Ask the attorney: The auto-renewal conundrum

(Editor’s note: Curtis Smolar is a partner at Ropers Majeski Kohn & Bentley. He submitted this column to VentureBeat.)

A reader asks: In order to more easily collect revenue for my website, I have set up an automatic renewal payment system.  Am I legally in the clear to do so?

Answer:  It really depends on where you are and/or how you do it.  If you are doing it in the right way, auto-renewals may be perfectly fine, but if you do it wrong or your jurisdiction has specific rules, you may be running afoul of state and/or federal laws.

Auto-renewal offers consumers an easy way to continue to enjoy products and services that they want without the hassle of having to continuously contact the service provider.  For the provider, it creates a predictable cash stream to better forecast revenue.

However, some billing practices are unconsidered improper and can land you in trouble. For example, over the past five years, the explosion of “free trials” of products on the Internet (which, in turn, convert to automatic renewals), has caught the attention of many Attorney Generals’ offices across the country, as well as the Federal Trade Commission (FTC).  The government wants to protect consumers from unauthorized charges to their bank accounts or credit cards — charges which often go unnoticed, can be difficult to reverse, and could potentially cause long-term harm to a credit score.

There are five ways to help protect your company from this kind of scrutiny:

Don’t use the negative option – A “negative option” is a billing and payment model where a consumer signs up for an online subscription, and their account periodically auto-renews (and their credit card is charged) unless an affirmative step is taken.  In other words, the consumer is required to opt out of the auto-renewing process.  Doing so is often hard to do.  This specific practice has been the target of numerous attorney generals and the FTC.

In California, for example, a new law went into effect in December 2010 that specifically addresses the opt-out issue, making it illegal to charge a credit card without the consume agreeing to the automatic renewal offer terms or continuous service.

Therefore, it is important that you have an “opt-in” automatic renewal agreement.

Be clear and conspicuous – Most states require that automatic renewal terms be presented to the consumer in a clear and conspicuous manner.  The terms must be presented to the consumer before the purchase and in visual proximity at the time of purchase.

This requirement can be counterintuitive or otherwise create confusion for web services, which might otherwise provide for automatic renewal on a separate page, such as in the Terms of Service.  Some states would determine that this is a violation of law.

Provide acknowledgement of automatic renewal – Many states require that you provide an acknowledgment after the purchase of an offer with an automatic renewal that also includes the cancellation policy.  This should be transmitted in a way that it may be retained by the consumer.  So, for example, a link to a website may work, provided the website is maintained and is not taken down or changed without notice.

Also, you must actually allow the consumer to cancel.  Some states even have notice provisions that require the company to provide telephone support for cancellation.

Give ample notice – One of the most important things you can do when you have an automatic renewal on your website is give the consumer ample notice of the renewal.  In some jurisdictions, that can be as much as 180 days. But in general, you should be giving at least 30 days notice to your customers before processing the auto-renewal.

Give notice of material changes – Although it is currently unclear what this requirement means or how it will be interpreted, it is generally a good idea to give notice of a material change of terms of the automatic renewal.

As a general rule, disclose, disclose, disclose.  This is highly regulated area and you need to be sure that you have consulted an attorney who is skilled in this area of law and your jurisdiction.

Startup owners: Got a legal question about your business? Submit it in the comments below or email Curtis directly. It could end up in an upcoming “Ask the Attorney” column.

Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.