Subscription services for everything from food delivery to beauty products to exercise gear have grown exponentially in the past five years. Such services require consumers to enroll in a program to purchase goods on a consistent basis. They typically automatically renew, often on a monthly basis, and require customers wishing to cancel to take affirmative steps to avoid being charged. Marketers know that consumers often fail to take steps to cancel timely, which only benefits the marketers’ bottom lines.

With the explosion of subscription business models, consumer complaints have skyrocketed as well, with consumers complaining that the terms of the negative option offer – an offer that interprets a consumer’s failure to take an affirmative action as an agreement to be charged – were not clearly explained. For example, consumers have complained that were not told they would be charged each month, were not adequately reminded of how to “skip” being charged each month, that prepaid credits expire without notice, and that it can be difficult to cancel. Thus, subscription businesses have faced increasing regulatory scrutiny and all advertisers that offer products or services that automatically renew should pay close attention.

AdoreMe Settlement

AdoreMe, a subscription lingerie service launched as a rival to Victoria’s Secret, recently agreed to pay $1.38 million to settle the Federal Trade Commission’s charges that the company did not clearly communicate to consumers the terms of its “VIP Membership” program which automatically billed consumers if they failed to “skip” a month within a 5-day window, falsely claimed that store credits could be used “any time,” and made it difficult for subscribers to cancel their memberships in violation of Section 5(a) of the FTC Act as well as the Restore Online Shoppers’ Confidence Act.

Specifically, according to the FTC’s Complaint, AdoreMe charged consumers that neglected to “skip” by the fifth of each month $39.95 for a store credit that the company claimed could be used “anytime” for a future purchase. The Complaint alleges AdoreMe failed to clearly communicate to consumers that unused store credits would be forfeited if membership is canceled, either by the consumer or by AdoreMe, burying this disclosure deep in the terms and conditions, a document accessible at the bottom of the website. The company enforced this policy against consumers that elected to cancel as well as against consumers whose memberships were canceled by AdoreMe after the consumers initiated chargebacks with financial institutions to dispute and reverse transactions from AdoreMe. As a result of this policy, the FTC alleged that $1.8 million of VIP’s unused store credits were forfeited.

Further, the FTC alleged that canceling VIP Membership was difficult, noting that AdoreMe limited the means that consumers could use to cancel, refused to accept, process, or accept cancellation requests and grossly under-staffed customer service, making it difficult to get a response. For consumers who called to cancel, customer service was so under-staffed, average wait time for customer service allegedly reached more than 32 minutes. Further, the company refused to allow VIPs who temporarily paused their memberships to cancel while their memberships were paused.

As a result of these practices, AdoreMe agreed to pay the FTC nearly $1.38 million, less any amount already transferred to eligible customers for forfeited store credits. Additionally, the settlement order requires AdoreMe to take the following steps:

• Not make misrepresentations about the terms and conditions of its Membership program or its credits;
• Make specific disclosures regarding its negative option program before consumers enroll and in a confirmation notice;
• Acquire express informed consent to the negative option features before using a customer’s billing information for payment; and
• Offer an easy online cancellation option for customers that subscribe online.

Subscription Businesses Face Increasing Scrutiny

The AdoreMe settlement is part of increased scrutiny on subscription-based companies. For example:

• California recently updated its Automatic Renewal Law, Cal. Bus. & Prof. Code § 17600 et seq. Effective on July 1, 2018, the law requires advertisers offering a free gift or trial to disclose how a consumer can cancel before the customer is charged or before the expiration of the promotional period, to adopt easy cancellation methods (including a required online cancelation method for consumers who subscribe online), to use clear and conspicuous language communicating the terms of the offer prior to purchase, and to obtain affirmative consent prior to charging consumers.
• Beachbody, LLC agreed to pay $3.6 Million to settle charges brought by the City of Santa Monica alleging that the company did not properly obtain consent for subscription renewals. Beachbody agreed to obtain customers’ consent through a separate checkbox for subscription renewals, to clearly disclose renewal terms, to send reminders of upcoming renewals and to allow consumers an easy cancellation mechanism.
• The National Advertising Division brought a self-monitoring challenge of active-wear company Fabletics earlier this year. The company agreed to comply with NAD’s recommendation that it disclose the terms of VIP Membership (including the requirement to go to the Fabletics website to skip between the 1^st and the 5^th of the month) in close proximity to advertisements for its introductory discount offer and modify the website to clearly and conspicuously disclose the material limitations of discount on the same page where discount offers are made. See JUSTFAB, Inc./Fabletics, NAD Case Report # 6091 (June 2017).
• Additionally, JUSTFAB, Inc., which launched Fabletics with Kate Hudson as well as ShoeDazzle (purchased from Kim Kardashian) and other popular subscription services entered into a settlement in 2014 with the Santa Clara and Santa Cruz District Attorneys for $1.8 million for failure to clearly and conspicuously disclose the terms and conditions of its negative option offers.

Recommendations

In light of this increased scrutiny, advertisers offering subscriptions with a negative option component should closely review their advertising and buy flows:

• Disclose the terms and conditions of a negative option offer in close proximity to advertised discounts;
• Incorporate a separate checkbox to obtain affirmative consent to a negative option program;
• Send a confirmation e-mail with the material terms and conditions of the offer, including charge dates and frequency and cancelation instructions;
• Offer an online cancelation mechanism that is easy to use and easy to find;
• When advertising trial or promotional offers, in the initial offer, the advertiser should clearly and conspicuously disclose how much consumers will be charged after the expiration of the trial period or promotional rate, when consumers will be charged, and how to cancel.

Additionally, advertisers should monitor customer complaints and chargebacks to gauge whether material terms are transparent.