By Dean Kaplan, The Kaplan Group
The SaaS business model is dependent on auto renewals. Auto renewals provide you with a reliable cash flow and they provide your clients with reliable service. But they are also a frequent source of confusion and disagreement between client and vendor. Many clients feel taken advantage of by auto renewal arrangements that they do not completely understand. In response to these concerns, several states have recently passed new laws that more clearly define the limits and expectations of auto renewal contracts. If your business uses auto renewal, you should become familiar with some of these newer laws.
Since July 2019, Vermont has had the strictest auto renewal law in the country. Some key elements of the law:
- For a subscription or contract with an initial term of one year or more that renews for a subsequent term that is longer than one month, the company offering the automatic renewal must clearly state the terms of the automatic renewal provision in plain, unambiguous language in bold-face type.
- Companies must obtain two consents from the client. The client must opt into the automatic renewal subscription or contract, and also, to the specific automatic renewal provision.
- Companies must also offer consumers an easy way to cancel their subscriptions or contracts.
- Companies must send clients a reminder 30 to 60 days prior to the automatic renewal.
D.C.’s newest laws took effect in March 2019. Some key elements of the law:
- For free trial offers of one month or more that automatically switch to paid services, a company must obtain the client’s consent to the automatic renewal before charging the consumer for the automatically renewing subscription or contract.
- A company must notify a consumer of the automatic renewal between one and seven days before the expiration of the free-trial period.
- A company must clearly and conspicuously disclose the fact that there is an auto renewal and outline the appropriate cancellation procedures.
- For auto renewals of a year or more, companies are required to send a notice between 30 to 60 days before the cancellation deadline for each renewal.
North Dakota’s new laws took effect at the end of July 2019. Some key elements:
- Companies must clearly present the terms of any auto renewals.
- Companies must provide something that can be saved by the client (such as an email or letter) that includes an acknowledgment of the automatic renewal terms and information about how to cancel.
- Companies need to provide a cost-effective, timely and easy way to cancel the subscription.
- For subscriptions that renew for more than six months after the initial term, the company must give the consumer clear and conspicuous written notice between 30 and 60 days prior to the end of the current subscription term.
- The law also allows the attorney general to bring an action against noncompliant companies.
The states mentioned above are just the newest auto renewal laws. Approximately half of the states in the country have their own laws that govern these important contracts. In addition to state laws, the Federal Trade Commission (FTC) also has rules regarding what’s considered fair in auto renewals. If the laws of your state allow, we also recommend including an acceleration clause in your auto renewal contracts. This clause will allow you to collect the full amount due if your client defaults on a payment. An acceleration clause can be a valuable negotiation tactic if you wind up sending a client to collections.
Whether or not the laws in your state require you to do so, having clear and obvious terms as well as sending renewal notices is good business practice. If you’re using auto renewal contracts it’s important that you consult with a lawyer and discover which laws are relevant to your business.
About The Author
Dean Kaplan, President of The Kaplan Group, has 35 years of business leadership, training, and consultation to many industries including software companies.