The Risk of Consumer Class Actions for Recurring Credit Card Charges

Is Your Company Complying with California’s Automatic Purchase Renewal Law?

Have you ever reviewed your credit card statements and noticed a charge appearing each month that you do not recognize? An internal investigation of all members of the household is launched in an effort to figure out who, if anyone, authorized these charges. Likely suspects include a spouse or significant other, some tech savvy kids—or maybe even yourself, in a forgotten impulse purchase months ago! Regardless of the culprit, someone has signed up for yet another monthly service or other transaction with an authorization for recurring credit card charges. The charges needs to be canceled, which can be a frustrating task.

A trend in consumer businesses is an increase in all types of goods and services delivered through automatic subscriptions with authorizations for recurring charges. In my household, these services and monthly product deliveries include our online entertainment (Netflix and Amazon Prime), online publications (WSJ), premium smartphone apps (Spotify and Strava), monthly shipments of food or beverages (Butcher Box) and even clothes (Stitch Fix).

Companies are attracted to this business model because, once the relationship is established, the revenue-generating transaction is seamless. And for those not on top of their personal finances, the charges may continue without notice for months or years, even if the goods or services are not desired or used. As long as the delivery and recurring charge is not cancelled, a steady stream of charges for the consumer and profits for the company will continue indefinitely.

Recognizing the potential for consumer deception and abuse in the context of these transactions, the California Legislature enacted the Automatic Purchase Renewal (“APR”) statute (Cal. Bus. & Prof. Code § 17600). Unlike some of the other legislative initiatives that come out of Sacramento, this is a law that candidly makes a great deal of sense given the potential for unscrupulous business practices associated with recurring credit card charges.

The proposition and mandate of the law seems simple enough—require companies to obtain informed consumer consent for recurring credit card charges. But having advised and defended clients on APR claims, I can attest to the fact that the nuances of compliance can be challenging and the litigation issues complex. These claims are a lucrative profit center for consumer class action plaintiffs. For these reasons, compliance with the APR law and implementation of some loss prevention steps are advisable to avoid this liability and litigation risk.

The Requirements of the Statute

The APR statute contains several mandates for businesses offering “automatic purchase renewal” and “continuous service” programs. In general, businesses must “present the automatic renewal offer terms . . . in a clear and conspicuous manner before the subscription or purchasing agreement is fulfilled and in visual proximity.” Cal. Bus. & Prof. Code § 17602(a)(1).

The core analysis turns on three questions: what, when and how are the terms of the transaction conveyed?

  • What? Multiple pieces of content must be conveyed to customers. First, the consumer must be notified “[t]hat the subscription or purchasing agreement will continue until the consumer cancels.” Cal. Bus. & Prof. Code § 17601(b)(1). Second, the statute requires a “description of the cancellation policy that applies to the offer.” Cal. Bus. & Prof. Code § 17601(b)(2). Third, the statute requires notification of the amount of the recurring charges, whether they are subject to change, the length of the term and any minimum purchase obligations. Cal. Bus. & Prof. Code § 17601(b)(3)-(5).
  • When? Automatic renewal information must be provided “prior to the completion of the initial order for the automatic renewal or continuous service.” Cal. Bus. & Prof. Code § 17602(d). It is advisable to present notices prior to purchase, including at “check out” (the page where the customer submits an initial order).
  • How? The terms must be presented in a manner that is “clear and conspicuous[,]” which may be accomplished in either of two ways: “[a] in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or [b] set off from the surrounding text of the same size by symbols or other marks, in a manner that clearly calls attention to the language.” Cal. Bus. & Prof. Code 17602(c) (brackets supplied).

Apart from these requirements, businesses must also obtain “affirmative consent to the agreement containing the automatic renewal offer terms.” Cal. Bus. & Prof. Code § 17602(a)(2). Precisely how this is done can be tricky. Is it sufficient to simply have a notice stating that, by submitting the order, all terms and conditions including the automatic renewal are accepted? Or is further action required for the affirmative consent, such as checking a box on a screen?

Businesses must also “provide an acknowledgment that includes the automatic renewal or continuous service offer terms, cancellation policy, and information regarding how to cancel in a manner that is capable of being retained by the consumer.” Cal. Bus. & Prof. Code 17602(a)(2). This is typically done in a confirming email or text. While that is easy enough to implement, there are a myriad of issues relating to ensuring that the cancellation practice actually matches what is described. If the business modifies their terms, consideration should be given to whether this constitutes a “material change” which the law requires to be communicated to the consumer in a “clear and conspicuous” manner. Cal. Bus. & Prof. Code § 17602(d).

The Remedy for Consumers

Consumers who believe they have incurred credit card charges in violation of the APR statute have many judicial remedies. Even though the APR statute does not provide for a private right of action, California’s Unfair Competition Law (“UCL”) (Cal. Bus. & Prof. Code § 17200) fits hand in glove with the statute. The UCL allows a consumer to bring a claim based on injury caused from a business’ practice that is unfair, fraudulent and unlawful. Id. The violation of the APR can be the predicate for a claim that the UCL was violated and opens the door to a claim for disgorgement of all profits from the offending conduct.

This claim is invariably for recovery of money paid—“disgorgement profits” to use the UCL parlance. One might intuitively think that, in situations involving the sale of goods rather than the mere passive receipt of a service (e.g., a software or web access), the claim under the APR statute would be difficult to make given the fact that it is unreasonable for a consumer to expect that the goods were being received each month for no cost. (In contrast, a consumer who is being charged for a service may not utilize the service or may do so not knowing there is an associated recurring charge.) As logical as this may seem, to date, those arguments have not barred claims for violations of the APR statute in connection with delivered products. In fact, the largest settlement that I have found involving an alleged violation of the APR statute involved delivery of products, not passive services. In Habelito v. Guthy-Renker LLC, Case Number: BC 499558 (Superior Court of California, Los Angeles County), the plaintiff alleged that the defendant offered Proactiv brand skincare products on its website, but enrolled customers in an automatically renewing subscription program without giving sufficient notice. The case reportedly settled for $15.2 million with class members permitted to make a claim-by-claim request worth $20-75.

The Recommendation for Businesses

Violations of the APR statute are low-hanging fruit for a plaintiff’s class action firm. And for that reason alone, this statutory scheme deserves special attention for any company utilizing this business model. Unlike some claims that may involve a technical violation of some obscure regulation, the scenario involving these claims has a ring of familiarity. One should expect that judges and juries will include individuals who readily identify with the alleged wrong, believing that they too have been a victim of an unauthorized recurring charge.

It is advisable to consider a top-to-bottom analysis of how the business: (a) interacts with consumers and advertises the product or service offered, (b) informs them of the opportunities associated with a recurring charge, (c) secures effective and informed consent for the recurring charges, (d) provides updates on changes to the policies and practices; and (e) processes cancellations for customers wishing to discontinue.