‘It Ends When I Say So!’ – Automatically Renewing Contracts in Illinois

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My early experiences with automatic contract renewals were not warm and fuzzy ones. I recall in the early 1980s (can I really be that um, seasoned?) when Columbia House’s ageless pitchman Dick Clark breathlessly hawked offers for “13 tapes for a dollar!” (or was it a penny?)  I’d frantically sign up, the cassettes would soon arrive and – for a little while, at least – Eureka! (this was pre-Nirvana of course.)

But once the novelty wore off, I continued to receive tapes along the lines of Kansas’ Point of Know Return (Kerry Livgren anyone?) or Loverboy’s Get Lucky (remember Mike Reno??) for the next several months even though I never ordered them!  

Then there was that never-ending People magazine subscription.  The time and energy I spent trying to extricate myself from that vice-grip subscription definitely did not justify my fleeting moments of guilty-pleasure fluff-reading. The culprit in both examples: automatically renewing contracts.

The Illinois Automatic Contract Renewal Act, 815 ILCS 601/1 et seq. (the “Act”), is the legislature’s attempt to protect unwitting consumers from being locked into long-term contracts against their will.

The Act only applies to consumer (not business-to-business contracts) entered into after January 1, 2005.  The Act provides that if a contract is subject to automatic renewal, the renewal clause must be clear and conspicuous manner.  815 ILCS 601/10. In addition to the B2B exclusion, the Act also doesn’t apply to contracts involving banks, savings and loan associations or credit unions. 815 ILCS 601/20(c), (d).

 The caselaw interpreting the Act does not specifically define “clear and conspicuous”.  To give content to the clear and conspicuous requirement, courts look to other statutes for guidance.  The Uniform Commercial Code (UCC) defines “conspicuous” as “so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.”  810 ILCS 5/1-201(10). 

In the case of a warranty, the court looks to (a) how many times a customer was made aware of the notice, (b) whether it was on the front or the back of the page, (c) whether the language was emphasized in some way (d) whether the notice was set off from the rest of the document so as to draw attention to it; and (e) font size. 

The Seventh Circuit’s clear and conspicuous calculus includes: whether a reasonable person would notice it; how many times a customer was made aware of the notice; whether it was on the front or back of the page; whether the language was emphasized in some way; whether the notice was set off from the rest of the document so as to draw attention to it; and font size.

The issue is not whether the disclaimer (or renewal term) could have been more conspicuous, but whether the term is presented in a manner to draw attention to it.

Illinois courts have enforced contract disclaimers that appear in ALLCAPS, bold-faced and unambiguous and where the term is set apart from the rest of the contract’s text. 

Section 10 of the Act requires a contract party to send written notice of automatic renewal and the consumer’s cancellation rights where (a) the contract’s terms is 12 months or more and (b) the renewal period exceeds one month. The renewal notice must be given within 30-60 days before the contract’s expiration.

Example: If a contract automatically renews on 12/1/13, and the cancellation deadline is 11/1/13 – notice must be issued no earlier than 9/1/13 and no later than 10/1/13.

As for remedies, an Act violation gives rise to a private cause of action under the Consumer Fraud Act.  815 ILCS 601/15.  This is significant because the Consumer Fraud Act provides for prevailing-party attorneys’ fees.  The Act does  provide a safe harbor to a business that violates the Act and takes documented corrective actions.  815 ILCS 601/10(c).

The take-away:  If you’re a business entering into a contract with a consumer, and the contract automatically renews, the caselaw suggests that for the renewal term to be clear and conspicuous, and therefore enforceable, the provision: (1) should not be hidden amid boilerplate legalese,  (2) should be in a type size at least as large (if not larger than) the surrounding language, (3) the term should be in ALLCAPS and preferably in bold type face and (4) should appear on the first page or otherwise set apart from the rest of the contract.

 

‘Inquiry Notice’ Element of Discovery Rule Dooms Plaintiff’s Fraud in Inducement Claim – IL First Dist.

The First District recently discussed the reach of the discovery rule in the course of dismissing a plaintiff’s fraud claims on statute of limitations grounds.

The plaintiff in Cox v. Jed Capital, LLC, 2016 IL App (1st) 153397-U, brought a slew of business tort claims when he claimed his former employer understated its value in an earlier buy-out of the plaintiff’s LLC interest.

Plaintiff’s 2007 lawsuit settled a year later and was the culmination of settlement discussions in which the defendants (the former employer’s owner and manager) produced conflicting financial statements.  The plaintiff went forward with the settlement anyway and released the defendants for a $15,000 payment.

In 2014, after reading a Wall Street Journal article that featured his former firm, plaintiff learned the company was possibly worth much more than was previously disclosed to him.  Plaintiff sued in 2015 for fraud in the inducement, breach of fiduciary duty and breach of contract.

The trial court dismissed the claims on the basis they were time-barred by the five-year limitations period and the plaintiff appealed.  He argued that the discovery rule tolled the limitations period and saved his claims since he didn’t learn the full extent of his injuries until he read the 2014 article.

Result: Dismissal of plaintiff’s claims affirmed.

Q: Why?

A: A fraud claim is subject to Illinois’ five-year statute of limitations codified at Section 13-205 of the Code of Civil Procedure.  Since the underlying financial documents were provided to the plaintiff in 2008 and plaintiff sued seven years later in 2015.  As a result, plaintiff’s claim was time-barred unless the discovery rule applies.

In Illinois, the discovery rule stops the limitations period from running until the injured party knows or reasonably should know he has been injured and that his injury was wrongfully caused.

A plaintiff who learns he has suffered from a wrongfully caused injury has a duty to investigate further concerning any cause of action he may have.  The limitations period starts running once a plaintiff is put on “inquiry notice” of his claim.  Inquiry notice means a party knows or reasonably should know both that (a) an injury has occurred and (b) it (the injury) was wrongfully caused.  (¶ 34)

Fraud in the inducement occurs where a defendant makes a false statement, with knowledge of or belief in its falsity, with the intent to induce the plaintiff to act or refrain from acting on the falsity of the statement, plaintiff reasonably relied on the false statement and plaintiff suffered damages from that reliance.

Plaintiff alleged the defendants furnished flawed financial statements to induce plaintiff’s consent to settle an earlier lawsuit for a fraction of what he would have demanded had he known his ex-employer’s true value.  The Court held that since the plaintiff received the conflicting financial reports from defendants in 2008 and waited seven years to sue, his fraud in the inducement claim was untimely and properly dismissed.

Afterwords:

This case paints a vivid portrait of the unforgiving nature of statutes of limitation.  A plaintiff has the burden of establishing that the discovery rule preserves otherwise stale claims.  If a plaintiff is put on inquiry notice that it may have been harmed (or lied to as the plaintiff said here), it has a duty to investigate and file suit as quickly as possible.  Otherwise, a plaintiff risks having the court reject its claims as too late.

Anticipatory Repudiation: Illinois Court Examines Doctrine in Real Estate Distpute

The home sellers’ failure to plead the buyers’ anticipatory repudiation of a real estate contract spelled defeat in Kelly v. Orrico, 2014 IL App (2d)  130002, a recent Second District case. 

In Kelly, the plaintiffs and defendants – who happened to be friends and neighbors (they lived on the same street) – entered into a real estate contract for plaintiffs to sell their house to the defendants for $1.2M.  

When defendants couldn’t sell their home, plaintiffs contracted with another buyer.  That buyer defaulted and plaintiffs eventually sold the house for $200,000 less than the contract price with the defendants.

Plaintiff sued defendants for breach of the real estate sales contract seeking to recover the $200,000 difference between the contract price with defendants ($1.2M) and the sales price to the new buyer ($1M). 

After a bench trial, the court ruled that the defendants anticipatorily repudiated the real estate sales contract and awarded plaintiffs damages of $150,000 (the $200K difference in the underlying contract price and the sales price to the new buyer minus the $50,000 earnest money plaintiffs kept after the first buyer defaulted).  Defendants appealed.

Held: Reversed.

Rules/Reasoning:

Anticipatory repudiation denotes a “party’s clear manifestation of its intent not to perform under a contract.”  The party claiming anticipatory repudiation must show more than an “ambiguous implication” of nonperformance. He has to demonstrate the other party made it very clear he won’t perform.  (¶¶ 29-30).

Here, plaintiffs didn’t plead anticipatory repudiation; they only alleged breach of contract.  This was a mistake because any proof at trial that the defendants repudiated the contract didn’t help the plaintiffs since an anticipatory repudiation claim was absent from the complaint. 

While Code Section 2-616(c) allows a party to amend pleadings at any time (even after judgment) to conform the pleadings to the proofs, plaintiff never filed a motion to amend their complaint to allege anticipatory repudiation.

The plaintiffs didn’t substantively prove anticipatory repudiation either.  The Court described anticipatory repudiation as a doctrine not to be taken lightly and where one repudiates a contract – by clearly indicating that he won’t perform – the other party to the contract is excused from performing or he may perform and seek damages for breach. 

The Court found that the defendants actions indicated, at most, ambivalence as to whether they would buy plaintiffs’ house. 

The plaintiffs offered no proof at trial that defendants tried to terminate the contract or indicated they wouldn’t proceed to closing.  Significantly, the Court found that defendants’ failure to respond to plaintiffs’ attorney’s letter declaring defendants in default didn’t constitute a clear manifestation of intent not to buy plaintiffs’ home.  (¶30).

Take-aways:

This case illustrates anticipatory repudiation’s strict pleading and proof elements.

The case’s procedural lesson here is clear: a litigant should move to amend his pleadings when the proofs at trial don’t match up.  Here, it wouldn’t have made a difference though.  The Court found defendants’ actions weren’t definite enough to rise to the level of a clear-cut intention not to proceed to closing.