What You Should Know About Subscriptions and Consumer Rights

Recurring payments and subscription-based services have had a contentious history in the United States, often due to questionable business practices from over-eager merchants. Related topics continue to make headlines, and local and federal agencies continue to investigate the issue and regulations. Though it’s unlikely that any business that avoids unscrupulous practices would find themselves running afoul, it’s still a good idea to keep up to date on recent developments.

Negative Option Billing and Why to Avoid It

Negative option billing is a subscription model familiar to most consumers under the guise of music subscription services such as BMG and Columbia, which famously used “1 cent CDs” as a way to lure in new members. It involves providing a “free” or reduced cost sample product to a customer before instituting a recurring billing agreement for further products and services. Although BMG and Columbia both exited the subscription market in the mid 2000s, the negative option billing model they embraced lives on, usually through “book clubs” and various “as seen on TV” marketing efforts. The FTC has issued several reports on the practice and promises more regulations in the future, though these efforts have been stalled by legislative gridlock.

Any company providing a free or reduced trial price is technically engaged in negative option billing, but the practice only garners a legally derogatory implication when terms are not properly disclosed. As such, any company which provides free or “freemium” options to entice prospective clients should remain aware of the legal requirements in securing an above-board transaction. In particular, an implied agreement to a subscription following a free sample may not hold up in court, as the FTC and various jurisdictions have repeatedly stated that any unsolicited and freely offered item or service cannot then be used as the basis to instate recurring charges.

Subscription-based businesses also need to make sure that payment information such as credit card data or business account numbers are provided directly by the buyer as part of a legally signed purchase agreement. The Consumer Financial Protection Bureau (CFPB) has issued several notices relating to unsolicited recurring charges and have made explicit the consumer’s rights to dispute those charges, have them canceled and refunded, and even pursue legal action against the charger in certain circumstances.

Remittance Transfer Regulations

As part of the Dodd-Frank Act passed in 2010, the CFPB issued updated regulations concerning electronic remittance transfers. This type of transfer is usually related to mortgages or relatively esoteric transactions between businesses, but the CFPB explicitly excluded legal subscription and recurring charges from the regulations. However, they have stated that they continue to investigate the rights of consumers for all recurring charges, and may consider issuing additional regulations that would also be applicable to subscription charges.

To avert potential legal issues, any businesses that use recurring billing should make sure to always provide clear information for cancels and refunds, and never, under any circumstances, state or imply that a customer is unable to cancel a purchase, even if they have agreed to it beforehand.

Because financial regulations vary widely from state to state, it’s always a good idea to consult the local Attorney General’s office and other relevant governmental authorities to ensure compliance for recurring billing.

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