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 we are contractually obligated to continue paying for the software (which we do not use) for another full year. How can this be?

A: The short answer is that the terms and conditions of the software license your company has with the vendor contain an “automatic renewal” or “evergreen clause.”

A typical evergreen clause 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 seemingly simple: “Are they enforceable?” The answer is, perhaps not surprisingly: “It depends.”

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. If the contract language is not followed and notice is not given within the required time to terminate, the contract extends for another term automatically.

While case law may favor those parties attempting to enforce these clauses, a few state legislatures have passed laws that may make it difficult for these parties to rely on evergreen clauses.

For example, Illinois, New York and Wisconsin have passed legislation that affects the enforceability of evergreen clauses in certain scenarios, by creating disclosure and notice of renewal requirements. The failure to comply with these statutory requirements may affect the enforceability of the evergreen clause.

Companies doing business in states that have statutes regulating these clauses should be mindful of these recently passed statutes so as to ensure compliance. Similarly, parties who find themselves unwillingly bound to another contract term as a result of an evergreen clause should also be aware as these statutes may provide defenses to an automatic renewal claim.

Steven Dutton can be reached at steven.dutton@mclane.com.

Know the Law is a bi-weekly column sponsored by The McLane Law Firm.

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