Years ago I worked for a large retailer, with hundreds of stores across the U.S. Unknown to the legal department, many of these stores had, individually, entered into five-year contracts with a company providing piped-in background music (these were the days before Pandora and Spotify). Each contract had a clause providing that it would automatically renew for additional five-year terms unless we notified the company well in advance of the termination date. Of course, in the corporate office we didn’t know about these contracts to track them, and because of store manager turnover, the stores forgot about them, so the contracts kept renewing and we kept incurring the expense. It was a big job to bring this under control.
What is an Auto-Renewing Contract?
Why tell this tale? Many business contracts contain similar “auto-renew” or “evergreen” clauses, similar to this:
This agreement will automatically renew at the end of the then-current term, for an additional term of [X] years, unless either party gives the other written notice of termination at least 30/60/90 [it varies] days prior to the end of the current term.
Obviously, the party that drafted the contract, and is providing the service, the software, etc., likes auto-renew provisions, and all too often the other party, making the purchase, overlooks it or fails to push back.
If a renewal term is brief, say a few months, or even a year, and is limited to just one renewal term, it may be acceptable. However, if the number of renewal terms is open, or the renewal periods are long (more than a year), a company can become trapped in a contractual relationship that is too expensive, no longer meets its needs, or is providing unsatisfactory products or services.
Where are Auto-Renew Clauses Commonly Found?
There are certain types of contracts that often contain auto-renew language. These include software licenses, leases, cable, phone, and internet agreements, equipment leases (think photocopiers and postage meters), and other service agreements. Not paying attention to these clauses can result in a company getting trapped into a long-term contract that it may not want. Sometimes they are hidden deep in the language of the contract, so it is important to read the entire agreement (paper or online) carefully before signing.
How to Deal with Auto-Renew Clauses?
I always recommend to client companies that they think carefully about whether an auto-renew provision meets their needs. If not, push back on the provision, either to have it deleted or to include a termination for convenience at any time after the initial renewal.
If you cannot get the other party to delete the auto-renew clause or agree to changes that make it more fair, it is important to have some system to manage important contract issues, such as when you need to give notice to terminate, etc. The system can be as simple as a spreadsheet, or as sophisticated as a dedicated contract management system, depending on the volume of contracts the company has, but some method is important. Don’t rely on people’s memories, especially when staff turnover is a reality.
Can you get out of an auto-renewing contract?
As we lawyers like to say, it depends. Some companies that include auto-renew clauses in their contracts may be open to an earlier termination, or some type of compromise (usually at a price). Others, especially software licensors that base their business model on recurring subscription revenue, may not be agreeable. If you decide to just stop payment, the other party may sue, and courts tend to be unsympathetic to business parties in such cases, telling them that it is assumed that the parties to a B2B contract are sophisticated parties with access to counsel.
Some states have enacted laws regulating the use of auto-renew clauses, requiring the provider to give notice or the upcoming renewal, or putting the clause in conspicuous print, but these protections apply mainly in the area of consumer contracts, not B2B. For this reason, it is vital to read contracts carefully and have an attorney review them if you are not sure about the language or how best to push back.
If you have additional questions, please contact Mark Spitz at Spitz Legal Counsel LLC, at mark@spitzlegalcounsel.com or by phone at 720.575.0440.