Advertising Law Blog

Automatic renewal programs and frictionless cancellation processes continue to garner significant regulatory scrutiny. Now, the Federal Trade Commission (“FTC”) is taking action against the software company, Adobe, and two of the company’s executives, Maninder Sawhney and David Wadhwani, regarding the company’s automatic renewal subscription practices, particularly as such practices relate to the company’s subscription enrollment and cancellation pathways. After investigating the company’s subscription practices, the FTC referred the matter to the United States Department of Justice, who in turn filed a complaint in federal court in the Northern District of California.

The partially redacted complaint asserts that prior to 2012, Adobe often sold its software products under a perpetual licensing model. That is, consumers made a one-time purchase and were able to use the applicable software product indefinitely. In or around 2012, Adobe began transitioning to a subscription-based licensing model, whereby consumers enroll in a subscription and are periodically billed for using the company’s products. According to the complaint, the subscription model has been very profitable for the company, with Adobe’s subscription revenue nearly doubling from $7.71 billion in 2019 to $14.22 billion in 2023.

The complaint lays out the three types of subscription plans offered by Adobe to customers – monthly, annual paid monthly (“APM”), and annual prepaid. The government’s complaint focuses on the APM plan, which is alleged to frequently be the preselected default plan for new consumers looking to subscribe. Subscribers enrolled in the APM are automatically charged each month until they cancel. However, subscribers that cancel their subscription before the end of the initial 12-month period are subject to an early termination fee, calculated as 50% of the total monthly charges remaining in the yearly contract.

The government takes issue with Adobe’s enrollment and cancellation flows. As detailed in the complaint, when a consumer is enrolling in the APM, there is a disclosure stating, “Fee applies if you cancel after 14 days ⓘ.”  Further, when consumers hover over the ⓘ symbol, text is revealed that states “If you cancel after 14 days, your service will continue until the end of that month’s billing period, and you will be charged an early termination fee.” Despite the early termination fee being mentioned, the government highlights several issues. Specifically, the government asserts that consumers are not given the details of the early termination fee, how it is calculated, and when it applies. Moreover, it is alleged that the plan selection page does not mention anywhere that the APM requires a one-year commitment, and that it does not disclose at all the amount of the early termination fee.

Further, the government takes issue with Adobe’s enrollment terms as they appear on the payment page, asserting that “Adobe knows many consumers do not notice or read” these terms, and that even so, the early termination fee is not mentioned by name and the amount of such fee is not make clear. Rather, the cancellation terms, including an explanation of how the early termination fee is calculated, appear at the bottom in a popup that is displayed only after consumers click on the “Subscription and Cancellation Terms” hyperlink.

The complaint alleges that Adobe knows about and profits from the consumer confusion that arises regarding the APM plans, and that the two named executives supervised and participated in Adobe’s unlawful enrollment practices.

Regarding the cancellation flow, the complaint details the steps that consumers must undertake in order to cancel their subscriptions online, stating that consumers must first locate the account management page, correctly choose “Manage plan” from the various options, and then select “Cancel your plan.” Thereafter, consumers are required to undergo a “convoluted process” to cancel, including taking several steps, some of which the government asserts are “wholly unnecessary” to complete cancellation. Such “unnecessary” steps include reentering passwords, providing the reason for cancellation prior to cancellation being processed, and being required to navigate through certain save offers. Further, the government alleges that consumers who attempt to cancel via customer service (phone or online chat) are also met with “obstacles that impede or delay their attempts to cancel,” including calls or chats dropping or disconnecting, and being transferred to one or more Adobe representatives, thereby requiring consumers to explain their situation multiple times and repeatedly request cancellation.

The government alleges that Adobe fails to clearly and conspicuously disclose the material terms of its offers, fails to obtain express informed consent from consumers entering subscriptions, and fails to provide a simple cancellation mechanism. The government is seeking both injunctive and monetary relief.

Takeaway: The FTC is currently undergoing a rulemaking process with respect to proposed updates to its negative option rule. It is of course important for subscription-based companies to keep up to date with this process and take necessary compliance action if and when the proposed new rule is finalized. However, even before the proposed new rule is finalized, there is much to be gleaned from this complaint regarding the FTC’s current interpretation of the applicable disclosure, consent, and cancellation requirements that apply to automatic renewal programs. Here, it appears that Adobe had taken some steps toward compliance. That is, details of the early termination fee were included in a popup, and subscriptions could be cancelled online. However, as is made clear in this complaint, the FTC does not view these actions as being sufficient. It is important for companies engaged in automatic renewal programs to not only keep abreast of the ever-evolving landscape of state and federal laws and regulations regarding these practices, but also to keep up to date with the government’s interpretations of such requirements.