Subscription-based pricing has become increasingly popular over recent years for both customers and businesses alike. Subscription-based business models can help businesses attract more customers, provide a more stable source of revenue, reduce customer acquisition costs and be more competitive on price.
To entice customers to subscription services, businesses frequently offer an initial free trial. However, not every customer who subscribes to a free trial intends to subscribe once the payment obligations kick in, which poses the question, what are consumers’ rights to withdraw?
A ruling of the Court of Justice of the European Union (CJEU) in October 2023 clarified the position in relation to consumers’ rights to withdraw from distance contracts which include a free trial period.
The case of Verein für Konsumenteninformation v Sofatutor GmbH EU:C:2023:735 concerned proceedings between the Association for Consumer Information, Austria (‘VKI’) and a German company (‘Sofatutor’) which operates an online learning platform for pupils in primary and secondary education throughout Austria. Sofatutor’s general terms and conditions provided that, when a subscription is booked for the first time, it can be tested free of charge for 30 days, during which the subscription could be terminated at any time. At the end of the 30-day trial period, the subscription would be automatically renewed for a fixed term and at this point would become chargeable. Consumers were informed of their right of withdrawal during the 30-day trial period, at the time of taking out the subscription.
VKI’s view was that, in accordance with European Directives, consumers had a double right of withdrawal. First, at the time of subscription, and second, at the end of the free trial period, arguing Sofatutor should provide pre-contract information to the consumer at the point at which the subscription would move to a paid-for model.
The CJEU was asked by the Austrian Courts for a preliminary ruling on the subject, namely, does a consumer have a second right of withdrawal at the point the subscription is auto-renewed?
The CJEU concluded that the consumer’s right of withdrawal from a distance contract only arises once, at the start of the free trial period. Such ruling is subject to the provider informing the consumer in a “clear, comprehensible and explicit manner” that, after the initial free period, the contract will become chargeable. Only when the provider fails to inform the customer of their rights, on the above terms, should the consumer benefit from a second right of withdrawal.
In practical terms, this judgment sets a precedent for the way in which providers must inform consumers of, not only their rights to withdraw from a contract within a free trial period, but also that the contract shall automatically renew at the end of the trial period at which point the service shall become chargeable. Where consumers are not informed of such rights, the provider should, in all circumstances, offer the consumer a second right to withdraw from the contract at the end of the trial period.
The judgment provides legal certainty to businesses wanting to adopt a subscription-based model that includes a free trial period; they need not send customers a reminder their free trial is due to expire, nor must they offer the customer a right to withdraw from the contract at the point of renewal, provided the correct communications have been made at the outset.
It is crucial for businesses to review the communication of their terms to ensure consumers are clearly informed of their rights and the total cost of the services, prior to subscribing.
Hamlins Commercial and Tech team advises businesses on the creation of consumer contracts and agreements. If you would like to find out how we can help your business, please get in touch.
