Tag: Automatic renewal

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

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My early experiences with automatic contract renewals weren’t warm and fuzzy ones.  Growing up, I recall Columbia House’s ageless pitchman Dick Clark breathlessly hawking “13 tapes for a dollar!” (or was it a penny?) offers across the pre-cable television airscape. I’d frantically sign up, the cassettes would soon arrive and – for a 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!  [My favorite Kansas songs you ask? (humor me), those would be “What’s On My Mind,” “Portrait,” “Miracles Out of Nowhere,” and “Hold On” (from the post-Steve Walsh era)]  

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.

 

“Never Ending”(?) Contract Still Definite Enough to Be Enforced – 7th Circuit

Burford v. Accounting Practice Sales, Inc. 2015 WL2261108 (7th Cir. 2015), deftly handles some tricky and recurring contract interpretation and enforcement issues that arise where a business agreement lacks a clear end date.

In the case, the plaintiff sued defendant for terminating a written year-to-year (and automatically renewing) contract for the plaintiff to market defendant’s accounting practice sales services in various states throughout the Southern U.S.  The agreement provided that the defendant could not terminate the contract “unless it is violated by [plaintiff].”  The district court found this language signaled an indefinite (and therefore, at-will) contract and granted summary judgment for the defendant.  The plaintiff appealed.

Held: Reversed.

Q: How Come?

A: Because in Illinois, indefinite contracts – contracts with no objective termination date – aren’t favored but can still be enforced in certain cases.  This is because parties should be free to order their business affairs as they see fit and unless there is fraud, duress or undue influence, a written contract should be enforced as written.

Parties can get around indefinite duration provisions by specifically spelling out grounds for termination of a contract.  A contract that lacks a fixed duration and that can only be cancelled for a specific event or “for cause” can be enforced and won’t be treated as an at-will contract (one that can be ended at any time for any reason) so long as the event or cause can be objectively gauged.

Here, the contract language negated its at-will character.  It could only be terminated if the plaintiff breached (“unless” he violated it).  Otherwise, the contract kept renewing every year.  The court found this termination provision specific enough to be enforceable by the plaintiff.  Since there was no evidence that the plaintiff breached the contract – defendant unilaterally ended the contract – summary judgment for the defendant was improper.

Policy concerns also supported the court’s decision.  It noted that if the defendant was allowed to freely terminate the contract like it did here, it would deprive the plaintiff of the economic basis of his bargain.  Meaning the plaintiff could spend a lot of time and money developing and marketing the defendant’s brand and then once terminated, he could be replaced by someone who could capitalize on all his work.

Conversely, the defendant would suffer if the plaintiff could escape the contract with impunity since the plaintiff could leverage the good will and relationships he fostered over a several-year period and take that good will to another company or use it himself and against the defendant.  The defendant was protected from this contingency by inserting a one-year non-compete and by allowing for “good cause” termination; defined as poor sales performance.

Since the parties contracted around the indefinite duration problem by allowing for termination only if the plaintiff violated the contract, it wasn’t an at-will contract.

Afterwords:

1/ The case gives a good illustration of the problems that arise where parties don’t specify when and in what situation a contract ends.  By taking some pains at the outset to make clear when a contract starts and ends, and establishing what constitutes a breach of “cause” for termination, the contract participants can likely avoid future litigation when one side decides to walk away;

2/  Substantively, the case amplifies that a contract lacking an objective termination date will be treated as at-will contract and can be terminated by any party at any time;

3/ If a contract can be terminated for a single specified reason, this will likely make the contract enforceable even though the contract lacks an objective termination date.