Automatic Renewal Programs: Reducing Risks During the COVID-19 Pandemic

By Ellen T. Berge, Ari N. Rothman, and Shahin O. Rothermel

Although the coronavirus pandemic has impacted every business over the past few weeks, companies offering negative option and subscription programs face a unique set of issues. On the one hand, the subscription model offers consumers benefits that are difficult to provide outside of this context (such as streaming services, online learning programs, and uninterrupted access). On the other hand, business interruptions — in addition to consumers tightening their budgets — have presented significant hurdles to the subscription model during the current pandemic.

For example, the current shutdown has prevented many companies that offer membership programs from continuing to provide these services to consumers, such as gyms, access passes, and in-person events. As a result, customers have increasingly begun to cancel their memberships to avoid paying for services that companies simply cannot fulfill. Online services are not immune to the fallout, as consumers who are tightening their belts and looking for ways to reduce spending have started cancelling recurring billing services, which they may view as unnecessary in the present circumstances.

These issues haven’t gone unnoticed by plaintiffs’ attorneys, and the inevitable wave of class action lawsuits has already begun. One class action has been filed against the operator of New York Sports Club, alleging that it did not suspend or credit membership fees despite being closed since mid-March and offering no access to its gyms. Instead, according to the complaint, the gym charged members the monthly membership fee. Similar lawsuits have been filed against other gyms, including LA Fitness.

In addition, Six Flags has been targeted in a putative class action lawsuit for allegedly continuing to charge customers for season pass memberships despite its theme parks being closed. Similarly, lawsuits have been filed alleging that ski resort companies continued to charge consumers for ski passes, even after the resorts had been closed, preventing members from taking advantage of the passes. And a putative class action was filed against Events and Adventures California and Adventures Northwest Inc., which offer events for singles, alleging that they unlawfully charged the monthly membership fee, despite cancelling in-person events as a result of the pandemic.

Although these lawsuits have focused on companies’ failure to provide the promised benefits, companies offering auto-renewal programs have faced other challenges as a result of the pandemic, such as consumers requesting to cancel or pause memberships before the end of their membership period. Other companies are experiencing the opposite problem: an influx of orders that they are unable to timely fulfill. This, in turn, may increase the number of refund and cancellation requests.

So, what can a company do to reduce its exposure? Adopt a lenient cancellation policy and allow customers to cancel their membership — even if it means adjusting the cancellation policy. In addition, if an organization decides to offer alternative ways to fulfill customers’ subscriptions (such as offering online classes and events in lieu of in-person), companies must follow all notice and consent requirements under applicable laws and regulations. Finally, providing a refund to all customers who request one is a simple way to lower the risk of a lawsuit or enforcement action.

Although these steps can help reduce risk, the only thing certain right now is uncertainty, and a company offering products or services on subscription should consult with counsel to ensure that, even with the current disruptions, it is continuing to comply with applicable laws, rules, and regulations.

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