Inside Track: Automatic renewal clauses in 'business contracts' now regulated:

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  • Inside Track
    January
    27
    2012

    Automatic renewal clauses in 'business contracts' now regulated

    Barbara J. Zabawa

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    To start off 2012 on the right foot, now is a good time to advise business clients on a law concerning renewal and extension provisions in business contracts. In this article, Madison attorney Barbara Zabawa explains the law and who it impacts.
    Michael Moore

    Feb. 1, 2012 – With very little fanfare, 2009 Wisconsin Act 192 (codified at Wis. Stat. section 134.49) created a law requiring businesses, including health care providers and insurers, to notify customers of automatic renewal or extension provisions in business contracts.

    As a practical matter, this law (effective May 1, 2011) generally impacts business contracts involving equipment and services in a variety of industries, including health care, construction, food service, consulting, information technology, manufacturing, insurance, and others.

    To start off 2012 on the right foot, now is a good time to advise and remind clients on the steps necessary to comply with the law to ensure enforceability.

    What are business contracts?

    Under section 134.49, “business contracts” are contracts “entered into for the lease of business equipment, if any of the business equipment is used primarily in this state, or for providing business services.” To be considered a business contract, it must be for the “direct benefit of the end user of the business equipment or business services.”1

    For business contracts entered into, modified, or renewed after May 1, 2011, businesses must make certain disclosures about renewal or extension provisions.

    For instance, the law requires businesses to notify their customers how they may decline renewal or extension of business contracts. A “customer” is a “person” who conducts business in the state and who is the lessee under a business contract for the lease of equipment or a “purchaser” under a business contract for the purchase of business services.2

    Businesses that fail to notify customers will not be able to enforce their renewal or extension provisions and the business contract will terminate at the end of its current term.

    The law also allows customers to bring counterclaims against “sellers” – providers of business services or lessors of business equipment3 – under certain circumstances.

    aAutomatic renewal clauses in “business contracts” now regulated

    Contracts not subject to Act 192

    According to the legislative history, the law brings business contracts in line with residential lease requirements. In the residential lease arena, landlords may not enforce an automatic renewal or extension clause unless the landlord provides advance written notice of the renewal or extension. Act 192 created a similar provision for business contracts.

    The law generally implicates contracts relating to the lease of business equipment or for the provision of business services, but contains numerous exceptions.4

    For instance, business contracts do not include contracts for the lease or purchase of real property, contracts for the lease of medical equipment, or contracts relating to equipment or services for personal, family, or household purposes.

    There are also exceptions for contracts involving “energy utility tariffs,” certain vehicle leases, and certain contracts related to telecommunications services, among others.

    The law does not apply to contracts that already permit customers “to terminate an automatically renewed or extended contract period by giving the seller notice,” but only if the contract does not require the customer to give notice more than one month in advance.5

    Also, the law does not apply to contracts “in which a customer agrees to purchase from a seller an undetermined amount of business services or lease from the seller an undetermined amount of business equipment,” but agrees to pay the seller “based on the amount of business services received or business equipment leased.” This exception only applies if the contract includes a predetermined minimum payment of $250,000 or more in a 12-month period.6

    For purposes of health care clients, for instance, the law does not apply for “per use” business services or equipment leases that state within the contract a predetermined minimum payment of at least $250,000.

    However, agreements for the provision of health care services that call for payment of less than the $250,000 amount will be implicated, unless another exemption applies. Thus, it appears that agreements relating to medical director services, claims administration, or billing services, would be business contracts, and subject to the law’s requirements.

    Notice and reminder requirements

    The notice requirement consists of both an “initial disclosure” about the automatic renewal or extension provision in the contract, and a “reminder notice.”

    The initial disclosure provision requires the seller of the services to inform the customer about the renewal or extension either on a separate form when the customer enters into the business contract, or in a conspicuous manner in the contract.7

    Under either method, the disclosure must contain certain elements. For instance, the initial disclosure must contain a statement that the business contract will be renewed or extended unless the customer declines, and the duration of the automatic renewal or extension period.8

    A disclosure must also inform customers about any increase in charges that will apply under an automatic renewal or extension, what the customer must do to decline renewal or extension, and the date by which the customer must decline renewal or extension.9

    For business contracts that have an automatic renewal or extension term of more than one year, sellers of services must provide a reminder notice about the automatic renewal provision. The reminder notice must contain similar elements as the initial disclosure.10

    The statute provides certain additional rules about when and how the seller must provide the reminder notice. For instance, sellers have various options to give customers written notice, including personally or through certified, registered, or U.S. mail (depending on the contract).11

    In addition, the statute voids a business contract provision that requires a customer to permit the seller to match any offer the customer receives from, or makes to, another seller after the end of the contract’s stated term.12

    Remedies for violations

    The statute has a specific remedies section, allowing customers to bring an action or counterclaim for damages against a seller for violations under section 134.49.

    Damages can include twice the amount of the damages incurred by the customer, including reasonable attorney fees. However, the seller can protect him or herself from liability by taking the steps necessary to ensure compliance with the law.13

    About the Author

    Barbara Zabawa is an attorney in the Madison office of Whyte Hirschboeck Dudek S.C. She practices business and intellectual property litigation and has almost 20 years of experience in the health care field. She received her Master's in Public Health from the University of Michigan before attending U.W. Law School.

    Endnote

    1 Wis. Stat. § 134.49(1)(a).

    2 Wis. Stat. § 134.49(1)(b).

    3 Wis. Stat. § 134.49(1)(c).

    4 See Wis. Stat. § 134.49(1)(a)1-14.

    5 Wis. Stat. § 134.49(1)(a)11.

    6 Wis. Stat. § 134.49(1)(a)1 & 4.

    7 Wis. Stat. § 134.49(2)(a)1-2.

    8 Wis. Stat. § 134.49(2)(b).

    9 Wis. Stat. § 134.49(2)(b).

    10 Wis. Stat. § 134.49(3).

    11 Wis. Stat. § 134.49(4).

    12 Wis. Stat. § 134.49(5).

    13 Wis. Stat. § 134.49(6).