about when you need to tell them, which is in visual proximity to the request to consent to the offer before they’re charged.
"You also have to send them an acknowledgement that they can keep in their records...something that has all the terms of what they all agree to and how to cancel, so it’s not just something that pops up on the website and then disappears.
"I think that jargon is, on these disclosures, not necessary, and maybe not a good idea. You really want to communicate the information that somebody looking at the site would understand, either a consumer looking at it or a court looking at it later can say ‘Yes, you told them in a way that people would get.’”