Businesses that sell products and services to Illinois consumers under contracts containing automatic renewal provisions should be aware of a recent amendment (effective 1/1/05) to the Illinois Automatic Contract Renewal Act1 (the "Act"). The Illinois General Assembly amended the Act to require, among other things, that businesses entering into contracts with Illinois consumers for an initial period of 12 months or more, that provide for an automatic renewal for a period of more than one month, must provide consumers with written notice of the automatic renewal no less than 30 days or more than 60 days prior to the date of the cancellation deadline for the automatic renewal. The Act was also amended to limit its application to consumer contracts; to exclude certain types of businesses from its application; to provide that violation of the Act is a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act; and to create a safe harbor for erroneous violations of the Act. Other amendments to the Act are discussed below2.
The amendment is effective January 1, 2005 and it does not apply to contracts entered into before that date. Businesses that enter into contracts with consumers (business to business transactions are specifically excluded) must be aware of the amendment to the Act and should institute written policies and procedures to comply with the Act. Businesses that fail to comply with the Act face potential regulatory action by the Illinois Attorney General, local State’s Attorneys, and individual or class action litigation under the Act and the Illinois Consumer Fraud Act. There has already been at least one class action claim filed under the Act.
History of Automatic Contract Renewal Act
The Act was first introduced in the Illinois Senate by Senator Pate Phillip on February 26, 1999 and was passed by the Illinois General Assembly on December 12, 1999, after an amendatory veto by the Governor. The Act became effective June 1, 2000. As originally enacted, the Act applied to all contracts and requires that automatic contract renewal provisions be clearly and conspicuously disclosed. A failure to make an automatic renewal provision in a contract clear and conspicuous rendered the automatic renewal provision unenforceable at the election of the party that did not draft the contract3.
The amendment to the Act was introduced in the Illinois House by Rep. Robin Kelly (D-38th) as H.B. 4450 on February 3, 2004. After the bill was amended in House and Senate, it was passed by both Houses on May 25, 2004. The Governor approved the bill on August 19, 2004 as P.A. 93-0950.
Clear and Conspicuous Disclosure of Automatic Renewal Provisions Required Under Act
The Act does not define "clear and conspicuous". The Illinois General Assembly initially passed the Act providing in Section 10 that "the clause providing for automatic renewal must appear in the contract in at least 14-point bold type." The Governor issued an amendatory veto to the Act as initially passed, suggesting that Section 10 of the Act be amended to delete the 14-point bold type requirement and to replace it with language requiring that the renewal provision be "clear and conspicuous". The Illinois General Assembly accepted the Governor’s suggestion and the Act was passed and enacted with the Governor’s amended disclosure requirement mandating a "clear and conspicuous" disclosure. As noted above, the Act was initially effective on June 1, 2000.
Although there are no reported decisions interpreting what constitutes a clear and conspicuous disclosure under the Act, there are several cases that are instructive on this issue. In Pulcini v. Bally, a class action claim brought under the Act, the defendant conceded that its automatic contract renewal provision was not clear and conspicuous4. In Country Squire Homeowners Association v. Crest Hill, the Illinois Appellate Court held that in the context of a real estate contract, a contract provision printed in capitalized terms, where no other capitalized terms were used in the contract, was "conspicuous and would be noticed by anyone signing the contract."5 In Channell v. Citicorp, the U.S. Court of Appeals for the Seventh Circuit referred to "clear and conspicuous" as "staples of commercial law," and noted that the Uniform Commercial Code provides a definition of "conspicuous."6 In Basselin v. General Motors, the Illinois Appellate Court looked to Section 1-201(10) of the U.C.C. in determining whether a disclaimer of an implied warranty of merchantability was clear and conspicuous7. The U.C.C. defines conspicuous as follows:
"Conspicuous": A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals (as: NON-NEGOTIABLE BILL OF LADING) is conspicuous. Language in the body of a form is "conspicuous" if it is in larger or other contrasting type or color. But in a telegram any stated term is "conspicuous". Whether a term or clause is "conspicuous" or not is for decision by the court.8
In Greisz v. Household Bank, the U.S. District Court for the Northern District of Illinois recently noted, in assessing the adequacy of a disclosure under the Truth in Lending Act, that: "[A] disclosure does not fail to be ‘clear and conspicuous’ or meaningful simply because a superior or more detailed statement could have been provided; the question is whether the disclosure offered is sufficiently clear for purposes of the statute."9
Last, as noted above, the Illinois General Assembly initially passed the Act with a requirement that the renewal clause had to be in at least 14-point bold type. While this requirement was eliminated by the Governor’s amendatory veto, the 14-point bold type standard may serve as a useful bench mark to define "clear and conspicuous."
While there is no bright line definition for "clear and conspicuous" under the Act, the cases cited above provide guidance. Whether a provision is clearly and conspicuously disclosed will be determined on a case by case basis taking into account all relevant facts. In general, if the renewal provision is sufficiently set apart by type size, bold, capitals or in some other manner that distinguishes it from the remainder of the text of the contract, such that a reasonable person would notice it, then the disclosure will likely be deemed clear and conspicuous under the Act.
Amendment Limits and Expands Application of Act
As initially passed, the Act applied to all contracts with a citizen of Illinois.10 The amendment to the Act limits the Act’s scope, as follows:
1. The Act is now limited to contracts between a business and a consumer. Specifically, Section 20 of the Act was amended to provide, "This Act does not apply to business-to-business contracts."11
2. The Act no longer applies to banks, trust companies, savings and loan associations, savings banks, credit unions and foreign banks that maintain a state or federally regulated branch.12
3. The Act no longer applies to a contract extended beyond the initial term as a result of the consumer’s initiation of a change in the original contract terms.13
4. The Act is now limited to contracts selling or offering to sell products or services to consumers.14 [as originally enacted, the Act applied to all contracts with Illinois residents or businesses. Thus, it would appear that as of January 1, 2005, real estate contracts such as leases, that frequently contain automatic renewal provisions, entered into after January 1, 2005, are no longer covered by the Act].
The amendment also expands the Act to cover offers to sell, which were not previously covered under the Act. Sections 10(a) & (b) of the amended Act expand the scope of the Act to cover the situation where a business offers to sell products or services to consumers under a contract containing an automatic renewal provision. Thus, the Attorney General could arguably bring an action against a business under the Illinois Consumer Fraud & Deceptive Practices Act for offering to sell products or services to consumers under a contract which contains an automatic renewal provision that is not clearly and conspicuously disclosed in the contract offered to, but not accepted by, the consumer.
The Act as amended also requires a business (other than those exempt from the Act) selling or offering to sell products or services to a consumer, to clearly and conspicuously disclose not only the automatic renewal provision, but also the cancellation procedure in the contract.
Amendment Requires Written Notice to Consumer of Renewal Under Certain Circumstances
The amended Act creates an additional obligation for a business that enters into a contract containing an automatic renewal provision with a consumer for products or services. Under the Amended Act, the business must provide the consumer with notice that the contract will renew unless the consumer cancels the renewal. Section 10(b) of the amended Act provides that a business that enters into such a contract with an initial term of 12 months or more, and that automatically renews for a period of more than one month unless the consumer cancels, must notify the consumer in writing of the automatic renewal. No such obligation existed under the Act as originally enacted. The amended Act also contains specific requirements as to the timing of the issuance of the notice, and its content.15
• The written notice to the consumer must be made no less than 30 days and no more than 60 days before the cancellation deadline set by the contract. (e.g. If contract provides it automatically renews on 1/1 unless cancelled by 12/1, then notice must be issued no later than 10/31 and no earlier than 10/1).
• The notice must be in writing and must clearly and conspicuously disclose that unless the consumer cancels the contract it will automatically renew.
• The notice must be in writing and must clearly and conspicuously disclose where the consumer can obtain details regarding the automatic renewal provision and the cancellation procedure (e.g. a number to contact the business or a reference to the contract provision).
While the amended Act generally requires businesses selling or offering to sell products or services to a consumer under a contract containing an automatic renewal provision to clearly and conspicuously disclose the automatic renewal provision in the contract, the obligation to give the renewal notice exists only where the initial term of the contract was 12 months or more, and the renewal period by which the initial contract period is automatically extended is more than one month.
Safe Harbor Created for Failure to Comply With Act
The amendment to the Act also creates a safe harbor for an erroneous failure to comply with the Act. Section 10(c) of the amended Act provides that a business may not be held liable for violating the Act or the Consumer Fraud Act where it can demonstrate that as a part of its routine business practice: 1) it has established and implemented written procedures to comply with the Act and enforces compliance with these procedures; 2) the failure to comply is the result of error; and 3) it provides the consumer with a full refund for the unwanted renewal period(s). Businesses should take advantage of this safe harbor provision. To do so it is necessary to draft and implement written policies and procedures regarding the Act, and to enforce these procedures.
Amendment Makes Violation of Act a Violation of Consumer Fraud Act
The amendment to the Act also provides that a violation of the Act is also deemed to be an unlawful practice under the Illinois Consumer Fraud & Deceptive Business Practices Act ("ICFA").16 The Act presently provides only that if the contract does not clearly and conspicuously disclose the automatic renewal provision then the automatic renewal provision is not enforceable by the party who prepared the contract or directed its preparation.17
By expressly providing that a violation of the Act constitutes a violation of the ICFA, the amendment significantly expands the enforcement mechanisms available, and arguably increases the exposure of businesses to individual and class action litigation for violation of the Act. In addition to the investigatory powers provided to the Attorney General and the State’s Attorneys by Sections 3 through 6 of the ICFA to enforce the Act, Section 7(a) of the ICFA provides:
(a) Whenever the Attorney General or a State’s Attorney has reason to believe that any person is using, has used, or is about to use any method, act or practice declared by this Act to be unlawful, and proceedings would be in the public interest, he or she may bring an action in the name of the People of the State against such person to restrain by preliminary or permanent injunction the use of such method, act or practice. The Court, in its discretion, may exercise all powers necessary, including but not limited to: injunction; revocation, forfeiture or suspension of any license, charter, franchise, certificate or other evidence of authority of any person to do business in this State; appointment of a receiver; dissolution of domestic corporations or association suspension or termination of the right of foreign corporations or associations to do business in this State; and restitution.18
Under ICFA, the Attorney General and State’s Attorneys may also seek civil penalties of up to $50,000 for violations of the Act, and where the violation was committed with the intent to defraud, an additional civil penalty of $50,000 per violation.19
The amendment also increases the exposure of businesses to individual and class action litigation for violations of the Act. ICFA provides that an individual may bring an action for damages and other relief for violation of the Act.20 ICFA further provides for attorney’s fees to a prevailing party.21 The availability of an award of attorney’s fees for a violation of the Act is likely to increase the chance that a business that violates the Act will face individual or class action litigation over the violation. The author is aware of at least one class action claim filed under the Act alleging that an automatic renewal provision in a health club contract violated the Act. Historically, the availability of attorney’s fees under ICFA for a violation of an act has drawn the plaintiff bar, and in particular the plaintiff class action bar, to such claims.
What Should a Business Do?
All contracts with Illinois consumers should be reviewed to determine whether the Act is applicable to the contract. Note that the amendments to the Act are only applicable to those contracts entered into on and after January 1, 2005. If the Act is applicable, the contract should be carefully reviewed to determine whether the automatic renewal provision is disclosed in a clear and conspicuous manner, and to determine whether the business is obligated to provide the consumer with the notice of renewal required under Section 10(b) of the amended Act.
If a business has a contract that obligates it to provide a renewal notice to the consumer, the business must establish procedures to ensure that the notice is issued within the relatively tight time parameters of the Act. The Act requires that the renewal notice must be issued not more than 60 days, or less than 30 days, prior to the date the consumer must act to cancel the renewal of the contract. Businesses must ensure that they have a street or e-mail address for the consumer to issue the notice, and that the notice complies with the disclosure requirements of the Act. They must also evaluate the costs and benefits of proof of notice, such as sending the notice via certified mail return requested and record keeping requirements for proof of notice. E-mail may be a cost effective means of transmitting notice and maintaining records of proof of notice. Contracts subject to the Act should obligate the consumer to notify the business of any change of address and specify that notice sent to the last street or e-mail address provided to the business constitutes effective notice.
Businesses may also want to examine the costs and benefits of providing for automatic renewal provisions in contracts, or tailor the contracts so as to minimize their obligations under the Act. Finally, businesses should develop written procedures and policies regarding compliance with the Act, and enforce these procedures so as to avail themselves of the safe harbor for erroneous violations of the Act provided under Section 10(c) of the amended Act.
1 815 ILCS 6010/1 et seq. (2004)
2 The full text of the Act as amended is available on the Illinois General Assembly webpage at http://www.legis.state.il.us/legislation/fulltext.asp? DocName=&SessionId=3&GA=93& DocTypeId=HB&DocNum= 4450& GAID=3&LegID=8893&SpecSess=&Session
3 815 ILCS 601/15 (2004)
4 Pulcini v. Bally Total Fitness Corp., 2004 Ill. App. LEXIS 1321 (1st Dist. 11/5/04)
5 Country Squire Homeowners Association v. Crest Hill Development Corporation, 150 Ill. App.3d, 30, 32, 501 N.E.2d 794, 796 (3rd Dist. 1986)
6 Channell v. Citicorp National Services, Inc., 89 F.3d 379, 382 (7th Cir. 1996)
7 Basselin v. General Motors, et al., 341 Ill.App.3d 278, 289, 792 N.E.2d 498, 508 (2d Dist. 2003).
8 810 ILCS 5/1-210(10)(2004).
9 Greisz v. Household Bank (Illinois), 8 F.Supp.2d 1031, 1047 (N.D. Ill. 1998)
10 815 ILCS 610/10 (2004).
11 815 ILCS 601/20(c) (2005) (effective 1/1/05)
13 815 ILCS 601/20(e) (2005) (effective 1/1/05)
14 See: 815 ILCS 601/10(a) & (b) (2005) (effective 1/1/05)
15 See: 815 ILCS 601/10(b) (2005) (effective 1/1/05)
16 815 ILCS 505/1 et seq. (2004)
17 815 ILCS 601/15 (2004)
18 815 ILCS 505/7(a) (2004)
19 815 ILCS 505/7(b) & (c) (2004)
20 815 ILCS 505/10a (2004)
21 815 ILCS 505/10a(c) (2004).
Bart T. Murphy is a partner in the Lisle office of Wildman, Harrold, Allen & Dixon LLP and is a member of the Litigation and Government Affairs Practice Groups. He is an experienced litigator and is regularly involved in the defense of class action litigation. He received a B.A. degree in Computer Science from Saint Mary’s University of Minnesota in 1978 and a J.D. from Loyola University of Chicago School of Law in 1981. He has been appointed a Special Assistant Illinois Attorney General, and formerly served as an Assistant Cook County State’s Attorney and as an Assistant Illinois Attorney General.