Could an Automatic Contract Renewal Land Your Business in Hot Water?

If your business includes automatic renewal provisions in your service contracts, you could be setting yourself up for unintended liability. States across the country are increasingly passing legislation that limits or conditions the use of such provisions.

Automatic contract renewal clauses typically state that a service will automatically be renewed for a specified price on a certain date unless one party to the contract provides advance notice of its intention to terminate the agreement. Practically speaking, the provisions allow companies renew a subscription service by simply charging the customer’s credit card, which is kept on file.

These provisions are used in a variety of industries, ranging from web hosting providers to office suppliers to magazine publishers. As the business model has gained traction, so has regulation. In most cases, the laws are intended to address cases where customers claim that they were not aware of or did not authorize automatic renewals or find themselves in a situation where they are indefinitely “married” to one service provider.

California and Oregon have some of the strictest laws on the books. Companies must provide clear and conspicuous notice of automatic renewal provisions. Prior to renewal, the laws also require businesses to make additional disclosures, provide easy to use cancellation procedures, and obtain affirmative consent from the consumer. The failure to comply with these requirements can result in the service or product being classified as an “unconditional gift” to the customer.

In New York, an entity seeking to enforce an automatic renewal provision contained in a “contract for service, maintenance or repair to or for any real or personal property” must comply with certain requirements. Most importantly, the company must provide prior written notice of automatic renewal, which must be served personally or by certified mail between fifteen and thirty days prior to the termination notice deadline.

In New Jersey, legislative attempts to regulate automatic renewal provisions have so far been unsuccessful. However, businesses that operate out-of-state should be mindful of these regulations so as to ensure compliance.

If you have any questions about this post or would like to discuss your company’s service contracts, please contact me or the Scarinci Hollenbeck attorney with whom you work.