Marc S. Roth is a partner and Moustafa Badreldin is an associate in the Media, Technology and Advertising division at the New York office of Manatt, Phelps & Phillips LLP.
For those who haven’t noticed or are just too busy eating out every night, the meal kit delivery market is exploding. Currently a $2 billion market, the industry has quickly expanded from a small group of market disruptors to traditional food brands, fueling growth expected by some analysts to reach $36 billion in the next few years.
To attract new customers and stay ahead of the competition, many of these companies offer consumers a free trial that automatically rolls into a paid subscription unless cancelled. While obviously good for business, these efforts need to be carefully scrutinized from a legal perspective for compliance with applicable state and federal free trial and auto-renewal laws. A wrong misstep can result in an unwanted federal regulatory enforcement action, multistate investigation or class action lawsuit.
At its core, meal-kit delivery plans rely on an offer device commonly referred to as negative option marketing, a model that has been used for decades to sell books, records, CDs, newspapers and magazines. A negative option offer involves a consumer initially enrolling in a program, which automatically continues without any consumer action. Goods and services are continually delivered and billed for until a consumer cancels. Negative option programs include free trials, continuity programs and automatic renewal plans, and are subject to several layers of regulation at the federal and state levels.
Free trials have traditionally been a popular way to introduce a new product or service into the marketplace. Federal and state laws generally require the seller of a free trial plan to clearly and conspicuously disclose the terms of the plan, including what will happen when the free trial ends and if the service will continue without the consumer having to take any action. If the program will continue, sellers must disclose the dates any charges will be made, a description of the total charges, the minimum purchase obligation (if any) and a clear cancellation procedure. Before any charges are made, customers must give their express consent to the terms of the trial.
Online auto-renewal offers
The Restore Online Shoppers’ Confidence Act (ROSCA) regulates how negative option marketing programs may be sold online. ROSCA, which was enacted in 2010 and is enforced by the Federal Trade Commission, defines a negative option as an “offer or agreement to sell or provide any goods or services, a provision under which the customer's silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer.” Similar to the free trial laws mentioned above, ROSCA requires online retailers to clearly and conspicuously disclose the terms of an online negative option transaction before obtaining the consumer’s billing information. They must also obtain express informed consent before charging the consumer, and provide a simple way to stop or cancel the charges once they have started. ROSCA does not provide specific examples of what would be considered an acceptable “simple mechanism for cancellation,” but the use of a toll-free number, e-mail address, webpage or other cost-free method that consumers can easily use would likely satisfy this requirement.
The FTC has recently stepped up its enforcement of ROSCA, targeting companies in various industries. As with most FTC matters, settlements with companies include various provisions prohibiting them from future violations of the law. But something notable and somewhat troubling in many of these agreements is a requirement for consumers to check an unchecked box on the sign-up page, in addition to clicking a submit button, in order to enroll in the program. This check-box is not necessary under ROSCA, but nevertheless signals an element of a consumer enrolment process that the FTC would like to see for other online negative option programs.
In addition to ROSCA, more than two dozen states have auto renewal laws that are aggressively enforced by their respective attorneys general. These laws share some common elements with ROSCA, such as requiring clear and conspicuous disclosure of the offer’s terms, obtaining express consumer consent to them and allowing an easy way to cancel. But laws in California and Oregon set forth specific requirements for disclosures that must be made “clearly and conspicuously,” whereas ROSCA and other state laws are not so specific.
Many state laws also require sellers to send consumers written notification of renewal, typically between 30 and 60 days prior to expiration of the current term. This notice obligation generally applies to contracts of 12 months or more, so monthly subscription models are exempt from this requirement.
Recurring charge authorization for debit cards
As auto renewal programs continue without consumers having to take any action, the billing device they provide is charged automatically. This raises concerns about whether the consumer granted appropriate authorization under the law. Following the rules described above will generally suffice to enroll a consumer in a continuity program. But if a consumer provides a debit card for service, the offer copy must include more robust language to satisfy a federal law governing recurring debits to a consumer’s checking account.
Regulation E, which implements the Electronic Funds Transfer Act (EFTA), requires a seller to obtain a consumer’s express authorization to place recurring charges to a debit card account, and to make a copy of the authorization available to the consumer. Importantly, Regulation E requires the authorization to be identified as such, so that the material terms of the offer must be identifiable as an authorization for the seller to place debits to the consumer’s account. As some consumers may not realize they are providing a debit card, and most companies will not know if a card is a credit card or debit card, it is advisable to treat all cards as debit cards and comply with the particular requirements under Regulation E.
Penalties for violating Regulation E and the EFTA can be steep. Allegations of non-compliance are often included in regulatory investigations by the FTC and state attorneys general, as well as class action lawsuits involving negative option offers. Accordingly, awareness of and strict compliance with Regulation E is a must for any seller of a continuity program where consumers are automatically charged on a recurring basis.
Sellers of meal-kit delivery plans, both large and small, need to be mindful of the laws and regulations governing continuity and auto renewal plans. As each meal kit offer is different, sellers have some discretion in determining how best to communicate this information to consumers. But the baseline disclosures and practices described above must be satisfied to avoid unwanted legal problems.