Archive» Silicon Valley Business Law Blog

December 2024
S	M	T	W	T	F	S
1	2	3	4	5	6	7
8	9	10	11	12	13	14
15	16	17	18	19	20	21
22	23	24	25	26	27	28
29	30	31

FTC Announces Final “Click to Cancel” Rule for Subscriptions, Memberships

The Federal Trade Commission (“FTC”) has just announced the final version of its “Click to Cancel” Rule for consumer software subscriptions. The Rule will go into effect 180 days after it is published with the Federal Register. This Rule will directly apply to all companies selling on a subscription or membership basis to consumers.

Full Text of FTC Rule

The full text of the FTC Rule is linked here, at pages 222-230.

Fact Sheet of FTC Rule

The FTC has also made available a fact sheet which briefly summarizes key provisions of the “Click to Cancel Rule,” which is attached here.

Key Provisions of the FTC Rule

According to the FTC announcement, the “Click to Cancel” Rule will apply to “almost all negative option programs in any media.” The key provisions of the FTC Rule will prohibit:

misrepresenting any material fact made while marketing goods or services with a negative option feature;
failing to “clearly and conspicuously disclose” material terms prior to obtaining a consumer’s billing information in connection with a negative option feature;
failing to obtain a consumer’s express informed consent to the negative option feature before charging the consumer; and
failing to provide a simple mechanism to cancel the negative option feature and immediately stop the charges.

Revisions to Final Version of the FTC Rule

Also according to the FTC announcement, the FTC dropped from its final Rule an annual reminder requirement that would have required vendors to provide annual reminders to consumers advising them of the negative option feature of their subscription, as well as a requirement that vendors had to ask canceling consumers for approval before a vendor could tell a canceling subscriber about reasons to keep the existing agreement or of possible modifications that could be made without canceling the subscription.

Reasons for Adoption of the Rule

Why did the FTC adopt a Click to Cancel Rule? According to the FTC Announcement, the FTC was receiving 70 consumer complaints per day over negative option programs, and this number was “steadily increasing over the past five years.” The FTC’s announcement follows a recent California enactment of a more comprehensive “Click to Cancel” law.

Does the FTC Rule Supersede California Law?

The FTC Rule should not supersede California’s more comprehensive law; in fact, the Rule specifically states in its text that the Rule will not be construed to supersede any State statute, regulation or order “except to the extent that it is inconsistent with the provisions of this part, and then only to the extent of the inconsistency.” The expected impact of the FTC Rule is primarily to bring federal regulatory law closer to California regulatory law as it pertains to subscriptions and memberships.

What do Companies Utilizing the Subscription or Membership Model Need to do in Response to this Announcement?

All companies utilizing a subscription or membership model should revise consumer contracts and processes to comply with the FTC Rule over the next 180 days (whereas revisions must be made to comply with the new California law sooner: by the end of 2024). Companies utilizing the subscription or membership model with a business-focused customer base should similarly consider what changes to make to their contracts and processes as public policy will likely change regarding subscriptions generally along with the new FTC Rule and California law changes. If you have questions or concerns about how new FTC “Click to Cancel” Rule or the new California ”Click to Cancel Law” will impact your company, please schedule a consultation with me today at https://calendly.com/kristieprinz.

California Adopts New Law for Subscriptions, Memberships

California has just adopted a new law that will apply to consumer subscriptions, along with memberships and other autorenewing or continuous service arrangements with consumers. The “click to cancel” bill will impact not only the technology industry but also industries like gyms, telecommunications and streaming services providers, Internet businesses, and other services businesses selling on a recurring monthly fee basis.

AB 2863 amends California’s existing autorenewal law to add additional protections for consumers with respect to autorenewing or continuous billing charges.

Text of AB 2863

To view the full text of AB 2863, please click here. The law goes into effect on January 1, 2025, applies to all contracts entered into, amended, or extended after that date.

New Requirements for Consumer Subscriptions, Memberships

Under the new California law, it will now be unlawful for any business in the state that makes an autorenewal or continuous service offer to a consumer in the state to do any of the following:

Fail to present the terms of the offer in a clear and conspicuous manner in visual proximity to the request for consent of the offer, which includes if there is a free gift or trial, a clear and conspicuous explanation of the price that will be charged when the trial ends;
Charge the consumer’s credit or debt card or any third party account for the automatic renewal or continuous service without first obtaining affirmative consent from the consumer to the automatic renewal or continuous service agreement;
Fail to provide an acknowledgement that includes the automatic renewal offer terms or continuous service offer terms, cancellation policy, and information regarding how to cancel in a manner that the consumer can retain, and if the offer contained a free gift or trial, the acknowledgement must include a disclosure of how to cancel and must permit the consumer to cancel before the consumer pays for the goods or services;
Fail to obtain express affirmative consent from a consumer to the automatic renewal or continuous service offer terms;
Include terms in a contract that interfere with, detract from, contradict, or otherwise undermine the ability of consumers to provide their affirmative consent to automatic renewal or continuous service terms;
Fail to maintain verification of consumer’s affirmative consent for at least three years, or one year after the contract is terminated, whichever is longer;
Misrepresent expressly or by implication a material fact related to the transaction;
Fail to provide consumer with a notice, before confirming the consumer’s billing information that clearly and conspicuously states:
- The service will automatically renew unless the consumer cancels;
- The length and any additional terms of the renewal period;
- The amount or range of costs consumer will be charged and the frequency of those charges, unless consumer stops the charges;
- One or more methods which consumer can cancel the autorenewal or service;
- If sent electronically, the notice must include a link that directs consumer to the cancellation process, or another electronic method that directs the consumer to cancellation; and
- Contact information for the business.

New Requirements for Gifts and Trials

In addition, businesses offering free gifts or trials at promotional or discount prices that last for more than 31 days in conjunction with an automatic renewal or continuous service offer will now be mandated to provide the same kind of clear and conspicuous notice no less than 3 days before and no more than 21 days before the expiration of the gift or trial. The only exception to this requirement is in cases of contracts that are not electronic, where the business has not collected or maintained the consumer’s valid email address, phone number, or other means of notifying the consumer electronically. “Free gifts” for the purpose of this law does not apply to a gift that is different than the subscribed product or service.

New Requirements for Contracts or Offers with Initial Term of One Year or Longer

If the contract or service offer was for an initial term of one year or longer, businesses will now be required to provide the specified notice at no less than 15 days and no more than 45 days before the offer renews.

Online “Click to Cancel” Requirement

Businesses that sign-up or subscribe consumers online will be required to provide one of two methods to allow consumers to cancel at will by either (a) a prominent link or button within the customer account or profile or within device or user settings, or (b) an immediately accessible termination email formatted and provided by the business that a consumer can email to the business without any additional requirement.

Direct Billing Requirement

Businesses that direct bill consumers on an automatic renewal or continuous offer basis will be required to provide a toll-free telephone number, email address, and postal address or “another cost-effective, timely, and easy-to-use mechanism for cancellation” that is described in the acknowledgement. If a telephone number is provided as the mechanism for termination, the business is required to answer calls promptly during normal business hours without obstructing or delaying the ability to cancel. If a voice mail is left by the consumer requesting cancellation, the business shall be required to either process the requested cancellation in one business day or call the customer back regarding the request within one business day.

Customer Retention Offer Requirement

Businesses will still be permitted to make customer retention offers, provided that they must first clearly and conspicuously inform the consumer that they may complete the cancellation process at any time by stating they want to “cancel” or similar words to that effect. Once the consumer states their intention to “cancel” or uses similar words, the business must promptly process the cancellation without obstruction or delay. Businesses making online customer retention offers will be required to display a simultaneous, prominently and proximately located and continuously displayed direct link or button labeled “click to cancel” alongside the offer. Once the consumer clicks on the button, the business is required to promptly process the cancellation.

Requirement for Material Term Changes

Businesses who materially change terms that have already been accepted by a consumer in the state will be required to provide to the consumer a clear and conspicuous notice of the material change and to provide information on how to cancel. If the change involves a fee that was already accepted, the business will be required to provide at least 7 days (and no more than 30 days) prior clear and conspicuous notice of the fee change and information on how to cancel.

Requirement for Annual Reminder

Businesses will be required to send an annual remind to consumers who have entered into annual automatic renewal agreements or continuous service agreements in the same medium that the agreement was activated or in the same medium by which the consumer is interacting with the business. If the medium was in-person or voice-based then the business may submit the reminder via telephone, mail, or another internet-based communication. The notice is required to disclose the product or service to which the agreement applies; the frequency and amount of charges; and the means to cancel.

Implications of Requirements

While these new rules apply only to automatic renewal agreements and continuous service agreements with consumers, they may be applied to small businesses in cases where the businesses are run by sole proprietors. Also, they may be applied in other contexts to businesses on public policy grounds, where the terms of service or contract terms in effect are not at least as good as what is required now by law in the case of consumers.

What does this mean for Silicon Valley Technology Companies?

Technology companies providing services on a subscription model basis need to start reviewing and updating their contracts and terms of service, as well as their practices and procedures, before the January 1, 2025 effective date of this new law.

If you have questions or concerns about how this new law will impact your subscription or membership-based company, please schedule a consultation with me today at https://calendly.com/kristieprinz.

Kristie Prinz to Lead New Silicon Valley Group in ProVisors

Business Lawyer Kristie Prinz Introduces The Prinz Law Office

Kristie Prinz Explains Why Companies Should Audit Their Key Customer Contracts in a Sluggish Economy

Will Your Silicon Valley Company Become the Target of Customer Cost-Cutting?

It has become increasingly clear over the past few months that businesses are in a cost-cutting mode, as the economy has become more and more sluggish. While your Silicon Valley company is likely focusing on its own cost-cutting strategy, have you stopped to consider whether your most significant customers might be doing the same? Is it possible those key customers may be focusing on how to cut the cost of their contract with your business? Could they be talking to one of your competitors? Could they be building their own proprietary product to replace the cost of your product?

A sluggish economy is the perfect occasion to audit and review your key customer contracts for weaknesses that might allow your customer to walk out the door as a cost-cutting move.

You might wonder why you should spend any resources on contracts when business is already sluggish: isn’t this exactly the time when you should be reducing legal expenses, along with all your other cost-cutting efforts?

Well, no, actually. While, it has been my experience that this is in fact what most companies do; however, I have been practicing now for 26 years and had the occasion to see a lot of sluggish economies, and given that experience, I would argue that it is exactly the wrong move to make in a sluggish economy. Why would I say this?

Imagine this: it is two months in the future. Over the last 30 days, all of your key customers have stopped paying on their contracts with you and have advised you that they are suspending performance. You are confident that they are just cutting costs and have no grounds to terminate the relationship. You pull out the executed contracts and send them to your business attorney to review for the first time, confident that he or she will confirm your assessment. However, instead of confirming your position, your business attorney tells that the signed contracts were poorly drafted and that the customers may have had valid grounds to terminate.

In this scenario, if you had known there was something you could do to interrupt this chain of events and shore up the customer relationships before they collapsed, would it have been worthwhile to do it? Presumably, yes. If the customers were your truly your key customers, you probably had a lot riding on the continuation of those relationships.

If the fact pattern seems far-fetched, I’ve actually seen it play out many times during sluggish economies. The larger and more expensive the contract, the more at risk it is for termination in a sluggish economy. If you are confident it won’t happen to your company, consider what kind of representation you had for the drafting and negotiation of that contract? Did you work with experienced business counsel who had advised other Silicon Valley businesses through multiple bad economies, and involve that counsel at every stage of the negotiation and drafting process and then implement all of his or her recommendations? Or did you cut a few corners in getting your deal done? Perhaps handled a lot of the negotiation and drafting without counsel, or relied on less experienced counsel that was more affordable? If you are like many SaaS companies, you probably cut at least a few corners–perhaps you even cut a lot of corners–and the contracts executed by you and your key customers are full of holes.

What would truly be the impact to your company of a complete loss of your three largest customers? Your six largest customers? Your ten largest customers? How fast could you really recover in a sluggish economy?

If the prospect of this kind of business loss fills you with terror, then this is precisely why you should revisit your significant contracts now.

So, what is it that you can do to shore up your key client relationships now? Well, skilled business counsel can evaluate those contracts and identify the potential liabilities and then work with you to develop a strategy to renegotiate them. By taking the opportunity to renegotiate a weak contract before the contract terminates, you can extend the term of the relationship, fix the legal problems in the contract, and keep the customer happy in the first place by giving the customer a concession that the customer really wants in exchange for the longer relationship term that carries the relationship through the down economy.

Isn’t this a better outcome than losing a key customer altogether over a vulnerability in your contract that is exploited in a cost-cutting effort?

If your company has not had its key contracts evaluated recently by an experienced business lawyer, schedule a consultation with me today at https://calendly.com/kristieprinz. Let’s identify the vulnerabilities in your key contracts before your customer exploits the vulnerabilities as a cost-cutting move, and resolve any potential problems in the relationships before they arise and become the reason you lose those relationships.

Business Lawyer Kristie Prinz Selected to 2024 Super Lawyers Northern California List

The Prinz Law Office Announces Launch of New Service Offerings Effective August 1, 2024

Kristie Prinz will speak on Negotiating SaaS Contracts in an Uncertain Economy

What are the Lessons to be Learned from Today’s Worldwide Technology Breakdown?