June 6, 2016
Authored by: Andrew Klungness and Aaron Ginsburg
The demand for subscription-based and recurring revenue business models is growing faster than ever. According to a 2014 report by The Economist Intelligence Unit, 80 percent of customers are demanding new consumption models including subscribing, sharing, and leasing. As a result, most companies are changing, or are in the process of changing, how they price and deliver their goods and services. With 6.8 billion potential subscribers on mobile, social and web, the market is ripe for the business models first made popular by companies such as BirchBox and Dollar Shave Club.
A natural corollary to the recurring revenue streams driven by subscriptions is the need to comply with laws regulating purchases that automatically renew. While subscription services (sometimes referred to as auto-renewal programs) can be lucrative, companies should be mindful of the applicable laws to avoid the costs of fighting off the type of lawsuits that led to Sirius XM Radio settling an auto-renewal case for $3.8 million and Angie’s List settling a similar suit for $2.8 million.
Automatic Renewal Regulation
Automatic renewal programs are regulated by both the federal government and individual states. Federally, automatic renewal programs are regulated by the Federal Trade Commission under 15 U.S.C. Section 41, et seq. and the Restore Online Shoppers’ Confidence Act. Under these regulations, the FTC and the attorney generals for individual states have enforcement authority to bring actions against companies in violation of these rules.
On the state level, at least 24 states have enacted statutes regulating automatic renewals to