Subscriptions and Recurring Charges and the Electronic Fund Transfer Act

Posted by Clyde Hutchins | Aug 17, 2016 | 0 Comments

Subscriptions and Recurring Charges

Subscriptions and recurring charges are used by some businesses engaged in e-commerce. This typically occurs where the business is offering a product or service on a monthly, quarterly or annual basis. Newspapers and magazines are a common product offered through a subscription. Other products include food, supplements, cosmetics, weight loss products, shaving products, clothing, books, soap and many others. Services can be offered this way too. For example, pest control and lawn fertilizer companies offer periodic service calls to your home. Cable, cell phone and satellite television services are offered this way too.

A federal law called the Electronic Fund Transfer Act and the corresponding Regulation E impose certain requirements on subscriptions and recurring charges. In my experience in the Attorney General's Office overseeing over 100 investigations and enforcement actions, I saw some online companies fall short of these requirements. Most of these occurred where the company failed to properly obtain authorization of the recurring charges; and failed to provide copies of the authorization to the consumer.

Obtain authorization from the consumer in writing and provide a copy

According to 15 U.S.C. § 1693e, when a business intends to periodically pull funds out of a consumer's bank account through a debit card, or other method, the transfer "may be authorized by the consumer only in writing, and a copy of such authorization shall be provided to the consumer when made." Regulation E, 12 CFR 205.10 provides that "[p]reauthorized electronic fund transfers from a consumer's account may be authorized only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer."

1.  Authorization in writing

The first requirement is to obtain authorization for the recurring charges from the consumer. Online merchants typically use one of two types of online agreements; the browse-wrap agreement or the click-wrap agreement. A browse-wrap agreement is where terms and conditions are posted on a website and can usually be reached through a hyperlink. A click-wrap agreement is where the purchaser must manifest his assent to the purchase by clicking on a button.

If the online merchant is relying on a browse-wrap agreement to obtain the consumer's authorization for the recurring charges, it is unlikely that the merchant is in compliance with the Electronic Fund Transfer Act. It is not possible to adequately obtain the consumer's identity and assent to the authorization through a browse-wrap agreement.

If the merchant is relying on a click-wrap agreement, the recurring charge terms still have to be clearly provided to the consumer. A click-wrap agreement where the consumer clicks a box next to a hyper-link does not ensure that the terms of the recurring charges are clear and readily understandable to the consumer. The online merchant should ensure that it makes the terms unavoidable to the consumer. If the consumer cannot readily see the terms, the merchant may be in violation of the Electronic Fund Transfer Act.

2.  Provide a copy

The second part of the requirement is to provide a copy of the authorization to the consumer. Although this is simple to accomplish through a follow up email, I have seen many instances where online merchants do not send a follow up email. This omission causes poor customer service. It also creates liability under the Electronic Fund Transfer Act. Online merchants should send follow up emails to their consumers to give them notice that there will be recurring charges.

The Electronic Fund Transfer Act is relatively simple to comply with. Merchants just need to engage in diligent review of their website, processing systems and customer communications to ensure compliance. If you would like a legal audit of your website for compliance with the Electronic Fund Transfer Act and the other applicable federal and state laws, or otherwise desire assistance in complying with the Electronic Fund Transfer Act, please contact Harmony Law.

About the Author

Clyde Hutchins

Clyde Hutchins is the founder of Harmony Law. Mr. Hutchins started his career as a lawyer in Cheyenne, Wyoming. First gaining experience as a law clerk for the district court judges, Mr. Hutchins entered private practice with a Cheyenne firm focused on civil litigation, business law and some general practice law. Later, Mr. Hutchins went to Alaska, where he was the chief litigator for a firm that engaged in bond law, corporate law, securities law, and the broad reach of municipal law. Mr. Hutchins returned to Cheyenne to represent the State of Wyoming in the national tobacco arbitration. While in that position, he developed the consumer protection unit for the Wyoming Attorney General's Office. He led over 120 investigations and enforcement actions in Wyoming and worked on numerous joint cases with the Federal Trade Commission and other states, including Colorado. Mr. Hutchins relocated to Colorado in 2016 and founded Harmony Law. Mr. Hutchins has established Harmony Law in three principal areas of law. First, it is a general practice firm in the areas of business law, estate planning and family law. Secondly, it is a civil litigation firm, practicing law in state and federal courts throughout Wyoming and Colorado. Finally, it is one of the few firms in Wyoming or Colorado that focuses on consumer protection law.


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