AH Media Group, LLC started down a long road of alleged customer deception beginning in April 2016. The company had at least eight health and dietary supplement lines, and it tempted an estimated 100,000 customers to try its products for free—shipping and handling not included.
According to a lawsuit filed by the Federal Trade Commission (FTC) in July 2019, the company then automatically enrolled customers in subscriptions, subsequently charging them full price for its products and continuing to charge them until they cancelled their subscriptions.
The lawsuit alleges AH Media Group took more than $35M from customers over the course of several years.
In all, the FTC charged the defendant with not one, but three separate legal violations, including:
- Section 5 of the FTC Act
- the Restore Online Shoppers’ Confidence Act (ROSCA), and
- the Electronic Fund Transfer Act.
Unraveling different subscription business laws
It’s essential for subscription businesses to understand how these laws work—not only to protect themselves from fraud claims, but also to protect the level of trust they build with their customers.
1. Federal Trade Commission Act Section 5: Unfair or Deceptive Acts or Practices
Section 5 of the FTC Act provides protection for consumers, stating that “unfair or deceptive acts or practices in or affecting commerce . . . are . . . declared unlawful.”
They define deceptive acts as those that deliberately mislead a customer through omissions, practices, or unfair representation. In a statement dating back to 1983, the Honorable John D. Dingell defined deceptions as “Practices that have been found misleading or deceptive in specific cases include false oral or written representations, misleading price claims,” etc.
If the FTC finds that a business is in violation of this act, it can initiate enforcement, either through the judicial process or through administrative actions.
2. The Electronic Fund Transfer Act (EFTA)
The EFTA dates back to 1978. This is well before the rise of subscription businesses of course, but a law that impacts the subscription ecosystem nonetheless.
Also known as Regulation E, the act provides protection for consumers who use electronic means to conduct financial transactions, including ATM transactions, pay-by-phone, or through the internet. Within the act, customers have a 45-day period to challenge and correct a financial error.
Additionally, consumers have 60 days to report suspected unauthorized transactions to their financial institutions.
3. Restore Online Shoppers’ Confidence Act (ROSCA)
On January 25, 2010, the U.S. Congress approved the Restore Online Shoppers’ Confidence Act (ROSCA). The act recognized the importance of the internet to online shoppers, citing at the time that online sales accounted for billions of dollars.
And while retail sales were on the rise, the Senate Committee on Commerce, Science and Transportation voiced its concerns about “aggressive sales tactics” that have “undermined consumer confidence in the internet and thereby harmed the American economy.”
The act, in essence, made it illegal for businesses to charge a customer unless that business:
- provides text that clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information
- obtains a consumer’s express informed consent before charging the consumer’s credit card, debit card, bank account, or other financial account for products or services through such transaction; and
- provides simple mechanisms for a consumer to stop recurring charges from being placed on the consumer’s credit card, debit card, bank account, or other financial account.
The third point is particularly essential for subscription businesses to note because it underscores the need for terms and conditions to be shared. When these are shared, a customer should then have to take the action to check a box before completing a purchase. This action helps protect subscription businesses from non-compliance.
State laws that enforce subscription auto-renewal policies
While the FTC Section 5, EFTA, and ROSCA are the three laws that come under federal jurisdiction and enforcement, individual states are also enacting their own legislation, often surrounding subscription auto-renewal.
Many businesses are unsure about jurisdiction rules. For example, if you’re a business that originates from one state, who’s responsible for your customers in an entirely different state?
Consider the tax laws that have been implemented in the past few years. Who owes the sales tax? Is it the state where the business resides, or the customer’s residential state?
Let’s take a look at a few subscription auto-renewal laws in different states to try to sort this out.
- California has one of the most stringent subscription automatic renewal laws to date. Section 17602 of the California Business and Professional Code works with customers in all 50 U.S. states, but it’s important to note that if a customer makes a purchase from a business in California, then they’re protected by that state’s laws.
Within California’s law, if a business that resides in that state provides a free gift, a free trial, or a promotional discount to a customer, that business is required to notify the customer of an automatic renewal. In other words, customers need to be given advanced notice that a subscription will renew automatically, and clear instructions on how to cancel the subscription prior to auto renewal. - As of July 2019, Vermont is another state that has concise auto-renewal laws. Within Vermont state rules, the terms of automatic renewal have to be clearly stated. These terms also need to be provided between 30 and 60 days of a subscription’s renewal period.
Vermont-based sellers need to provide specific methods for customers to cancel their contracts if desired, and they must provide very clear seller-contact-information. - Also enacted in July 2019 are laws governing North Dakota. If a subscription has a renewal period extending six months or beyond, the agreement must be provided clearly and conspicuously, with a checkbox for the customer indicating their agreement.
- Next, there are the laws enacted for Washington, DC. that came into existence in March 2019. Subscriptions that have an initial term of twelve months or more are bound by subscription renewal notices, meaning a business needs to inform its customers that subscriptions will be renewed. These notifications, by law, are required to be sent between 30 and 60 days of renewal by first class mail, email, or another easily accessed form of communication.
This includes any ‘free trial’ subscription. And if a business violates this law, they face automatic termination of the contract per the District of Columbia Consumer Protection Procedures Act.
Download the Table of Auto-Renewal Laws by State (U.S)
The future of legislature governing subscription businesses
As of January 22, 2020, AH Media Group has been ordered to pay more than $111,000, but the story’s in ‘to-be-continued’ mode. No restitution has been made to defrauded customers, and many of the products can still be ordered by unsuspecting consumers.
Unfortunately, subscription businesses are held by the old ‘one bad apple’ adage, even though the vast majority of businesses realize and respect they’re only as good as their customer base—and as such, treat their customers accordingly.
There are, businesses that take advantage though, and it’s these businesses that necessitate stringent laws to protect subscribers. It’s imperative for subscription businesses to keep monitoring changes so they can remain compliant with any new legislation.
In addition to the bills listed above, there are others being debated within the government that have not become law, as-of-yet. For example, in May 2019, California Rep. Mark Takano sponsored H.R. 2683: Unsubscribe Act of 2019. This bill aims to increase consumer protection from ‘negative option’ agreements—in essence, the business practice of assuming a customer says yes to a subscription before they say no.
While most laws are similar, they do differ state-by-state. Subscription businesses need to learn the ins and outs of the laws that govern the state where they operate, for the protection of their customer relationships and their business’s reputation and legal well-being.
