Changes to California’s auto renewal law could have sweeping implications for businesses

On July 1, California implemented certain changes to its Automatic Renewal Law (ARL) regarding companies that offer customers subscriptions or services that require automatic renewal. The state already has some of the strictest requirements for automatic renewals in the country, and the new changes add further layers to the legislation and can have sweeping implications for businesses.

Existing law in California defines “automatic renewal” to mean “a plan or arrangement in which a paid subscription or purchasing agreement is automatically renewed at the end of a definite term for a subsequent term.” This applies to all types of subscriptions, from monthly to annually to biannually and so on.

The changes to the laws broaden the coverage to also target “free-to-pay conversion” – agreements where a customer will initially get a free trial period before converting to a paying subscription.

The changes also now explicitly require companies to get customers’ “express affirmative consent” for automatic renewal and would require the companies to maintain verification of that consent for at least three years, or one year after the contract is terminated, whichever period is longer. These changes in particular could have a significant impact on B2C subscription companies, as the more stringent “affirmative consent” requirements would probably impact customer retention.

The updates to the automatic renewal laws came into effect on July 1 under Assembly Bill No. 2863. The full text can be read here.

These changes would no doubt directly have an effect on companies offering subscription services. These firms range from streaming giants such as Netflix (NASDAQ:NFLX), Disney (NYSE:DIS), and Spotify (NYSE:SPOT) to digital news publishers such as the New York Times (NYSE:NYT) and the Wall Street Journal – owned by News Corp. (NASDAQ:NWS) – to software services such as Microsoft’s (NASDAQ:MSFT) Office 360.

Subscription services are largely provided by companies across the technology (NYSEARCA:XLK), communication services (NYSEARCA:XLC), financial (NYSEARCA:XLF), and consumer (NYSEARCA:XLY) (NYSEARCA:XLP) sectors.

Back in July, such companies had seen a win in the form of a U.S. appeals court decision striking down the Federal Trade Commission’s “click-to-cancel” rule, which required businesses to make it as easy for consumers to cancel subscriptions as it was to sign up.

Here are some exchange-traded funds linked to the technology, communication services, financial, and consumer sectors: (VGT), (IYW), (FTEC), (IXN), (RSPT), (VOX), (IYZ), (RSPC), (XTL), (VFH), (IYF), (FNCL), (IYG), (FXO), (VCR), (FXD), (FDIS), (RSPD), (RXI), (VDC), (IYK), (FSTA), (KXI), and (RSPS).