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Automatic Renewal Provisions in Subscription Agreements for Software Services

By Jane Song and Ryan Enchelmayer of Paul Hastings LLP

The prospect of securing recurring revenue is particularly valuable to software companies, and subscription agreements for software services that automatically renew for additional terms unless a party provides prior notice of non-renewal are commonplace. These automatic renewal provisions are sometimes referred to as “evergreen clauses.” For example, software companies may enter into agreements with their customers to provide software as a service (SaaS), where the customers pay on a monthly basis to access the software. These agreements typically have an initial term of one or more years, then automatically renew for additional one year terms, unless either party elects not to renew. These agreements often include a termination fee provision, which requires the customer to pay a termination fee (which sometimes equals the amount of fees payable through the remainder of the then-current term) in the event the customer prematurely terminates the agreement without cause. Alternatively, software companies may grant perpetual licenses to their software and sell support and maintenance services on an annual basis. Support and maintenance services portions of these agreements often have an initial term of one year but renew automatically thereafter for additional one year terms, unless either party elects not to renew. Customers are typically required to pay for support and maintenance in advance of each year.

Although the ge...

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