$10 million ABCmouse settlement: Avoiding auto-renewal traps

Online subscription services can be a convenience for consumers and a boon for business – especially now that so many people are shopping from home. But under the law, companies have an obligation to explain the details of the deal up front, clearly disclose any automatic renewal terms, get consumers’ express consent before billing, and offer simple ways to cancel. The FTC just announced a $10 million settlement with online learning company ABCmouse for allegedly violating those established consumer protection principles. The case offers lessons for subscription-based businesses about the perils of snaring customers in a negative option trap.

The Restore Online Shoppers’ Confidence Act (ROSCA) makes it illegal to charge consumers for products sold through online negative options unless the seller:

1. clearly and conspicuously discloses material terms of the transaction before obtaining the consumer’s billing information;
2. obtains the consumer’s express informed consent before making the charge; and
3. provides simple mechanisms to stop recurring charges.

What’s more, deceptive or unfair practices related to negative options – and the failure to disclose material information – may violate the FTC Act, too.

California-based Age of Learning, Inc., operates ABCmouse, a membership learning site where parents can have their kids between the ages of two and eight access educational content. In addition to monthly memberships costing $9.95 per month, ABCmouse advertises a “Special Offer” – a 12-month membership for $59.95. But according to the FTC, from 2015 until at least 2018, the company failed to clearly disclose that memberships would automatically renew, charged consumers’ credit card without their express authorization, and made it difficult for consumers to stop those recurrent charges.

ABCmouse also offered consumers who enrolled in a 30-day “free trial” membership the ability to extend it beyond the trial period for $39.95 for 12 months or $29.95 for 6 months. But according to the FTC, ABCmouse again failed to clearly disclose that consumers would be charged automatically – and repeatedly – after the initial period ended. The complaint alleges that ABCmouse revealed key terms of the offers only on separately linked “terms and conditions” pages. Even if consumers knew to look there – a big if – the FTC says the details were buried in dense text, in a small font, and in single-spaced type.

Furthermore, for potential customers who might be on the fence, the company made the supposed simplicity of the cancellation process part of its sales pitch: “Easy Cancellation. If your family does not absolutely love ABCmouse, you can cancel at any time!” But when consumers wanted to cancel their memberships and stop recurring charges, the FTC says ABCmouse made them navigate through a confusing hide-and-seek maze – hardly the “simple mechanisms” mandated by ROSCA.

For example, the company allowed cancellations only through one online link that the FTC alleges was difficult for people to find and challenging to complete. More than 100,000 exasperated consumers tried to cancel through the Contact Us link on ABCmouse’s Customer Support page. But instead of honoring those requests, the company responded that “A member’s account can only be cancelled by that member on the site itself, not via email or any other means.” ABCmouse offered a novel rationale for its policy: a purported concern that accounts might be cancelled “unintentionally or maliciously.”

In addition to a $10 million judgment, the proposed order puts provisions in place to protect consumers in the future. Among other things, the order prohibits misrepresentations about negative options – including deceptive representations related to “free,” “trial,” “sample,” or “no obligation” offers. ABCmouse also will have to disclose the terms of negative options “clearly and conspicuously, and immediately adjacent to” claims about “free, trial, no obligation, reduced, upgraded, or discounted” offers – which means no more hard-to-find and hard-to-read fine print. In addition, the company will have to follow up on customer orders with written confirmation.

Other companies that sell through online subscription can pick up some pointers from the FTC’s action against ABCmouse.

Listen to your customers. Wondering what consumers think about your marketing methods? The answer could be as close as your “in” box. ABCmouse received tens of thousands of complaints about its auto-renewal and cancellation policies. In January 2015, the company conducted an internal review and spotted some recurring customer support issues – for example, “Subscription page is misleading” and “Customers are confused about their billing plan on registration, customers do not like that they [are] not notified of their auto-renewal.” But according to the FTC, the company’s policies remained unchanged. More than a year later, an ABCmouse employee characterized a consumer concern as “the standard ‘I only subscribed for 1 year and now I’m being billed again’ complaint.” Here’s a suggestion: If your own employees call it a “standard” complaint, it merits closer consideration.

Cancellation methods must be free of red tape and rigmarole. Under ROSCA, it’s illegal to offer an online negative option unless you provide “simple mechanisms for a consumer to stop recurring charges from being placed on the consumer's credit card, debit card, bank account, or other financial account.” Hard-to-find links, labyrinthine cancellation paths, and consumer-unfriendly policies won’t cut it. Not only is it the law, but it’s good business, too. Relationships that end on friendly terms are more likely to be rekindled in the future. Demonstrating for customers how easy it is to cancel may make them more amenable to return in the future.

A key component of consumer confidence is transparency. Of course, the conduct challenged in the ABCmouse complaint occurred pre-pandemic. Nonetheless, now is a pivotal point for companies that sell through subscription models. Consumers appreciate the convenience of delivery, but how will they respond when Main Street reopens? Companies that clearly explain the nature of the transaction up front, get consumers’ express consent before billing, and make it easy for them to cancel – in other words, companies that are ROSCA-compliant – are more likely to build a base of satisfied customers.