FTC Files Lawsuit Against Adobe over Annual Paid Monthly Subscription Software Model

Consumer-facing SaaS and software companies are on notice by the FTC that their subscription billing practices are under scrutiny.  The FTC has just filed a lawsuit against Adobe over its “Annual Paid Monthly” subscription model, which the FTC says in its consumer alert “put subscribers on the hook for a whole year of payments, paid in monthly increments” without proper explanation or disclosure.   A copy of the FTC complaint is attached here.

What subscription practices with the “Annual Paid Monthly” subscription plan did the FTC find particularly objectionable?

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.

What is particularly significant about the FTC’s actions is that the FTC not only filed suit against the corporation Adobe but it also filed suit individually against two of its executives.  The FTC is demanding monetary civil penalties against Defendants and a permanent injunction as well as other damages.

What is the basis of the FTC’s legal case against Adobe?  The FTC’s 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.

What are the SaaS and software contracting best practices to be learned from this FTC action?

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.

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 price of the early termination fee.

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.

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.

Finally, if you are a SaaS or software 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 Software Law Blog will continue to advise you of the developments with this FTC action as it moves forward.  If you have questions or concerns about FTC compliance generally or this action in particular, please reach out and schedule a consultation with me at this link.