FTC Sues LA Fitness Over Recurring Membership Practices

The FTC recently sued nationwide gym chain LA Fitness over its recurring membership and cancellation practices, based on alleged violations of Section 5(a) of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. Section 45(a) and Section 4 of the Restore Online Shoppers’ Confidence Act (“ROSCA”).

Although this case involves a gym membership rather than a SaaS subscription, given the recent enforcement priority of the FTC on subscriptions, the facts and circumstances of the case are still relevant to SaaS and software companies.

In this case, the FTC alleged that LA Fitness enrolled customers in monthly memberships with negative option features, either via a website or at the gym.  However, once customers became members, they were required to cancel the membership in one of two ways: either by submitting a difficult-to-access form in person at the gym to a particular manager and wait for that manager to process the cancellation, or by mailing the same difficult-to-access-form via registered or certified mail at the member’s expense.

The FTC particularly noted that most gym services were accessed exclusively through an app but LA Fitness did not make the cancellation form available through the same app: it was only available through the website.  Also, according to the FTC, customers could not access or download the form without first logging into the website, and they couldn’t submit the form in person without first accessing a printer to print the form. Then, according to the FTC, if customers complied with all these steps, cancellations were only accepted by the gym locations between the hours of 9 a.m. and 5 p.m. M-F, even though the locations were generally open 19 hours a day/7 days a week, and then cancellation requests were only accepted by a single employee: the Operations Manager, despite employing multiple other employees at each location. Finally, according to the FTC, to further frustrate cancellations, the Operations Manager was often not available to accept the cancellation, and never followed up, despite LA Fitness promising he would do so.

According to the FTC, the mail cancellation procedures often worked no better, and that customers often sent multiple cancellation forms to LA Fitness but could never obtain a cancellation.

In addition, the FTC alleged that the LA Fitness often signed customers up for additional services with recurring charges such as towel service or childcare using the same membership contract but imposed “different and inconsistent cancellation” procedures.  According to the FTC, LA Fitness failed to disclose that the additional services were “separate negative option programs, distinct from their base membership, which. . . could be [canceled] independently.”  FTC alleged that LA Fitness further frustrated the cancellation process by not allowing customers to cancel all the services at once: the gym required that each service had to be cancelled by a separate form.  Consequently, even where consumers were able to cancel one recurring membership, they were often still billed for another.

The FTC further alleged that customers who complied with the restrictive cancellation procedures were often still billed for their memberships, and that the FTC had received tens of thousands of customer reports on these problems.  According to the FTC, even when the customers cancelled their cards to escape the charges, LA Fitness would manage to bill the same charges to replacement cards.

The FTC complaint alleged that LA Fitness’s cancellation practices constitute “unfair acts or practices in violation of Section 5 of the FTC Act, 15 U.S.C. Section 45(a), (n).”

Also, the FTC complaint alleged that its practices violate Section 4 of ROSCA, 15 U.S.C. Section 8404(a) by [failing] “to clearly and conspicuously disclose all material terms of the transaction” in connection with a negative option feature “before obtaining the consumer’s billing information, including a. the method of cancellation; and b. that their add-on services and amenities are separate negative option programs that are subject to separate cancellation requirements.”

Finally, the FTC complaint alleged that the practices in not “providing simple mechanisms for a consumer to stop recurring charges” constitute a violation of Section 4 of ROSCA, 15 U.S.C. Section 8403(3).

What are the lessons to be learned by software and SaaS companies from the LA Fitness case?

Well, first and foremost, the LA Fitness case highlights the risks of relying on what the FTC refers to as a “negative option feature.”  The FTC’s Telemarketing Sales Rule (“TSR”) defines “negative option feature” as “an offer or agreement to sell or provide any goods or services, a provision under which the consumer’s silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer.”  The best practice is to avoid utilizing negative option features altogether.

However, if your company elects to utilize a negative option feature notwithstanding the risk, you are required to do the following:

• clearly and conspicuously disclose all material terms of the transaction before obtaining the consumer’s billing information;
• obtain the consumer’s express informed consent before making the charge; and
• provide simple mechanisms to stop recurring charges.

Third, to the extent you have multiple negative option features, each with different terms and cancellation policies, the material terms need to each be clearly and conspicuously disclosed before obtaining the consumer billing information, and the consumer’s express informed consent needs to be obtained before making the charge.

Then, fourth, you need to timely process cancellations upon receipt.

Does your company utilize a subscription or membership agreement?  Are your terms compliant with the FTC Act, ROSCA, and other state regulations governing subscriptions or memberships?  Schedule a consultation with a subscription law attorney today at this link.