Many business models rely on auto renewal contracts. Auto renewals provide a business with a reliable cash flow and they provide clients with reliable service. No one wants to come in on Monday morning to discover that the software they depend on is no longer available to them. However, auto renewals are also a frequent source of confusion and disagreement between client and vendor. Many clients do not read their auto renewal contracts carefully and come to feel taken advantage of by them. We often handle claims from companies that result from unpaid invoices related to auto renewals.
Several states have recently passed new laws that more clearly define the limits and expectations of auto renewal contracts. If your business uses auto renewal either as a client or provider, it’s important that you become familiar with the laws of the states where you do business. Below are three of the newest state laws which are representative of the types of terms many states now require. They include provisions on how the auto-renewal language must be presented at the time the customer signs up, notice requirements, ease of cancellation requirements, and in one case clearly states that failure to comply with the law makes the product or service provided a gift to the customer.
North Dakota (as of July 2019)
A person that sells or offers to sell merchandise for a specified period under an agreement containing a provision for automatic renewal shall:
(a) present the terms of the automatic renewal offer in a clear and conspicuous manner before a subscription or purchasing agreement is fulfilled and in proximity to the offer;
(b) provide an acknowledgement that includes the terms of the automatic renewal offer and information regarding how to cancel in a manner which is capable of being retained by the buyer; and
(c) provide a cost-effective, timely and simple procedure for cancellation which must be described in the acknowledgement.
A person that sells or offers to sell merchandise for a specified period under an agreement that contains a provision for automatic renewal for a period of more than six months at the end of the time period specified in the agreement must provide a clear and conspicuous written notice to the buyer stating that the buyer may cancel the contract and avoid automatic renewal. An agreement for sale of merchandise in violation of this chapter is unenforceable and void and will be considered an unconditional gift to the buyer. The attorney general may enforce this chapter and a person aggrieved by a violation of this chapter may bring an action to enjoin the violation or for restitution, or both.
Vermont (as of July 2019)
A seller making the automatic renewal or continuous service offer must:
(1) clearly and conspicuously state the terms of the automatic renewal provision in plain, unambiguous language in bold-face type;
(2) require the consumer to affirmatively opt in to the automatic renewal provision in addition to accepting the contract; and
(3) provide a written or electronic notice to the consumer who opts in not less than 30 (but no more than 60) days before the earliest of the (i) automatic renewal date; (ii) the termination date; or (iii) the date by which the consumer must provide notice to cancel the contract, that includes:
a. the date that the contract will terminate and a clear statement that the contract will renew automatically unless the consumer cancels the contract on or before the termination date;
b. the length and any additional terms of the renewal period;
c. the method or methods by which the consumer can cancel the contract; and
d. contact information for the seller.
Definition of “Clear and Conspicuous” Clear and Conspicuous means in plain, unambiguous language in bold-face type.
Penalty for Failure to Comply: Violations of this section are an unfair and deceptive act in commerce in violation of Section 2453 of the V.S.A.
Washington, D.C. (as of March 2019)
The seller must notify the consumer of the first automatic renewal (and annually thereafter) by (a) first class mail,
(b) email, or
(c) another easily accessible form of communication, such as text message or a mobile phone application, if the consumer specifically authorizes the person to provide notice in such form. Such notice must be sent to the consumer no fewer than 30 (but no more than 60) days before the cancellation deadline for the first automatic renewal (and the same annually thereafter), and it must clearly and conspicuously disclose:
(1) that unless the consumer cancels the contract, it will automatically renew;
(2) the cost of the goods or services for the term of the renewal;
(3) the deadline by which the consumer must cancel the contract to prevent the automatic renewal; and
(4) the methods by which the consumer may obtain details of the automatic renewal provision and cancellation procedures, including by contacting the seller at a specified telephone number, email address, or by another easily accessible form of communication. If the notice is provided by email, include active weblinks to allow the consumer to cancel the automatic renewal. Additionally, if the seller provides a person a free trial of a good or service with a term of one month or more and the contract will automatically renew at the end of the free trial period, the seller must notify the consumer of the automatic renewal between one and seven days before the expiration of the free trial period, and obtain the consumer’s affirmative consent to the automatic renewal before charging the consumer for the automatic renewal.
Definition of “Clear and Conspicuous” “Clearly and Conspicuously” means in larger type than the surrounding text, in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks, in a manner that calls attention to the language and is visually proximate to any request for the consumer’s consent.
Penalty for Failure to Comply: A violation of this title shall render an automatic renewal provision void and terminate the contract at the time in which the violation occurred, and it will also constitute a violation of the District of Columbia Consumer Protection Procedures Act (unless the person can demonstrate a good faith effort to comply, including establishing written procedures).
Several states do not currently have auto renewal laws on the books. These states include: Alabama, Alaska, Delaware, Idaho, Indiana, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming.
The other states in the country have their own laws that govern these important contracts. In addition to state laws, the Federal Trade Commission (FTC) also has requirements.
You can find a complete state-by-state list of auto renewals here.
With so many states having different terms with respect to advance notice, vendors are going to need to have an automated system that takes into account the state where their customer resides in order to consistently comply. Failure to do this could have expensive consequences for companies that offer expensive services with auto-renewal provisions. Customers could even continue to use your service, not pay, and then argue it was a gift if they no longer need the service.
Recently our company experienced auto-renewals of a couple low cost software services that we no longer use. We didn’t receive advance notice. When notified of the auto-renewal and credit card charge, we requested cancellation and refund of the charge by simply responding to the email notificatoin. In both cases this request was honored within 2 business days. It didn’t use to be that way. So it appears that some companies have made the decision to not bother trying to comply, but simply provide a refund if there is a request. That probably results in more auto-renewals than if they did provide notice and people chose to cancel.
But if your contract with your customer is worth $10,000 or $250,000, it probably makes more sense to be proactive, comply with the law, and retain a solid legal position in the event there is a subsequent payment issue. We have already had several claims that we had to close without collecting because the customer cited state law that was violated.
If the laws of your state allow, we recommend including an acceleration clause in your auto renewal contracts. If your client defaults on a payment, this clause will allow you to collect the full amount due under the entire term of the contract, not just the one payment that became delinquent. This can be a valuable negotiation tactic if you wind up sending a client to collections.
At Kaplan Group we don’t want to only help you when you have a client who isn’t paying their bills. We want to be an ongoing resource for your business, helping you establish contract terms that help you get paid. Let us know how we can help.