Business-Minded Legal Solutions

Automatic renewal clauses: don’t trap your company in an unwanted business relationship

Virtually all of us deal with contracts on a regular basis – from rental leases to employment agreements. One feature that has become increasingly common in many contracts – particularly for subscription services – is the automatic renewal clause. This is a provision that automatically renews the terms of the agreement after the termination date unless the user specifically cancels within a stipulated time frame prior to this date.

Such clauses have their advantages – for businesses and end users alike. For example, such a clause can help to ensure that you don’t suddenly lose your phone service if you forget to renew your contract. It can also help a business to have a more reliable income stream.

However, such clauses also offer the potential for abuse. For instance, if an automatic renewal clause is hidden away in fine print within a contract, a you may not realize what you’re signing up for. In an effort to address this concern, the Federal Trade Commission has created some regulations regarding such clauses.

Federal guidelines

The Restore Online Shoppers Confidence Act (ROSCA) defines how automatic renewal clauses (referred to as “negative option features”) must appear in contracts for goods and services purchased online:

  • The automatic renewal clause must be clear and conspicuous – for example, written in all caps or in a way that otherwise stands out from the rest of the contract. This must be disclosed before the buyer is prompted to provide their billing information.
  • The seller must obtain express informed consent from the consumer before processing payment.
  • There must be a simple method for the consumer to cancel the automatic renewal.

Only part of the solution

While the above guidelines go a long way toward making automatic renewal clauses more conspicuous, it’s worth noting that these rules only apply to online shopping – and not to the vast majority of business transactions.

Building your business involves establishing relationships with any number of external vendors. You may have rented a copier, subscribed to a cloud service or signed up for bottled water delivery. Virtually every business relationship you make will involve a contract.

You may have signed a contract without realizing that an onerous automatic renewal and long notice of termination period were buried in the terms and conditions. This problem is further compounded by liquidated damages provisions, which make early termination very expensive. If you opt to cancel services or switch providers, you may be shocked to discover you’re actually locked into a multi-year commitment.

This is why it’s so important to have counsel review even routine contracts before signing. Taking this step is a responsible business practice – as it can help you avoid costly mistakes.