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Know the Law: Beware the “evergreen clause”, automatic renewal

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Q: I recently called our company’s software vendor to cancel our license agreement but was told that it does not allow us to simply cancel. In fact, our vendor claims that our license automatically renewed and that we are contractually obligated to continue paying for the software (which we do not use) for another full year. How is this possible?

A: The short answer is that the terms and conditions of the software license contain an “automatic renewal” or “evergreen clause.” An evergreen clause provides that the term of an agreement will automatically renew for some period of time unless one party provides notice to the other party that it does not wish to renew.

A typical evergreen clause in a license agreement may read something like this:

Each term shall automatically renew for subsequent periods of the same length as the initial term unless either party gives the other written notice of termination at least thirty (30) days prior to expiration of the then-current term.

Under this clause, if the customer does not provide timely written notice, the contract automatically renews. These types of clauses may be included in various contracts, but are particularly prevalent in service, distribution and supply contracts.

The question for individuals and businesses who are parties to contracts containing an evergreen clause is whether such clauses are enforceable. The answer to that question depends on the nature of the contractual relationship between the parties, the subject matter of the contract and, notably, the jurisdiction governing the contract.

There are many court decisions across the country addressing the enforceability of evergreen clauses. In most cases, particularly in the context of business-to-business contracts, courts strictly construe these provisions where the contract language is clear and unambiguous, and uphold the automatic renewal clause. While case law may favor those parties attempting to enforce these clauses, in recent years many state legislatures have passed laws that regulate automatic renewal clauses. Indeed 22 states have now enacted at least some form of statutory restriction on these contractual provisions.