How Not to Do Website Terms of Use

Client: Hi Paul, we need website terms of use and a privacy policy. We want to save money, so we’ve copied the terms of use and privacy policy for XYZ company, which has a similar product. Please review it for us so we can post it when we launch next week.

Me: [facepalm repeatedly]

This is the classic and all-too-common scenario, and it’s completely the wrong way for a startup to do their website terms of use and privacy policy. First, it’s blatant copyright infringement. Just swapping out your company name for their company name isn’t exactly going to fool anyone.

Second, just because XYZ has a similar product, or operates in roughly the same space, doesn’t mean that they operate exactly how you operate in every single respect. Nor does it mean that their policies and practices will suit your tastes. So unless you plan on copying all of XYZ’s internal policies and practices and operating procedures, much of what is in that terms of use and privacy policy simply won’t be an accurate reflection of your company.

Third, who’s to say that the terms of use or privacy policy that you copied from someone else’s website is any good? It could be a hot mess. They could have copied their terms of use from some company that’s completely unrelated in every way.

As the CEO of a startup, your job is much bigger than just writing software code. You have to run the company. That means putting the time into things like what will go into your terms of use, and developing information collection and handling practices that are accurately reflected in your privacy policy. You have to be intentional about this. When you just send me a terms of use that you copied from someone else, I’m going to push back, and ask you to describe your business model and practices. If you can’t do that, it tells me you haven’t put the time into it yet.

This is an important process, and you cut corners at your risk, and the risk of your investors. Terms of use, if done right, form a binding contract between your company and its customers, a contract that favors you and puts your company in a strong position. Done poorly, and you’re litigating with a customer in a court in Fairbanks, Alaska in February. Privacy policies are increasingly important as states like California, with 38 million residents, pass more and more restrictions on how you can collect and use customer data. You don’t just face the risk of class-action lawsuits, you also have to worry about FTC investigations and fines. Spending your time and money to do things right from the start will save you money, time, and headaches down the road.


Vermont Passes Strictest Subscription Renewal Law

Companies that offer subscriptions that renew automatically now have to pay attention to tiny Vermont, which just passed the strictest automatic renewal law in the country. Several states, including California, have laws governing subscription renewals that require sellers to clearly and conspicuously present the terms of the offer, get express consent from the consumer, provide an easy method to cancel, and send a reminder prior to the start of a renewal term. Vermont’s law adds two new twists, however. First, the auto-renewal provision must be presented in boldface type. Second, consumers have to take two actions to accept the renewal offer.

California, which prior to passage of the Vermont law had perhaps the most restrictive law on the subject, gives companies a great deal of latitude in deciding how to meet the “clear and conspicuous” standard – it can be boldface, larger type face than surrounding text, contrasting color or font, or text that is set off by surrounding text by symbols or other marks. Vermont’s law will give no such latitude. If the renewal plan text is larger font, contrasting color, and surrounded by symbols, but is not in boldface, it will not comply.

The two-action consent requirement means that in both online and written offers, the company must get a consumer’s consent through both:

  1. A check box, signature, or other similar method that shows consent specifically to the auto-renewal terms, and
  2. A separate consent (like a “Submit” or “Purchase Now” button) to the overall order.

The Vermont law covers both business-to-consumer and business-to-business subscriptions, although there is an exemption for insurance contracts and contracts between a consumer and a financial institution or credit union. By including B2B, the Vermont law goes well beyond California’s law, which only protects consumers. This means a wide variety of SaaS businesses need to look at their subscription and renewal practices, if they are doing business with Vermont companies.

Vermont’s new law will take effect on July 1, 2019, and only applies to contracts with an initial term of one year or more, and subsequent terms that are longer than one month. So, if a company offers a product or service with an initial term of less than a year, and the term renews on a monthly, quarterly, or semi-annual basis, the company is not covered. Similarly, companies that offer simple monthly subscriptions, like many streaming services and subscription boxes, are not covered. Many magazine subscriptions have an initial term of one year, and typically renew for terms of a year, so these most likely will be covered by the new law.


California’s Subscription Renewal Law About To Change

On July 1, 2018, California’s subscription auto-renewal law is about to change in a couple of important ways. This law applies to e-commerce vendors who sell to consumers on a subscription basis, where the subscription renews automatically. For example, companies that offer subscription box services are generally subject to this law. Under the law as it currently stands, vendors must disclose the terms of the automatic renewal policy in a clear and conspicuous manner at the time of the original purchase, get the consumer’s affirmative consent before charging the consumer, and explain how to cancel the subscription.

Beginning July 1, vendors will have to allow online cancellation if the subscription was originally commenced online. Such vendors cannot require that their customers use phone or snail-mail to cancel. Also, if the subscription offer includes a free gift, trial subscription, or promotional pricing, vendors must notify consumers how to cancel before they are charged (or before the promotional pricing expires and they are charged full price). Vendors must explain the price to be charged when the promotion or free trial ends. If the initial offer is at a promotional price that will increase later, the vendor must obtain the consumer’s consent to the non-discounted price prior to billing.

Auto-renewing subscriptions have been fertile ground for California class action attorneys, who have made a cottage industry out of shaking down vendors that fail to comply with the state law. Consequently, it’s important for any company whose business model is based on consumer subscriptions that renew automatically to update their terms of service and selling processes before the new law takes effect. It doesn’t matter if the company isn’t based in California, either – the law applies if the consumer is a resident of California. Finally, keep in mind that more than half of US states have a law dealing with auto-renewing subscriptions.

Best Practices for Auto-Renewal Subscription Plans

Many of us purchase products or services on subscription plans that renew automatically, without the need for any additional action. Magazine subscriptions, streaming music, and streaming video services are common examples of these kinds of subscription plans. So are cloud computing services like Dropbox and Office365. It is a lucrative model for businesses, because the business doesn’t have to reach out to the consumer after a period of time to solicit renewal. In addition, customer inertia typically plays in the business’s favor. We tend to let these subscriptions run on indefinitely. If you operate a business that sells goods or services to consumers using that business model, however, you should ensure that your auto-renewal plan complies with a California law governing the practice, even if your business is not located in California. Otherwise, you run the risk of having those subscriptions be considered “gifts,” and you may be subject to penalties. Class action lawsuits have recently been filed against Spotify, Dropbox, and Hulu, alleging widespread violations of the California law. Please read further, and I will describe the five basic requirements for your company’s auto-renewal subscription plan.

Before going into the specific requirements for auto-renewal subscription plans, it is important to understand two things. First, the rules apply only to businesses selling to consumers. Business-to-business transactions are not included. Second, the rules apply to sales to consumers in California, regardless of where the selling business is located. As long as your customer is in California, the law applies. This makes it important for businesses in other states to ensure that they are in compliance with California’s rules.

Now let’s take a look at the five requirements for an auto-renewing subscription plan:

First, the terms should be presented in a clear and conspicuous manner before the subscription agreement is fulfilled. Also, the terms should be placed in visual proximity (or in the case of a voice offer, such as by phone, in temporal proximity), to the request for consent to the offer.

Second, you must get the consumer’s affirmative consent to the terms, before charging his or her credit card, debit card, or other payment account.

Third, you must provide an acknowledgement to the consumer, containing the terms of the plan, the cancellation policy, and information on how to cancel. This acknowledgement has to be in a form that can be retained by the consumer. If your offer contains a free trial, you must disclose in the acknowledgement how to cancel, and you must allow the consumer to cancel before the consumer pays for the goods or services.

Fourth, you must provide a toll-free telephone number, e-mail address, postal address (only when directly billing the customer), or another cost-effective, easy-to-use means for cancellation, that is described in the acknowledgement.

Fifth, if you make a material change to the terms of an auto-renewal plan, you have to provide the consumer with a clear and conspicuous notice of the change, along with information about how to cancel, in a form that can be retained by the consumer.

The California law has been in effect since December 2010, but many existing businesses located outside of California may not even be aware that it applies to them. Whether you operate an existing business or are starting a new business, if you use auto-renewal subscription plans as part of your business model, you should carefully review your terms and practices to make sure you comply with these California requirements.

Follow me on Twitter @PaulHSpitz