Many Software-as-a-Service (“SaaS”) businesses have automatic renewal provisions in their contracts. There are obvious advantages to these provisions, such as reliable cash flow and avoiding the employee, managerial, administrative, and other costs associated with repeated contract renewal negotiations. However, SaaS businesses must be aware of State and federal automatic renewal statutes and their requirements.
The SaaS Lawyers here at Revision Legal recommend that SaaS companies keep abreast of changing laws with respect to automatic service contract renewals and be prepared for quick action if necessary. Further, SaaS businesses should take time to audit their contracts to determine if there are auto-renewal provisions in their contracts, how many, and of what type. If services are being provided to “consumers,” then be aware that the requirements of the auto-renewal statutes are applicable. Finally, SaaS businesses should evaluate whether auto-renewal provisions are necessary and/or optimal and under what circumstances.
Currently, the relevant legal issue is whether SaaS services are being provided to consumers or to businesses. About half of the States have enacted statutes that regulate automatic renewal provisions. Those statutes do not apply to business-to-business (“B2B”) contracts and services. Indeed, some States — such as Illinois — explicitly exclude business-to-business contracts. See 815 ILCS 601/20(c).
However, there is political pressure to expand the application of the protections to B2B circumstances. The argument is that small businesses are, in effect, “consumers” and, thus, deserve protection from unfair and deceptive auto-renewal business practices. But, as noted, some SaaS companies may be providing services to “consumers” — as defined by these statutes — in industries like video gaming and eSports. SaaS businesses must evaluate whether they are providing services to “consumers” and, if so, must ensure that they are in compliance with the statutes.
At the federal level, the relevant regulatory agency is the Federal Trade Commission (“FTC”). Of note in regard to auto-renewals is the FTC’s proposed changes to its Rule with respect to negative options. An auto-renewal provision is deemed a “negative option” in the sense that no action — a negative — is necessary for the contract to continue. The proposed updated Rule would explicitly apply to business-to-business contracts. As of late 2024, the proposed new Rule has not gone into effect.
Complying with auto-renewal laws may not be difficult
While the FTC’s proposed updated Rule and the State-level statutes are different and nuanced, there are some significant similarities. The general idea is that those affected by the auto-renewal provisions must give consent, be given clear disclosures, and be provided with “easy” methods of terminating the auto-renewals. So, under the New York and California regulations, the following is required at minimum:
- Conspicuous — and clear — disclosure/notice of the auto-renewal term
- A mechanism for specifically consenting to the auto-renewal terms
- An easy mechanism — as easy as the mechanism used for consenting — for canceling the auto-renewal
As noted, there are some variations in the statutes. For example, under the Vermont statute, two consents are required — one for the auto-renewal and a separate one for the terms of the auto-renewal. Further, many statutes require some form of Notice before the auto-renewal begins.
Contact the SaaS Business Attorneys at Revision Legal
For more information, contact the experienced SaaS Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.
