Is your automatic renewal clause enforceable?

In All, Technology by lowndestech

By: Alex Simser

Automatic renewal clauses, or “evergreen clauses,” are a frequent occurrence in contracts of all kinds and are becoming increasingly prevalent as businesses transition from traditional methods of selling products and services to various “as-a-Service” (i.e., SaaS, PaaS, IaaS) and subscription-based business models. These types of clauses typically state that the contract automatically renews if the customer does not provide notice of termination prior to the renewal. In the typical case, a year or more goes by after the customer signs the contract, the service goes downhill, the customer misses the termination deadline, and then they are stuck with a vendor or service they don’t want or need.

Or are they? Apparently unbeknownst to many as-a-Service providers and their customers, both state and federal law restrict automatic renewal clauses, particularly in the consumer context. Florida Statute §501.165 requires that automatic renewal provisions in service contracts be clear and conspicuous, and that the consumer be notified no less than 30 days nor more than 60 days before their contract automatically renews, if the initial contract is 12 months or more and if it automatically renews for more than 1 month.

Additionally, the Federal Trade Commission has attacked automatic renewal clauses in recent years through enforcement of the Restore Online Shoppers Confidence Act (“ROSCA”). ROSCA requires that automatic renewal clauses (a.k.a. “negative option features”) for goods or services purchased on the Internet be clear and conspicuous, that the business obtain the consumer’s express informed consent prior to charging their card, and that the business provide simple mechanisms for the consumer to cancel.

What constitutes “clear and conspicuous” is not specifically defined and depends on a number of factors, however, at a minimum, the automatic renewal clause should be in all caps or otherwise distinguished from the rest of the contract.

Automatic renewals can serve a valuable purpose for both consumer and businesses by way of avoiding lapses in service, consistent billing and the like; however, being up-front and easy to handle is not only a good business practice that will enhance a business’s reputation, but it is also required by law.