Key Takeaways

  • California’s Automatic Renewal Law (ARL) requires clear disclosures, easy online cancellation, and customer consent for renewals.
  • Businesses must provide notice of renewal, especially after free trials or promotional pricing ends.
  • Federal law is less strict, but many states now regulate automatic renewal clauses in different ways.
  • Noncompliance can result in consumer protection claims, reputational damage, and injunctions.
  • Businesses can mitigate risk by drafting balanced clauses, offering reminder notices, and negotiating flexibility into contracts.

An automatic renewal clause business to business California is regulated by the Automatic Renewal Law (ARL), Code § 17600. This law went into effect on July 1, 2018. It requires any e-commerce company doing business in California to permit customers to cancel auto-renewal members or other purchases through an online form.

Specifics on the California ARL

In particular, the ARL states that “a consumer who accepts an automatic renewal or continuous service offer online shall be allowed to terminate the automatic renewal or continuous service exclusively online, which may include a termination email formatted and provided by the business that a consumer can send to the business without additional information.”

Another provision in the law relates to sellers who provide customers with a promotional gift or free trial to get them to sign up for a subscription. These sellers are required to inform their customers how they can cancel the auto-renewal of their subscription before they are charged.

Finally, sellers must be fully transparent about what their services will cost the customer after the promotion or free trial. If the price is going to change, they must get consent from the customer about the change before they bill the higher amount.

Notice and Disclosure Requirements

California law emphasizes transparency in contracts containing an automatic renewal clause. Businesses must present renewal terms in a “clear and conspicuous” manner at the time of agreement, not hidden in fine print. This means disclosing:

  • The length of the renewal term.
  • The cancellation procedure, including how and when customers may terminate.
  • Whether pricing changes will occur after a promotional period or trial ends.

Some states, like Wisconsin and New York, require affirmative reminder notices before renewals take effect, especially for long-term or annual contracts. While California does not universally mandate reminders, best practice is to notify customers before renewal to reduce disputes and enhance compliance.

How to Comply With the New ARL

If you own a business, there are several steps you should take to comply with the new ARL in California.

  • Make your language clear and easy to understand in all terms and conditions, including cancellation policies and initial offers.
  • Inform customers of your policies regarding cancellation and provide a set of instructions for what to do if they want to cancel their services.
  • Create a cancellation process that can be done quickly and easily online.
  • Add in arbitration provisions or class action waiver language that's easy to understand. Just keep in mind that you might be limited in preventing litigation because of the decision in the McGill v. Citibank case.
  • Design an online interface that gets consent from your customers before collecting their payment.
  • Alert customers of any changes to your terms and provide them with updated materials before the terms go into effect.
  • Send your customers an email receipt confirming the terms of your promotional offer and the cancellation policy related to the offer.

Drafting Effective Automatic Renewal Clauses

To reduce risk, contracts should be drafted in plain language and structured to withstand legal scrutiny. Common drafting practices include:

  • Specific Renewal Term: State the exact length (e.g., “12 months”) rather than vague language.
  • Notice Window: Provide a defined timeframe for termination (e.g., “30 days before renewal”).
  • Flexible Cancellation: Offer multiple cancellation methods such as email, online portals, or mail.
  • Pricing Transparency: Clarify whether renewal pricing matches the original or will increase.

Model clauses often stipulate that a contract renews for one-year terms unless either party gives written notice of intent not to renew within a set period. Avoid overly one-sided terms, as courts may strike them as unconscionable.

How the California ARL Differs From Federal and Other State Laws

Federal law isn't very strict on automatic renewal clauses. In fact, all it does is require sellers to provide the terms of a transaction to the customer and collect their consent before charging them. This is defined in the Restore Online Shoppers' Confidence Act, 15 U.S.C. §§ 8401-8402.

When it comes to state law, California isn't the only state to require sellers to disclose information about automatic renewals. In fact, there are over 20 states that have similar laws. While they all have varying requirements and stipulations, most ask companies to disclose their renewal policies in a way that's clearly visible.

Another thing many state laws have in common is to require companies to provide customers with advanced notice prior to the automatic renewal. This gives them the chance to cancel the renewal before it happens without their knowledge.

While California's ARL includes all consumer contracts, most other states limit their ARLs to only cover specific contracts, such as a home security system or a fitness club membership. Since most e-commerce companies operate in all states, the easiest way for them to be compliant with all of the varying ARLs is to simply use California's ARL as guidance because it is has the strictest guidelines.

Business-to-Business Contracts Under ARL

Although California’s ARL was originally consumer-focused, its scope can affect business-to-business agreements if one side is deemed a small business or “consumer-like” entity. Courts may scrutinize whether a B2B contract unfairly restricts termination rights.

Other states, such as Illinois and Colorado, have introduced specific statutes governing automatic renewal clauses in B2B contexts.

These typically require:

  • Advance written notice of renewal.
  • A clear description of how to cancel.
  • Reasonable notice periods that allow businesses to avoid surprise renewals.

For national businesses, aligning practices with California’s strict ARL can serve as a compliance baseline across jurisdictions.

What Happens if You Don't Comply With the ARL?

Noncompliance with California's ARL does not create a private cause of action, but there have still been several complaints under California's consumer protection statutes and unfair competition law since the ARL was created in 2010. Through these complaints, courts have determined that the ARL only applies to customers living in California. As long as a customer lives in the state, they can pursue an injunction if a company violates the ARL. This should be sufficient motivation for companies to always be compliant with the ARL.

Risks, Enforcement, and Best Practices

Noncompliance carries several risks beyond injunctions. Businesses may face:

  • Consumer Protection Claims: Plaintiffs can bring actions under California’s Unfair Competition Law.
  • Reputational Harm: Customers may publicize unfair practices, impacting brand trust.
  • Contract Disputes: Opposing parties may argue that a contract auto-renewal is unenforceable.

To avoid these outcomes, businesses should:

  • Implement compliance checklists for all contracts with auto-renewal provisions.
  • Send reminder notices even when not legally required, particularly for multi-year agreements.
  • Train sales teams to clearly communicate renewal terms during negotiations.
  • Regularly audit contracts for ARL compliance and consistency across jurisdictions.

Frequently Asked Questions

  1. What is an automatic renewal clause?
    It is a contract provision that renews an agreement for another term unless one party cancels before a specified deadline.
  2. Are automatic renewal clauses enforceable in California?
    Yes, but only if they comply with the Automatic Renewal Law by providing clear disclosure, consent, and easy cancellation options.
  3. Do businesses have to send a reminder before renewing a contract?
    Not always in California, but some states require reminders. Sending one voluntarily is considered a best practice.
  4. Can automatic renewal clauses apply to B2B contracts?
    Yes, especially if one party is small or operates like a consumer. Courts may scrutinize unfair or hidden renewal terms in B2B agreements.
  5. What happens if a business violates the ARL?
    Violations can result in injunctions, lawsuits under consumer protection laws, and reputational damage.

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