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May 7, 2018
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Pennsylvania businesses have so far been spared from complying with restrictions on the enforceability of automatic contract renewal terms.  Automatic renewal terms are present in nearly every service contract and exist to avoid continuing transaction costs requiring the parties to enter into a new contract or amend the previous contract’s term on a regular basis.  Automatic renewal provisions provide parties with the flexibility to enter into shorter contract terms that renew in perpetuity.  This allows either party to sever the relationship at the end of a term if it desires to change service providers, while allowing seamless continuation of service if the working relationship is positive.

States have been moving to change this over the past decade, with more than half now having restrictions on the enforceability of an automatically renewed contract.  The Pennsylvania House of Representatives has routinely received bills that would limit a company’s ability to enforce automatic renewal terms against consumers.  To date, no such bill has passed.  However, neighboring states do have these types of restrictions and businesses must be mindful of this issue when contracting across state lines.  States which have passed these laws are zealous in their enforcement and several courts have applied their laws to contracts containing choice of law provisions in other states.  This means your service contract under Pennsylvania law with performance in Albany, New York may be subject to New York restrictions.

These laws generally state that a service provider must provide advanced notice to its customer before a renewal term takes effect.  If no notice is given, the customer is not bound to any renewal term.  While each state’s law differs, most states view this as a consumer protection statute, meaning business-to-business transactions are not covered.

Of the states neighboring Pennsylvania, Maryland and New York have automatic renewal laws.  The other neighboring states have considered them or are in the process of passing such laws.  New York was one of the first states to enact general restrictions on automatic renewal clauses and has one of the most onerous versions in the nation.  The New York law addresses all “contracts for service, maintenance or repair to or for any real or personal property.”  This law is not limited to consumers facing contracts and applies to business-to-business transactions as well.  The New York law requires the service provider to give notice of the upcoming renewal between fifteen and thirty days before a renewal term would begin, excluding renewal terms that are month-to-month.  If notice is not properly given, the contract term is not enforceable against the customer.

The ramifications of this are broader than a customer being able to terminate their service without advanced notice.  By stating the renewal term is not enforceable against the customer, the New York legislature has created substantial pitfalls for the unwary contract drafter.  Termination fees, return of goods provisions and other actions triggered by the end of the contract term or non-renewal of the contact may not be enforceable if the customer terminates due to a lack of renewal notice.  Businesses should go back through their standard contracts and ensure that triggering events are worded in such a way that they are not bound to the end of a “term.”

This article addresses general laws relating to service contracts.  Bear in mind, every state has industry specific laws governing certain renewal terms.  Each state’s laws differ; however, these specific restrictions are common in real estate, utilities, consumer credit sales, insurance and gym memberships.

David Noll practices in the McNees Corporate & Tax Practice group with a focus on private company mergers and acquisitions, as well as general corporate law for various industries.  His experience includes drafting and negotiating business agreements, advising clients on corporate governance matters and coordinating local counsel for cross border transactions.  He can be reached at DNoll@mcneeslaw.com.