Due to the high cost of customer acquisition, ecommerce clients are increasingly relying on continuity programs and subscriptions as their payment models, which allow customers to be billed for goods and services on a continual basis until they cancel. Because consumers are charged until they affirmatively cancel, the regulatory scrutiny of these programs has continued to increase, both on the federal and state levels. Indeed, regulators and lawmakers have persistently taken aim at various aspects of automatic renewal programs and cancellation processes, continuing to enforce the legislative and enforcement priorities of the relevant stakeholders.
States continue to enact their own laws, resulting in a hodgepodge of applicable laws governing enrollment, notifications and cancellations. The list of states with separate automatic renewal laws continues to grow, including Tennessee, Minnesota, South Carolina, Virginia, and Utah passing or updating their own versions of automatic renewal laws in 2024.
The FTC on Automatic Renewals
On the federal side, the Federal Trade Commission (FTC) – the leading regulator in the ecommerce space – has been slower to formally act, relying instead on policy statements and litigation to regulate the marketplace. The existing Negative Option Rule, a term or condition that allows a seller to interpret a customer’s silence, or failure to take an affirmative action, as acceptance of an offer, dates back to 1973 when “Book of the Month Club” type programs were prevalent.
Recognizing that a lot has changed in the nearly 50 intervening years, in 2021, the FTC issued an Enforcement Policy Statement Regarding Negative Option Marketing, laying out the FTC’s interpretation that continuity marketing enrollments must obtain a knowing informed consent to the subscription terms. Moreover, the FTC stressed the importance of allowing consumers to cancel in the same manner in which they enrolled – i.e., online enrollees should be able to easily cancel online.
The FTC’s proposals to formally modernize its Negative Option Rule began in March 2023, though the updated rule has yet to be finalized. Recognizing the delay in promulgating the updated rule, the FTC has relied on existing laws to bring high-profile actions against Amazon.com and Adobe for, among other things, their failure to offer appropriate cancellation options.
FTC Sues Amazon
In June 2023, the FTC sued Amazon in federal court in the state of Washington for allegedly using dark patterns (i.e., manipulative design practices) to enroll consumers in Amazon Prime without their knowing consent. The FTC’s complaint also focused on Amazon’s cancellation path, a process so cumbersome that Amazon internally used the term “Iliad” to describe the process, an allusion to Homer’s epic 24 book poem about the decade-long Trojan War.
The FTC subsequently amended its complaint to include claims against three principals who oversaw the Amazon Prime program. Those claims will continue through May 2024 as the district court denied the defendants’ motion to dismiss the amended complaint. A trial against the company and the named principals has been scheduled for June 2025.
FTC Takes Action Against Adobe
The FTC has more recently taken action against Adobe, and two of the company’s executives, Maninder Sawhney and David Wadhwani, regarding the company’s automatic renewal subscription practices, in particular their cancellation practices. After investigating the company’s subscription practices, the FTC referred the matter to the U.S. Department of Justice, who in turn filed a complaint in federal court in the Northern District of California.
The partially redacted complaint asserts that prior to 2012, Adobe often sold its software products under a perpetual licensing model. That is, consumers made a one-time purchase and were able to use the applicable software product indefinitely. In or around 2012, Adobe began transitioning to a subscription-based licensing model, whereby consumers enroll in a subscription and are periodically billed for using the company’s products. According to the complaint, the subscription model has been very profitable for the company, with Adobe’s subscription revenue nearly doubling from $7.71 billion in 2019 to $14.22 billion in 2023.
The FTC’s Adobe complaint lays out the three types of subscription plans offered by Adobe to customers – monthly, annual paid monthly (APM), and annual prepaid. The government’s complaint focuses on the APM plan, which is alleged to frequently be the preselected default plan for new consumers looking to subscribe. Subscribers enrolled in the APM are automatically charged each month until they cancel. However, subscribers who cancel their subscription before the end of the initial 12-month period are subject to an early termination fee, calculated as 50% of the total monthly charges remaining in the yearly contract.
The government takes issue with Adobe’s enrollment and cancellation flows. As detailed in the complaint, when a consumer is enrolling in the APM, there is a disclosure stating, “Fee applies if you cancel after 14 days ⓘ.” Further, when consumers hover over the ⓘ symbol, text is revealed that states, “If you cancel after 14 days, your service will continue until the end of that month’s billing period, and you will be charged an early termination fee.”
Despite the early termination fee being mentioned, the government raises several issues. Specifically, the government asserts that consumers are not given the details of the early termination fee, how it is calculated, and when it applies. Moreover, it is alleged that the plan selection page does not mention anywhere that the APM requires a one-year commitment, and that it does not disclose at all the amount of the early termination fee.
Further, the government takes issue with Adobe’s enrollment terms as they appear on the payment page, asserting that “Adobe knows many consumers do not notice or read” these terms, and that even so, the early termination fee is not mentioned by name and the amount of such fee is not made clear. Rather, the cancellation terms, including an explanation of how the early termination fee is calculated, appear at the bottom in a popup that is displayed only after consumers click on the “Subscription and Cancellation Terms” hyperlink. The complaint alleges that Adobe knows about and profits from the consumer confusion that stems from the APM plans, and that the two named executives supervised and participated in Adobe’s unlawful enrollment practices.
Regarding the cancellation flow, the complaint takes aim at the friction created within the process, detailing the steps that consumers must undertake to cancel their subscriptions online. The complaint explains that to cancel a subscription, consumers must first locate the account management page, correctly choose “Manage plan” from the various options, and then select “Cancel your plan.” Thereafter, consumers are required to undergo a “convoluted process” to cancel, including taking several steps, some of which the government asserts are “wholly unnecessary” to complete cancellation.
Such “unnecessary” steps include reentering passwords, providing the reason for cancellation prior to cancellation being processed, and being required to navigate through certain discount offers for staying. Further, the government alleges that consumers who attempt to cancel via customer service (phone or online chat) are also met with “obstacles that impede or delay their attempts to cancel,” including calls or chats dropping or disconnecting, and being transferred to one or more Adobe representatives, thereby requiring consumers to explain their situation multiple times and repeatedly request cancellation.
The government alleges that Adobe fails to clearly and conspicuously disclose the material terms of its offers, fails to obtain express informed consent from consumers entering subscriptions, and fails to provide a simple cancellation mechanism. The government is seeking both injunctive and monetary relief.
Conclusion
Advising companies engaged in automatic renewal programs requires ongoing monitoring of the ever-evolving landscape of state and federal laws and regulations regarding these practices, but also to stay current with the government’s interpretations of such requirements. In its enforcement actions against Amazon and Adobe and its principals, the FTC provides clear insight into its enforcement priorities and interpretation of existing laws, regulations, and guidance and intolerance for dark patterns, intentionally manipulative practices and negative option marketing. As active litigation unfolds ahead of the 2025 trial, attorneys should be mindful of the FTC’s position on automatic renewal programs and the newfound emphasis on transparent user experiences for consumers.
