Q: I recently called our company’s software vendor to cancel our license agreement, but was told that it does not allow us to simply cancel. In fact, our vendor claims that our license automatically renewed and we are contractually obligated to continue paying for the software (which we do not use) for another full year. How is this possible?
A: The short answer is that the terms and conditions of the software license contain an “automatic renewal” or “evergreen clause.” An evergreen clause provides that the term of an agreement will automatically renew for some period of time unless one party provides notice to the other party that it does not wish to renew.
A typical evergreen clause may read something like this:
Each Term shall automatically renew for subsequent periods of the same length as the initial Term unless either party gives the other written notice of termination at least thirty (30) days prior to expiration of the then-current Term.
Under this clause, if the customer does not provide timely written notice, the contract automatically renews. These types of clauses may be included in various contracts, but are particularly prevalent in service, distribution and supply contracts.
The question for individuals and businesses who are parties to contracts containing an evergreen clause is whether such clauses are enforceable. The answer to that question depends on the nature of the contractual relationship between the parties, the subject matter of the contract and, notably, the jurisdiction governing the contract.
There are many court decisions across the country addressing the enforceability of evergreen clauses. In most cases, particularly in the context of business-to-business contracts, courts strictly construe these provisions where the contract language is clear and unambiguous, and uphold the automatic renewal clause.
While case law may favor those parties attempting to enforce these clauses, in recent years many state legislatures have passed laws that regulate automatic renewal clauses. Indeed 22 states have now enacted at least some form of statutory restriction on these contractual provisions.
For example, Illinois, one of the first states to regulate automatic renewal, requires clear and conspicuous disclosure of the automatic renewal and additional written notice, including cancellation instructions, within 30 to 60 days of the cancellation deadline. The Illinois statute broadly covers most consumer products and services. California and Connecticut have similar statutes. Other states, such as Georgia and Florida, only relate to service contracts. Other states may target specific goods or services. New Hampshire is one such state, having enacted specific legislation addressing health club memberships (RSA 358-I:5).
The failure to comply with statutory requirements in states that have enacted legislation regulating automatic renewals may affect the enforceability of these clauses in contracts.
Companies doing business in states that have statutes regulating these clauses should be mindful of recently passed statutes so as to ensure compliance. Similarly, parties who find themselves unwillingly bound to another contract term as a result of an evergreen clause should also be aware as these statutes may provide defenses against an automatic renewal claim.