Most SaaS vendors rely on automatic renewal terms — and love them. If the customer doesn’t think to cancel shortly before the term ends, the contract automatically renews. But the U.S. states have begun to clamp down on auto-renewal in B2C contracts — in agreements with consumers. South Dakota passed a restrictive law this summer, joining California, Vermont, D.C., and many more. This post offers best practices for addressing those laws in online contracts.
In theory, we should all learn all fifty states’ laws (as well as foreign laws), since online companies operate everywhere. But that’s rarely practical. The best practices below address the strictest of the states’ B2C auto-renewal laws. (They not meant for B2B contracts, where rules are much looser.)
- Prominent Notice: In the contract, inform the consumer-customer that the agreement automatically renews. Explain when and how — in clear, simple terms. And put that notice in all caps or bold. You should also put the notice close to the “I agree” click-box — ideally right on top of it.
- Arbitration with a Class Action Waiver: Have each side submit to binding arbitration in the contract, waiving the right to a court. And have each waive the right to a class action. You don’t want to find yourself on the wrong side of an auto-renewal class action.
- Cancellation System: Create an easy system for the consumer-customer to cancel online — like by sending an e-mail or filling out a very short wizard. Don’t try to make cancellation difficult. Don’t hide the ball.
- E-Mail Acknowledgement: Right after the consumer-customer executes the agreement, send a follow-up e-mail. Then send a similar e-mail between 30 and 60 days before the cancellation deadline. These notices should repeat the auto-renewal terms and deadlines and explain how to cancel. And if you can’t send an e-mail, make sure the message gets through somehow, like by text or letter.
- No Automatic Renewal for More Than a Year: North Dakota won’t allow auto-renewals for more than year for merchandise sales contracts. And in general, consumer-protection rules and courts look with suspicion on terms longer than 12 months.
- Notice of Amendments: Whether or not they auto-renew — and whether or not they serve consumers — online vendors should require that customers execute any new or revised contract. (See Chapter III.S of The Tech Contracts Handbook.) On top of that, if you change your contract terms related to B2C auto-renewal, provide another e-mail acknowledgement, like the one in bullet 4 above. Make sure the customer has a crystal clear, prominent explanation of the revised auto-renewal terms.
A final recommendation: recognize that the list above may not be enough. If you’re serving consumers, keep informed about auto-renewal laws. A firm called Faegre Baker Daniels has created a guide: Automatic Renewal Laws in All 50 States. It looks like a great resource.
David Tollen is the author of The Tech Contracts Handbook, the American Bar Association’s bestselling manual on IT agreements. He is an attorney, expert witness, and the founder of Sycamore Legal, P.C., a boutique IT, IP, and privacy law firm in San Francisco. His practice focuses on software licenses, cloud computing agreements, and other IT transactions. David also serves as a lecturer at U.C. Berkeley Law School. Finally, he is the founder of Tech Contracts Academy and our primary trainer.
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