- within Accounting and Audit, Insolvency/Bankruptcy/Re-Structuring and Wealth Management topic(s)
Key Takeaway
Automatic renewals are becoming increasingly popular, but an overly complicated cancellation process poses substantial risk of both class action lawsuit and regulatory enforcement actions.
Last week the popular diet app Noom announced that it had reached a $62 million settlement with plaintiffs in a class action who brought a host of state-law consumer protection and common law claims based on Noom's allegedly deceptive enrollment scheme.
The lawsuit, which was originally filed in May 2020, but was amended a third time in January 2021, argued that Noom's substantial recent growth in revenue came not from satisfied dieters, but from misled consumers who were automatically charged fees. More specifically, plaintiffs alleged that Noom advertised a free trial period so long as the user cancelled during the period. But in reality, Noom intentionally created a difficult cancellation process, so users who were unable to withdraw in time were instantly back charged for months of service. This "automatic enrollment trap" led to more than 1,000 complaints with the Better Business Bureau and ultimately the lawsuit. See Third Am. Compl. at ¶¶ 2-3. Noom moved to dismiss the case in February 2021, arguing primarily that Plaintiffs' allegations did not meet the heightened pleading standard under Federal Rule of Civil Procedure 9(b) (see Dkt. 205), but the court largely denied this motion in August 2021. See Dkt. 415. The parties settled the case for $62 million—pending court approval—a handful of months later.
As the Noom case demonstrates, automatic-enrollment and automatic-renewal lawsuits have the potential to create significant liability and are particularly attractive targets for the plaintiffs' bar. Businesses that use automatic renewals must be aware that their practices will come under increased scrutiny. And this scrutiny is not limited to the private sector. In October 2021, California passed a bill requiring additional regulation of automatic renewals 1 and the FTC issued a statement saying that it plans to "ramp up enforcement" of automatic renewal scams.2
Footnotes
1 https://www.gov.ca.gov/2021/10/04/governor-newsom-signs-consumer-financial-protection-legislation-to-combat-predatory-practices-and-increase-transparency/
2 https://www.ftc.gov/news-events/press-releases/2021/10/ftc-ramp-enforcement-against-illegal-dark-patterns-trick-or-trap?utm_source=govdelivery
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