FTC Sues Software Company over Annual Paid Monthly Subscription Contract
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The FTC has just taken enforcement action against a software company over its subscription contracting practices, filing a complaint against Adobe over its Annual Paid Monthly subscription contract and its consumer practices regarding the contract. A copy of the FTC complaint is linked here. If your digital health company relies on a subscription-based revenue model, there are some clear lessons to be learned from the FTC action.
In its complaint, the FTC raised concerns not only with the terms of the subscription contract and how they were drafted but also the process and practices of the company in signing up and retaining customers. According to the FTC, Adobe enrolled consumers by default in its most expensive plan without clearly disclosing the key terms of the plan, which were that they were agreeing to a year-long commitment with a large early termination fee, and that consumers only discovered the nature of what they agreed to when they tried to terminate and realized they could not do so without incurring a significant fee. The FTC stated:
Adobe hides material terms of its [Annual Paid Monthly] plan in fine print and behind optional textboxes and hyperlinks, providing disclosures that are designed to go unnoticed and that most consumers never see. Adobe then deters cancellations by employing an onerous and complicated cancellation process. As part of this convoluted process, Adobe ambushes subscribers with the previously obscured ETF when they attempt to cancel.
The FTC’s legal case focuses on The Restore Online Shopper’s Confidence Act, 15 U.S.C. §§ 8401-8405 (“ROSCA”). The text of ROSCA is published here. ROSCA prohibits unfair and deceptive Internet sales practices, and generally prohibits charging consumers for goods and services sold in transactions through a negative option feature unless the seller:
- clearly and conspicuously discloses all material terms of the transactions before obtaining billing information from the consumer
- obtains the consumer’s express informed consent before making the charge
- provides simple mechanisms to stop recurring charges.
The FTC alleges Adobe had significantly increased its revenue by engaging in practices that violated ROSCA.
Digital Health company founders should take note that the FTC case was not limited to an action against the company: the FTC also filed suit against two of Adobe’s executives on an individual basis.
What are some of the lessons that digital health companies should learn from this FTC action against Adobe?
First and foremost, you should rethink the use of “Annual Paid Monthly” Subscription Plans. They may seem clever from a marketing perspective, but they are likely to draw heavy regulatory scrutiny going forward. Plans that are annual commitments should be clearly referenced and defined in contracts and marketing materials as “annual subscription plans” and not presented as monthly plans.
Second of all, if you are offering “Annual Paid Monthly” subscription plans, you should go out of your way to clearly and conspicuously disclose the key terms of your “Annual Paid Monthly” plan, including in particular the key facts that the plan has an annual subscription term and that it has an early termination fee. You also should be exceedingly clear about the specifics of any early termination fee, and the termination fee needs to be presented in a way that is very clear and conspicuous.
Third of all, if you are offering “Annual Paid Monthly” subscription plans, you should refrain from taking steps in the customer enrollment process to push your customers to the “Annual Paid Monthly” subscription plan. All options should be equally presented to customers without defaulting to a less favorable option.
Fourth, if you are offering “Annual Paid Monthly” subscription plans, you should make it easy for your customers to cancel. If customers are posting online complaints about the problems they have had in trying to cancel your subscription, you should take action prompt action to address those problems. It seems clear that the FTC was troubled by the complaints posted with the better business bureau against Adobe on this issue.
Fifth, even if you do not offer a subscription that looks like an “Annual Paid Monthly” subscription, you should refrain from offering subscriptions with negative options, as the FTC clearly finds them to be problematic.
Finally, if you are a digital health company, you need to become familiar with ROSCA and the government’s ROSCA enforcement practices, if it was not already on your company’s radar.
The Silicon Valley Digital Health Law Blog will continue to follow developments with this FTC enforcement action. If you have concerns about whether or not your digital health subscription contract or contracting practices will comply with the FTC’s requirements as articulated in its case against Adobe, I invite you to schedule a consultation with me today at this link.
