Overcoming the Regulatory and Management Challenges of Auto-Renewing Contracts
Auto-renewing contracts are everywhere. An agreement that renews without any intervention can be convenient for both parties. Without them, key services or goods could simply stop flowing because the parties failed to act timely and renew. While auto-renewing agreements can be useful, they also present challenges for businesses and consumers alike. A growing trend towards regulation and associated penalties on the one hand, and new contract management technologies on the other, have changed the landscape of auto-renewing agreements. Let’s take a look at these changes and where the state of auto-renewing agreements is today.
For businesses, predictable revenue also brings risk
Auto-renewing agreements ensure consistent operation and predictability by protecting against expiration due to neglect. But auto-renewing agreements also carry risk if mismanaged. First, failing to terminate an auto-renewing agreement under its specific terms can lead to overpayment on unnecessary goods and services. Second, increasing regulatory scrutiny could lead to enforcement action and penalties for failure to provide proper notification.
For businesses, that can be a double-edged sword. From a sales and revenue perspective, an auto-renewing subscription agreement is great: Make the sale once, locking a customer into an agreement that may not end. Not only can this create a predictable revenue stream, but the inclusion of pricing escalators can increase that revenue with no effort. Unsurprisingly, the number of subscription model businesses are growing.
But businesses can be buyers too. From that perspective, auto-renewing agreements can be challenging to manage. Yes, they provide predictability for critical business needs. But what happens when the business decides to go in a different direction? Tracking these auto-renewing agreements for key terms around duration and termination rights becomes essential. Failure to do so can lead to improper termination penalties, duplicative vendors, excessive spend, and harm to the bottom line.
For consumers, convenience can be expensive
Auto-renewing agreements are a bit more fraught for consumers. In the best light, they are convenient. Imagine the frustration of coming home one day only to find that you have lost internet service because you forgot to renew your contract with your service provider? That convenience (think gym memberships) is why consumers regularly choose auto-renewing agreements even against their own financial interests. To help consumers, Government agencies and newspapers alike have issued guidance to consumers on how to properly manage auto-renewing agreements. Still, the negative, cumulative effects of these consumer-facing agreements are real. According to the Pew Trusts, a study done for the British government in 2019 found that auto-renewing subscription agreements “in non-regulated businesses are worth … about $33.3 billion annually” and that “consumers spend around … $2.4 billion per year on subscriptions they do not think are a good value.” Auto-renewing subscription agreements are big business.
Changing laws and enforcement actions raise the stakes for businesses
Given the risk-reward proposition of these auto-renewing agreements, legislatures around the world are taking action. The Pew Trusts reports that California, Colorado, Delaware, Georgia, Hawaii, Illinois, Louisiana, New Mexico, New York, North Carolina, Oregon, Vermont and Virginia have enacted laws to curb automatic renewal. Ten other states, and even foreign governments like the United Kingdom, are considering similar legislation. Notably, class-action lawsuits are possible under California's Automatic Purchase Renewal Statute. These types of actions can cost millions of dollars to defend and settle even if plaintiffs fail to prove and defendants never admit liability. The Federal Trade Commission has also issued guidance to businesses, laying out the particular statutes and factors that form the applicable framework for enforcement actions. Failure to comply with that framework – properly notifying customers of auto-renewing terms, obtaining clear consent, and removing barriers to termination – can lead to millions of dollars in penalties.
Contract technology can help
Given the risks of auto-renewing agreements, both on the procurement and sales sides, businesses need technology to properly track the terms of their agreements and manage their regulatory obligations. This begins by turning contract language into structured data. For active auto-renewing agreements, using artificial intelligence (AI) to identify relevant agreements and jurisdictions allow for proper management and compliance. Businesses can leverage the data in process automation to track renewal notice requirements. As a buyer, this eliminates the risk of paying for unnecessary goods and services. As a seller, this ensures compliance with regulatory standards and reduces risk.
This is just the beginning. For all new agreements, legal departments can automate the adoption of current, compliant auto-renewing language by jurisdiction and obtain clear, documented consent through electronic signatures with robust audit trails and certificates of completion. Further, automating customer notices, queuing tasks for contract managers, and generating reporting for the business are the next steps in leveraging technology to address these types of contracts. Simply put, technology can mitigate the major risks of auto-renewing agreements.
Learn about the benefits of integrating AI with contract management, and how DocuSign solutions can help you manage auto-renewals.