Service Franchisors: New Rules in California for Automatic Renewals July 1st

From streaming services and gym memberships to software vendor agreements and e-commerce franchises, automatic contract renewals are common occurrences. Currently, California law protects consumers regarding automatic renewal and continuous service offerings.

New rules enhance those protections. On Sept. 24, 2024, California Gov. Gavin Newsom signed Assembly Bill 2863, which increases consumer protection and transparency between service providers and customers. The bill becomes California law on Jul. 1, so all businesses and consumers signing, changing, or extending contracts on or after that date, must comply.

It’s also important to note that on Oct. 16, 2024, the Federal Trade Commission (FTC) issued its own “click-to- cancel” rule to update its 1973 Negative Option Rule.

The new FTC rule expanded the original rule’s marketing, disclosure, consent and cancellation requirements and includes a broader definition of negative options programs. However, due to legal challenges, the FTC recently voted to waive compliance of many provisions of the updated rule until Jul. 14.

What is AB 2863?

With the passage of AB 2863, the legislature amended Sections 17601 and 17602 of the Business and Professions Code.

Before the amendments, California defined some key terms pertaining to renewals:

• Automatic Renewal – An arrangement in which a paid subscription or purchasing agreement is renewed automatically at the end of a specific period for a successive term.
• Continuous Service – A plan where the subscription or purchasing agreement continues until the consumer cancels the service.

Under AB 2863, these definitions apply even when the subscription is a singular part of a large-scale agreement, such as a franchise agreement. Additionally, free-to-pay conversions, which occur when customers begin a free trial that automatically turns into a paid subscription if not canceled, are now regulated along with automatic renewal and continuous service offerings.

Crucial Aspects of AB 2863

The California Assembly Bill expands on existing laws in numerous ways. Some key changes include:

Affirmative Consent and Documentation

The bill requires businesses to receive explicit permission from consumers for automatic renewal or continuous service terms. Also, the service provider may not misrepresent any facts related to the purchase of services or agreement to terms that mislead consumers.

Businesses must record the customer’s affirmative consent for at least three years, or at least one year after the contract’s termination, whichever is longer.

Annual Reminders

Businesses must send consumers yearly notices that include:

• The product or service associated with the automatic renewal or continuous service agreement.
• The amount charged and how often charges occur.
• The ability to cancel the service.

Easy Cancellation

Businesses must enable customers to cancel subscriptions using the same channel they used to sign up, or through channels consumers usually use to interact with the business. Additionally, a company employee must promptly answer a provided phone number during business hours, for consumers to call to cancel services without delay.

An organization can attempt to keep leaving consumers by offering discounts, incentives to stay, or by communicating the effects of cancellation, as long as the consumer remains able to cancel or terminate the service easily.

Increased Communication

When a business wants to change the automatic renewal or continuous service fee, it must provide clear notice of the fee change and cancellation information seven to 30 days before the change takes effect. It must also notify consumers of the cost range and payment frequency before confirming billing information.

Other Considerations

Companies that utilize automatic renewal or continuous service in their daily operations should review their organizational subscription practices to ensure they align with the bill.

A lack of transparency with consumers and non-compliance with the bill can lead to reputational damage, financial penalties, and litigation risk. An experienced attorney can provide guidance to organizations affected by California’s increased regulations regarding automatic renewal and continuous service.

Barry Kurtz is a Certified Specialist in Franchise & Distribution Law, by the State Bar of California Board of Legal Specialization.