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California's Negative Option Law To Take Effect December 1, 2010

California's new auto renewal legislation takes effect on December 1, 2010.

California's new auto renewal legislation takes effect on December 1, 2010. It is critically important that marketers who rely upon advance consent for continuity offers and the like review their enrollment programs to be sure that they are in compliance. This is particularly important given the state's aggressive plaintiff's bar.

In 2009, California passed SB 340 which regulates "automatic renewals" and "continuous services." Many marketers rely on these enrollment options in offering consumer's their goods and services on a continuing basis. An automatic renewal typically occurs in a subscription plan, where at the end of the paid term, the subscription automatically renews for another paid term. Under the statute, a continuous service means a plan or arrangement in which a subscription or purchasing agreement continues until the consumer cancels the service.

The law, which becomes part of California Business & Professions Code §17600, et seq. is effective beginning on December 1, 2010. Under the statute, an offer which includes an automatic renewal provision must include a clear and conspicuous disclosure that: (1) the subscription will continue until the customer terminates the contract; (2) the cancellation policy of the offer; (3) the amount of the recurring charges that the customer's credit card will be charged, and if the amount will change, and if so, the amount that the charge will be changed by, if known; (4) the duration of the automatic renewal term or that the subscription is continuous; and (5) if there is any minimum purchase requirement. The statute spells out the requirements of "clear and conspicuous." To qualify as clear and conspicuous, a disclosure must be in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks, in a manner that clearly calls attention to the language. In the case of an audio disclosure, "clear and conspicuous" and "clearly and conspicuously" means in a volume and cadence sufficient to be readily audible and understandable. To charge a consumer on a continuing basis, the merchant must obtain the consumer's affirmative consent to the agreement containing the automatic renewal/continuing service offer terms.

While most programs comply with these provisions as a matter of proper business practices, the statute includes an additional provision that may require some modifications. Specifically, in addition to getting the consumer's affirmative consent to clearly disclosed terms, the statute requires that the consumer be provided with an acknowledgment that includes the automatic renewal or continuous service offer terms, cancellation policy, and information regarding how to cancel in a manner that is capable of being retained by the consumer. If the offer includes a free trial, the business shall also disclose in the acknowledgment how to cancel and allow the consumer to cancel before the consumer pays for the goods or services.

Please note that there are several potential exemptions that may apply to a particular business:

  1. Any service provided by a business or its affiliate where
    either the business or its affiliate is doing business pursuant to a
    franchise issued by a political subdivision of the state or a
    license, franchise, certificate, or other authorization issued by the
    California Public Utilities Commission (CPUC),
  2. Any service provided by a business or its affiliate where
    either the business or its affiliate is regulated by the CPUC, the
    Federal Communications Commission, or the Federal Energy Regulatory
    Commission,
  3. Any entity regulated by the Department of Insurance,
  4. Alarm company operators,
  5. A bank, bank holding company, or the subsidiary or affiliate
    of either, or a credit union or other financial institution, licensed
    under state or federal law,
  6. Service contract sellers and service contract administrators regulated by the Bureau of Electronic and Appliance Repair pursuant,to Article 4.5 (commencing with section 9855) of Chapter 20 of Division 3.

While the statute does not treat a violation as a criminal offense, it does state that if a customer's consent is not obtained and an automatic renewal is executed, any services or goods received by the consumer shall be treated as an "unconditional gift." Additionally, "all available civil remedies that apply to a violation of this article may be employed," for example, money damages. The later provision portion is critical given in California a consumer can sue for any violation of the law on a class basis as a constituting an unlawful business practice.

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