New York, Automatic Renewal Clauses Are Not So Automatic

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     Many industries utilize term contracts with automatic renewal clauses to capture recurring revenue. An automatic renewal clause is a contractual provision by which the contract is automatically renewed at the end of the specified term unless one party to the contract provides advance notice of its intention to cancel the contract, which typically must be done by a designated date. Also known as “evergreen” clauses, automatic renewal clauses are commonly used in a variety of service- provider contracts.  

     Section 5-903 of New York’s General Obligation Law (“GOL”) addresses automatic renewal clauses contained in “contract[s] for service, maintenance or repair to or for any real or personal property.” GOL § 5-903 is designed to protect businesspersons who find themselves “married” to self-renewing maintenance or service contracts. Mobile Diagnostic Testing Servs., Inc. v. TLC Health  Care Network , 19 A.D.3d 1145, 1146 (4th Dep’t 2005). Because this danger may arise in many contexts, courts broadly construe “service, maintenance, or repair.” Tel. Secretarial Serv. v. Sherman , 28 A.D.2d  1010, 1011 (2d Dep’t 1967). Service contracts covering everything from mobile MRI units to telephone answering services to vending machines fall within the statute. 28 N.Y. Prac., Contracts Law  § 28:21 (2009).  

     While many states regulate automatic renewal clauses, GOL § 5-903  is different in that (1) it applies to service contracts concerning real or  personal property, and (2) it expressly applies to both individuals and  companies. Thus, if a person or entity seeks to enforce an automatic renewal provision to a contract for the service, maintenance, or repair to real or personal property, the provider must give timely written notice of the renewal, served personally or by certified mail. The notice must call the renewal provision to the recipient’s attention, allowing the recipient to timely exercise its right to terminate. If the beneficiary of the automatic renewal clause fails to provide this notice, the contract may be cancelled at any time. Ovitz v. Bloomberg , 77 A.D.3d 515, 516 (1st  Dep’t 2010), aff ’d , 18 N.Y.3d 753 (2012). This is true even if the service recipient makes payments under the contract after the renewal date.  

Bloomberg L.P .’S Cautionary  Tale

     Ovitz v. Bloomberg L.P. illustrates the importance of complying with GOL § 5-903. In June 2000, Bruce Ovitz and Bloomberg L.P.  (“Bloomberg”)—a provider of real-time financial data—entered into a service contract to lease a desktop terminal, software, and other equipment for real-time financial information services. The two-year contract contained a clause that provided for automatic two-year renewals of the contract. In September 2008, Ovitz informed Bloomberg that he wished to cancel the service. Bloomberg responded that the service was automatically renewed through June 2010 and that Ovitz would have to pay approximately a year’s worth of subscription fees as an early-termination fee. Ovitz sued, alleging, inter alia , that  Bloomberg had failed to notify him of the renewal, as GOL § 5-903  requires. The Appellate Division, First Department held the service  contract’s automatic renewal provision inoperative and unenforceable  because “[Bloomberg] failed to provide the requisite notice to plaintiff  that the two-year subscription term was to be automatically renewed,”  (77 A.D.3d at 515-16), a decision that Bloomberg conceded to  be correct before the Court of Appeals ( Ovitz , 18 N.Y.3d at 759).

Conclusion

     To receive the benefit of an automatic renewal clause in a service, repair, or maintenance contract, a New York service provider must provide proper, timely notice of the renewal to its customer.

Topics:  Automatic Renewals, Bloomberg Inc., Service Contracts

Published In: General Business Updates, Consumer Protection Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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