Nasir Pasha & Matt Staub

Is Consumer Outrage Over Reneged Grandfather Clauses Justified? [e249]

Nasir and Matt discuss the different ways that Netflix and 24 Hour Fitness handled backing out of grandfather pricing to customers.

Transcript:

NASIR: Welcome to our podcast where we cover business in the news and add our legal twist to that business news. My name is Nasir Pasha.
MATT: And I’m Matt Staub.
NASIR: Today, we’re covering a very interesting topic, but you’re going to have wait to see what it is.
MATT: I can see that you think subscription-based or monthly pricing or whatever you want to call it is an interesting topic.
NASIR: Well, honestly, I didn’t name the topic because I wasn’t sure exactly how to summarize the topic. I just know we get to talk about Netflix and 24 Hour Fitness.
MATT: We’ll get into the Netflix part of it first.
I guess, for people that pay or for people that have been signed up, 2014 or before that, they were paying $7.99 a month which I believe is what I pay. I’m not positive but I think that’s when I signed up. I don’t know. I don’t even know when I signed up.
NASIR: I know I used to pay $7.99 a month but I kept giving away my username and password to family and friends that I ended up using Netflix one of these days and it said that there was too many users on or something like that so I upgraded from there to where you can pay more to have access to more screens or whatever. But I’m pretty sure I was paying $7.99. I don’t know what I’m paying now. It’s probably like a billion dollars per month.
MATT: Probably not that much because I think it’s only going up to, well, the most someone was paying was $9.99 a month.
NASIR: Oh, good. I can afford that.
MATT: Yeah, that’s what the more recent people are paying. Now that I think about it, I want to say… I don’t know if it was Netflix or maybe it was somewhere else that put up a promotion somewhat recently of “sign up now and you can get this lower rate” and I’ll get to why that’s relevant but what Netflix has now come out and said is, “Anyone that’s paying $7.99 a month, it’s going to get bumped up to $9.99 a month. You know, the silver lining is we’re going to still give you two full years of that $7.99.” I guess I shouldn’t say that fully. You can stay on the $7.99 a month plan but you’re only getting standard definition. For anyone that wants to watch in HD which has got to most people, it’s going to go up to $9.99.
NASIR: So, it’s effectively a downgrade though because, with $7.99, you had access to HD, right?
MATT: Right.
NASIR: It is a downgrade.
MATT: It is definitely a downgrade. You could technically still stay on $7.99 a month, though. You just get a lesser version of what you had.
NASIR: Got it.
MATT: But they’re giving you two years before they do that so they’re giving you a little bit of notice here and it is a month to month arrangement so I guess you could still jump on the $7.99 a month for two years and then back out if you’re really upset about the $2.00 per month increase which is what, $24.00 a year?
NASIR: Approximately.
MATT: But it’s the principle of the thing and I think that’s why a lot of people are complaining about it now as, “Hey, I thought this was supposed to be a $7.99-a-month arrangement. You’re supposed to be grandfathered into this price. Why do I have to pay more for this now?” and we’re going to get into 24 Hour Fitness which might be one of the bigger culprits of this scheme but, to me, they’re giving you the two years of kind of a buffer to figure out if you want to stay on or not. I mean, that’s about as fair as you’re going to get.
NASIR: Yeah, that’s reasonable, and it’s a couple of dollars, like you said, approximately $24.00 more per year if you’re doing your math correctly. I can’t verify that but, yeah, I mean, it’s reasonable and, frankly, I’m pretty sure, without looking at the contract, I mean, Netflix is month to month and we can cancel at any time and, therefore, so can they and they can increase the price at any time. And so, when they did increase the price to $9.99 a month for new members, they could have easily done it for old members, too. But, of course, why they didn’t is because people would have been upset, you know, and there would have been more of a backlash. But I think they ease people into it. New members are paying $9.99 a month then you have people realizing that’s how much it costs and so, when you make that change, it’s not that big of a deal, even when they are making that change, like you said, they can still stick to that same price plan if they’re on a budget and, you know, the difference between standard definition and high-definition is probably not that big of a deal on smaller screens like mobile. You’ll probably notice it on TVs and so forth but, like you said, not unreasonable change.
MATT: Right. Well, I disagree with you on that. I think it is noticeable even on small screens.
NASIR: Oh.
MATT: But, you know, that’s neither here nor there, I guess. That’s not the point of this. What’s going to be the response for customers? We might as well just get into the 24 Hour Fitness aspect of it. If there’s anyone that wants to do a quick search of “24 Hour Fitness complaints” or just type that into Google or “24 Hour Fitness Lifetime Membership” – I think I typed it in “24 Hour Lifetime Membership” and there was something, I don’t know what site it was but it was like 1,600 reviews, a 1.1 out of 5 rating which is unheard of.
NASIR: Yeah.
MATT: That’s like every single person giving you a one and a handful of people giving you a five which doesn’t even seem possible.
So, these lifetime memberships with 24 Hour Fitness…
NASIR: I assume they’re not available anymore, right?
MATT: I guess there’s different versions of this and I know you have a friend that has entered into something like this but, you know, one of my friends, this is their version of the lifetime membership, they paid I believe – it was a while back – they paid $1,000 upfront and they never had to pay a penny ever again and they had a lifetime membership to 24 Hour Fitness. Now, the problem with his was that only got him into the basic 24 Hour Fitness clubs and all these sport clubs or high-level ones, whatever the descriptions are, you know, anything other than just the barebones weights.
NASIR: You know, I asked my friend, too. He gave me some more details and he knows these numbers pretty well and I’ll tell you why.
He says, in 1996, he paid – similar to your friend – $1,000 or nearly $1,000 for a three-year contract. And then, afterwards, $49.00 per year for life after that. Since 1999, he’s effectively been paying $4.00 per month. Like you said though, this was for a particular gym and so there was another class action lawsuit for a guy that signed up for a lifetime in 1992 or something to that effect. Something similar, I don’t think he had a big down-payment but basically he makes this argument and turned it into a class action where 24 Hour Fitness created all these subcategories. I’m sure you guys have heard of it – like, these 24 Hour Sport and I don’t know what the other ones are, you’ve heard of that, right?
MATT: Yeah, and that was his thing. I think the sport version has, like I said, it’s more than just the barebones weights equipment and I think it adds a basketball court or a sauna and stuff like that or a pool. I think a pool is a big part of it.
NASIR: What’s funny is that these guys that signed up in the 90s, I mean, fitness has changed quite a bit. I mean, there’s always going to be fads but I’m sure you remember the Bo Flex Home Gym and Tae Bo – these are the things that were big in the 90s but I don’t even know what kind of gyms there were back then. I was busy in school, studying.
MATT: Yeah. Well, I don’t think the Bo Flex and all that stuff, I don’t think that’s really popular anymore. The trend in gym stuff now is Crossfit and I guess it kind of goes along with it is all the weird races and we’ve talked about that before.
NASIR: Oh, yeah, like Mud Run and stuff like that? Yeah.
MATT: It doesn’t seem like as many people are doing it and now there’s a lot of competition with those two. That industry is getting over-saturated with different things and probably legal issues, too.
NASIR: Well, anyway, sorry to digress.
MATT: You know, regardless of what the different type of lifetime membership these people have, the general complaint is “I was told or I was promised that I would only have to pay X amount for this period and then I would get a significantly reduced rate year three or year four and every year after that.” But, now, 24 Hour is coming back saying, “Yeah, we’re going to up your monthly rate. It doesn’t matter what happened previously.” I didn’t search in extreme detail but I think it says something when I try to find 24 Hour Fitness gym contract online and really can’t – even when there’s been these lawsuits. But my guess would be there’s a clause in there saying, you know, “We have the right to raise your monthly rate up to…” you know, it could have a cap on it too of up to 10 percent a month or whatever it’s going to be but there’s going to be some clause in there saying they have the right to do that or else, “Sorry about what we said before but this is what it says in your contract.”
NASIR: Yeah, I think that’s best-case scenario that they did that, but I honestly would not be surprised that they don’t have that kind of provision in there and, as a business model, like, “Okay, look, we want to expand but, if we start putting all this money in these new gyms, what about all these lifetime memberships that we gave? We’re really losing an opportunity here,” and I wouldn’t be surprised. I wouldn’t know for sure but, based upon all the complaints and how many people were affected by this – because I’m sure a lot of people signed up for these lifetime memberships – they specifically said, “Okay, these newer gyms that we’re creating, let’s create subcategories and we can just tell the member, ‘Hey, you signed up for a lifetime membership to Gym A. This is Gym B and Gym B has a pool. Gym A doesn’t have a pool. And so, it’s not fair for you to get this great rate on a gym that you didn’t pay for.’” Of course, from a consumer perspective, that doesn’t seem very fair because you’re thinking, “Well, I get a lifetime membership to 24 Hour Fitness – whether it’s 24 Hour Fitness A or 24 Hour Fitness B,” especially since those subcategories didn’t even exist at the time.
MATT: Yeah, and that’s a pretty smart – I mean, I don’t know if smart is the right word but it’s a nice way for 24 to go about it. And so, let’s say that happened to somebody, do they at least some sort of credit on their monthly rate if they want to try to go to this higher-level club and they’ve already paid this lifetime membership? I mean, I would hope they do, but I guess that there’s no requirement that they do. But good business would allow them to do that, I would think, but who knows?
NASIR: So, these agreements, these subscription agreements I should say are pretty common. We’ve talked about subscription models online quite a bit and the contracting behind those. But one thing that I think we can say for certain, you can put whatever you have in the agreement but, if the expectations don’t match from the consumer, if you’re telling them that this is a lifetime agreement and then you say that you can adjust the price at any time, you may win a breach of contract action but you’re not going to win, first of all, a popularity contest, but you may be entering into false advertising or the realm of misrepresentation, fraud, and these are some of the allegations that were made against 24 Hour Fitness. From what I can see, I haven’t been able to find an actual judgment against 24 Hour Fitness for this – not to say that it doesn’t exist – but the class actions that I’ve seen, they actually were able to settle some of these claims that these members who entered these lifetime agreements have made.
MATT: Yeah, I mean, there is a difference between telling them, “Oh, you know, this is whatever you’re going to pay. It’s never going to go up,” and then, you know, not abiding by that, there could be some misrepresentations that get brought in there later on. So, it’s not the ol’ bait and switch as I said before. There’s still avenues for these consumers that feel like they got taken advantage of, if that’s the case. But, going back to Netflix, I’m not sure what the situation was with them either. I don’t know if they were told, “You’re only ever going to pay $7.99 a month.” I don’t remember ever seeing that. They might have raised the rates to that $9.99 and said, “Oh, if you’re already paying $7.99, we’re going to keep on that,” and now they’ve decided to up it which is a different story than, “Hey, sign up now because this is the year you get locked in, that’s the rate you’re going to pay,” and then, later on, they’re going to up it. It’s a different situation.
NASIR: Yeah, and words matter. Again, you can put whatever in your agreement but, if you start using these “lifetime” or make representations or even in your marketing material, and that’s why businesses get into trouble because they’ll send a contract to their attorney and they’ll review it, they’ll revise it, and make it bulletproof. But then, it gets handed to the marketing team to actually sell the product and everything’s kind of lost from there because that marketing material doesn’t go through that legal review that it needs to and it’s very easy to fall into that trap. It reminds me, in preparing for this episode – which, of course, I prepare hours for – I think it was just yesterday or the day before, I received a WhatsApp message or notification. WhatsApp, I’m sure everyone knows is a mobile chat service, one of the most popular in the world, it’s actually owned by Facebook now. Normally, you pay a $0.99 or $1.00 annual subscription but I got this notice, a pop-up basically saying, “Congratulations! You have a lifetime membership now to WhatsApp!” I’m like, “Okay, that’s cool.” And then, literally five minutes later, it said, “Your subscription ends on July 2016.” I’m like, “Okay, maybe that first message was a mistake.” And then, maybe another twenty minutes later, I got the same congratulations lifetime membership. So, then, of course, I look it up and, apparently, it wasn’t a mistake. WhatsApp has scrapped its subscription fee.
MATT: I didn’t even know there was an annual fee. I remember when I downloaded it years ago, I remember I had to pay $0.99 but I thought that was a one-time thing. I don’t remember… well, I’m sure there was something I had to agree to and I probably had to…
NASIR: Which you didn’t read.
MATT: If it’s $0.99 a year, it’s not going to break the bank.
NASIR: But, yeah, what if it was a dollar per year and then a billion dollars the next year? You should still read your contracts.
MATT: Well, yeah, it did say it could go up that percent per year.
NASIR: Ah. It’s interesting because what if they decide six years from now to start charging for WhatsApp, right? Is that message that I received saying that I have a lifetime membership enough to create a binding contract? Probably not, but is it enough to maybe create false advertising and so forth? Again, the difference is they’re giving it for free. And so, if they change the service – you know, WhatsApp 2.0 so to speak – and then start charging for that for new features in order to access this new feature or this new upgraded version, then you have to pay for it, then we’re talking about new territory and I think they can easily do that just like 24 Hour Fitness did.
MATT: Yeah, when did they get bought out by Facebook? I know it wasn’t yesterday.
NASIR: No, it’s been a while. I think it’s been at least…
MATT: At least one year.
NASIR: Yeah, I was going to say a couple of years – at least one year, approximately two years, not more than three years, definitely not four years.
MATT: Somewhere in that range.
NASIR: Definitely not five.
MATT: Yeah.
NASIR: Ah, I could be wrong. I’m just going to look it up now because I’m probably way off.
MATT: Well, yeah, I mean, the message, did it just send you a notification?
NASIR: No, it looked like it was a little WhatsApp message. By the way, February 2014 – two years ago, almost to the exact date – plus minus one month.
MATT: Yeah, I didn’t get that message at all. It’s probably not good.
NASIR: It was in my notifications. I don’t think iPhone has the notifications but it was a notification. And then, after I swiped it away, I tried to find it again and I couldn’t find it.
MATT: Yeah. I mean, that is an interesting thing. Like you were saying, what if they want to go back and start charging people for it. I mean, you’ve already got the confusing message of kind of conflicting things and now they want to go back to charging. I mean, there’s other ways to go about charging people.
NASIR: By the way, I have to mention this because my friend just messaged me on WhatsApp to one of our friends’ group because he was talking about how people used to make fun of him for paying $1,000 initially for the gym membership and how that was a complete waste of money, you know. I mean, ’96, I mean, that’s $1,000 for a three-year contract, that was a lot and so he’s like, “Therefore, I have paid $1,833 to 24 Hour Fitness during the past twenty years equating to nearly $92.00 per year or $7.64 per month. The average fee would decrease, of course, over time in proportion.” He’s really into numbers. He’s a real estate appraiser so it kind of makes me laugh.
MATT: So, after that first three years, he’s paid the same amount every year since and they haven’t bumped it?
NASIR: Yeah, I remember I talked to you about it before because I think the 24 Hour Fitness by his home is one of those upgraded ones – like, 24 Hour Sport or whatever – but, apparently, he was allowed to go to that gym because it was the closest one to his residence. Apparently, there was some exception that they made for lifetime residents. In other words, he may not be able to go to another 24 Hour Fitness Sport in Los Angeles but he can by the one in San Diego.
MATT: Well, that’s reasonable of them, I guess. That’s a nice gesture.
NASIR: Yeah. And so, there may be some people that are upset with 24 Hour Fitness. I’m not sure, that may have been a result of the class action lawsuit or a settlement of some sort.
MATT: Based on my experiences and others with 24 Hour Fitness, it seems like something would have to be done in a lawsuit settlement for them to agree to that, and that is reasonable.
NASIR: Yeah.
MATT: Yeah. I mean, I guess that’s a good deal. Every year, it’s going to get better and better because he’s going to be paying less money per year overall.
NASIR: What people don’t know is he’s only been to the gym once, though.
MATT: That would be really funny. He’s paid for twenty-something years and never gone.
NASIR: I know he goes to the gym. He’s in shape but, yeah, that would be funny if he just went once but he still brags about how great of a deal he got.
MATT: He breaks it down to the cent of how it was a good deal and he just doesn’t go at all.
NASIR: But you have to tell us the story – or at least tell everyone else – about how you got kicked out of 24 Hour Fitness. That was funny.
MATT: Oh, yeah. Well, not doing anything bad…
NASIR: Yeah, right. I don’t know about that.
MATT: So, when I first moved to Sacramento, I joined 24 Hour Fitness and they talked me into actually what I thought was a better deal but ended up being worse. Based on kind of these things, it was cheaper to sign up for a two-year contract which they always tell you to don’t get locked into these long-term deals but I knew I was going to go because I’d always gone to the gym and it was cheaper per month but he talked me into the month to month because he’s like, “Ah, no one stays at the gym for that long,” and it was like, “Oh, all right.” It was weird they were kind of talking me out of it.
NASIR: Yeah.
MATT: I was a member for a couple of years and I was like, “I’m paying way too much money,” so I quit and then I went to another location with my wife because she was a member there. When you go there as a guest – I think I was technically a guest of hers – you have to fill out this paperwork and so I’m probably a good 30 or 45 minutes into being there, they heard my name over the loudspeaker and I was like, “That’s weird, did they call my name?” So, I went over there. They’re like, “Oh, you were a member here?” I was like, “No, I was a member at the one downtown. I’m just trying this one out because it’s different. I’m considering possibly joining here.” They’re like, “Well, you can’t be a guest if you’re already a member here.” I was like, “I’m just testing this one out. Still, I’m considering joining again,” because it had been at least a few months at that point. They’re like, “Well, you can’t just do this. You’re going to have to leave right now.” I was like, “Can I at least finish my workout?” They’re like, “No, you can’t.” I was like, “Okay. I at least need to tell the person that drove me here so they aren’t looking for me as I’m standing outside.” And so, they let me do that at least.
NASIR: Oh, that’s good.
MATT: Yeah, but we did have to leave.
NASIR: “Can I at least tie my shoe?” “No, you have to leave right now.”
MATT: Yeah, it’s just ridic… I mean, the thing was I wouldn’t be able to come back to that one again without joining because they keep, like I said, when you’re a guest, you have to sign into the system or fill out this paperwork. It’s a one-time thing and it’s ridiculous that they wouldn’t let me finish that workout and then I ended up joining again, months down the road.
NASIR: You ended up joining again? After they basically offended your honor and kicked you out? So, the same exact location, too?
MATT: Well, no, that was the whole thing. I wanted to have access to multiple locations and so I ended up joining a broader… I think the membership I signed up for, I could go to any of them but it was ridiculous and I wasn’t a big fan of how they handled things.
NASIR: Did you pay more or less than $7.64 per month?
MATT: Definitely more.
NASIR: Okay. So, my friend still got a better deal. I just want to confirm.
MATT: I mean, I have friends that have paid under $10.00 a month for a long time, too, because they “locked in” to these rates when they bought them through some family membership a long time ago by their parents. It’s definitely possible. I think the people that seem to be getting the raw end of the deal here are the ones that paid a lot of money upfront based on the promise it’d be less over time and now they’re getting those rates are getting raised.
NASIR: So, just a quick takeaway…
MATT: Never join a gym.
NASIR: Never join a gym. A lot of people are getting into subscription models of different sorts – whether you’re providing a service or a product or what-have-you. We’ve talked about them in the past. There are state-specific statutes that protect consumers or even businesses. We talked about the one in New York which requires notices for annual subscriptions and things like that. We’ve talked about the one in California and Illinois. All these have different provisions but one thing that is consistent amongst all of them is that they want to make sure that the consumer or the person – I should say the person signing up to this reoccurring service – is not kind of caught off-guard. They’re made aware of this and over-communicating I think is always going to be a really good deal for you in the long-term. If your business is dependent upon – I think we’ve talked about vitamin supplement companies and how they depend upon the idea that, once you sign up, it’s hard to cancel – if you’re kind of depending upon that model, you’re just asking for trouble. You know, 24 Hour Fitness, they’re a larger company. They probably made the risk-benefit analysis of doing this – that they may have to go through a lawsuit – but, over a long term, they’re going to survive and most people aren’t going to care and they’re just going to upgrade. That’s just something to keep in mind. We’ve all signed up to services where, you know, a week or two before the annual subscription gets renewed, we get a notification, “Hey, it’s going to renew soon,” and then we’ve also been involved with those companies that just renew without asking and understand how that makes us feel, right?
MATT: Yeah, particularly the ones on that latter half where, you know, they just take out money from your account every month, especially without notification. I mean, state by state, there are specific rules on how you have to go about having the consumer or the client agree to those things. You know, as a business, you’ve got to make sure that you follow those because you don’t want to get in trouble.
NASIR: Yeah.
MATT: But, the more notice, the better – the general rule of thumb, I guess.
NASIR: Well, this is becoming a long episode so we better end it quickly.
MATT: Yeah.
NASIR: I think we may have to cut out your story.
MATT: That’s fine. It wasn’t that good.
NASIR: No, yeah, what I mean cut it out and make that the episode. So, that’s it – just your story.
MATT: It would be confusing for the listeners.
NASIR: All right, well, thanks for joining us, though.
MATT: Yeah, keep it sound and keep it smart.

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