What You Don't Know Can Hurt You

Welcome to the first edition of this column, which is dedicated to discussing the types of hidden issues in-house counsel unwittingly often face. This is a sort of “ignorance ain’t bliss” attempt to keep me and my fellow in-house colleagues out of trouble.

What are some of the blindside-type issues I am talking about? One example is state specific laws that differ from the norm. An example of a non-legal issue would be revenue recognition accounting rules, which impact our work as in-house counsel.

John Chory, a senior partner at Hale and Dorr’s Waltham, Mass. office, agreed to help me with this first article. John specializes in representing emerging companies like Captivate that often have a one-person legal department.

We bring to your attention a little known New York law regarding automatic renewal provisions. How many times has each of us, out of weariness at the tail end of a hard fought negotiation, (or, in the beginning, if we didn’t have any leverage) rolled over and agreed to a New York choice-of-law provision? How many times have we said to ourselves, “How different can it be? It’s not like they are asking for California or Louisiana.”

Well, guess what? Every state has its idiosyncrasies — its secrets, if you will. Some just have more than others.

Here is the punch line: If you include an automatic renewal provision in a contract governed by New York law, you better make sure that it is either not covered by New York’s automatic renewal statute, or comply with it by giving the required “reminder” notice before the contract auto renews.

If you don’t, you run the risk of finding out that the contract you thought you were providing services under, at least for purposes of getting paid, ended as of the date when you thought the contract automatically renewed.

Specifics Of New York Statute

Section 5-903 of the New York General Obligations Law provides that an automatic renewal provision of a contract for “service, maintenance, or repair to or for any real or personal property” is unenforceable by a service provider unless prior notice of the pending automatic renewal is provided to the customer.

The service provider must make the notice no less than 15 and no more than 30 days prior to the date that the customer is required to inform the service provider of termination of the contract. (Even when you know about the statute, it’s not that easy to comply with. Do you think the New York Legislature could have made the notice window any smaller?)

The statute is extremely broad in terms of its applicability and scope, and does not provide any definitions or other limits on the terms it uses. The problem is compounded by the fact that there is very little case law concerning the statute.

What you do find are statements from both the New York state and federal courts that Section 5-903 is to be given broad and expansive interpretation and that the words “service, maintenance or repair” are to be “generously read in order that their scope will engage the variegated evil the statute was intended to meet.”

The “evil” to be regulated, by the way, is exploitation by service providers. Specifically, the purpose of the statute is to “protect small business persons who unwittingly find themselves ‘married’ to self-renewing maintenance or service-type contracts.”

Here is the problem: Section 5-903 is not limited to small business owners. The only limitation is that it does not apply to contracts with renewal provisions for less than one month.

Application Of Statute

The statute has been applied to automatic renewal provisions in a broad range of service contracts, including: a telephone answering service agreement; an agreement to provide and maintain mobile magnetic resonance imaging equipment at a hospital; an agreement to provide and maintain vending machines in a restaurant; a contract to supply and maintain mechanical equipment; a contract for apartment complex management services; and contracts for the transmission of news wire services to radio stations.

Courts have broadly determined that a service is rendered “to or for” property, as required under the statute, when a service is rendered “in connection with property.”

Courts generally have ruled that Section 5-903 does not cover contracts dealing strictly with personal services. These personal services contracts include agreements for personal consulting and administrative services concerning the management of an employee benefits plan and a retainer agreement under which an attorney was to provide advice and counsel to a labor union on a variety of legal matters.

Failure to provide notice to the customer renders the automatic renewal provision ineffective. Thus, in the absence of notice required by Section 5-903, the automatic renewal will be deemed to be ineffective, and the contract rendered unenforceable and effectively terminated as of the date the contract was supposed to have automatically renewed. In other words, the customer is not liable for any services provided after the termination date.

To qualify as proper notice, the service provider must alert the customer either in person or through certified mail at least 15 days, and not more than 30 days, prior to the deadline by which the recipient is required to inform the service provider that the recipient wishes to terminate the contract and avoid the automatic renewal. The notice must clearly identify the automatic renewal provision, and not include the reference to the renewal provision with other information contained in the notice.

We hope that you found this article helpful. If you have any questions, comments or suggestions on this column or suggestions for future topics please contact me at [email protected].

John H. Chory is a senior partner at Hale and Dorr in Boston, specializing in the representation of venture-backed emerging technology companies. Hale and Dorr is nationally and internationally recognized for its experience in venture capital, initial public offerings, intellectual property and securities litigation.