When SaaS companies and start-ups first contact me, they are often doing so with the idea that there are a few really well SaaS template contracts circulating in the SaaS industry and they seeking the” right” attorney to provide that industry-standard template to them. Alternatively, they contact me telling me that they’ve already put together a draft SaaS contract, and that they just want me to look over and “bless” what they’ve already written based on a particular SaaS company’s contract available for download on the Internet.
In these cases, which are the norm rather than the exception, I often encounter significant push-back when I first suggest to them that they are approaching the SaaS contract drafting process entirely the wrong way. I always explain that a well-drafted SaaS contract should be tailored to their specific business model, and then I proceed to ask them a number of questions about their business model, which they generally aren’t prepared to answer. They often then proceed to get frustrated by all the questions about their business, when all they are actually looking for is the “right” contract template.
If you are in the SaaS industry and have created your customer contract in a similar fashion, or committed the other common software contracting “sin” of caving into pressure exerted by a potential customer and just agreed to their standard agreement terms because you wanted to close a deal with them, then you may want to consider the example of recent litigation against an industry leader, which adopted contract language which was then alleged not to match the company’s business practices.
The litigation at issue involves class action suits against the McAfee brand security software: Williamson v. McAfee, Inc., No. 5:14cv00158 (N.D. Cal. Aug. 30, 2016) and Kirby v. McAfee, Inc., No. 5:14cv02475 (N.D. Cal. May 29, 2014). Both cases focus on the company’s business practices surrounding its use of automatic renewal clauses–a standard practice widely adopted throughout the SaaS industry. The litigation is ongoing: while the court granted final approval of a settlement in both cases, an appeal has been filed. (See posted notice).
The particular contract clause at issue in the Williamson case is a common clause routinely included in SaaS contracts that stated at autorenewal customers would be charged the “then-current” price for the product. However, the Williamson complaint alleged that the actual practice of the company was to charge customers upon autorenewal a higher price for the product than the price that the customer could have purchased the product for elsewhere.
The particular contract clauses at issue in the Kirby case stated that customer would be automatically enrolled in the autorenewal program and that a customer’s credit or debit card could be charged at autorenewal even after it had expired. The Kirby complaint alleged that the actual practice of the company was to import into its billing system updated customer credit or debit card information provided by Visa or MasterCard rather than procuring a new authorization from client when the prior authorization became invalid, and to charge the customer at autorenewal at a higher price than originally paid without the customer’s express consent.
While there are a number of allegations made against McAfee in these class action suits, a fundamental problem alleged was that the terms of service binding the customer did not match the company’s actual business practices, and that the customer did not provide consent to the company’s actual autorenewal practices.
While these particular suits were filed against McAfee, the business practices alleged in these cases are perhaps the current standard of conduct for today’s software industry. Furthermore, I would argue that more often than not terms of service are adopted by companies without any consideration whatsoever of the actual technology and business model for the software or SaaS product, so it is probably rare for the terms of service to match the company’s actual business practices. Thus, it is my assertion that these cases provide an excellent primer of the risks of adopting terms of service that do not match the actual practices of the business. It’s still not clear what the ultimate price tag on this matter will reach on the part of the company, but it’s clear it will be multiple millions of dollars in costs and expenses.
Moreover, these cases demonstrate the importance of consent to having an effective autorenewal clause. State laws applicable to these cases did require the procurement of clear and conspicuous consent to autorenewal, which McAfee is alleged not to have had in these particular sets of facts. Obviously, any deficiency with consent could have easily been addressed through the adoption of better business practices and terms that would demonstrate clear customer consent in compliance with applicable state laws.
The bottom line is that terms of service should not be adopted by a SaaS company without a thorough consideration of the technology, the business model, and the business practices of the company. Even common business concepts like autorenewal accepted across the board within the industry may lead to costly lawsuits if insufficient consideration of business practices is contemplated in conjunction with the drafting of terms of service.