Investigators for the states said that consumers had either been billed or had their credit cards charged for "unwanted or unordered subscriptions".
They also said that consumers were left confused because automatic renewal offers were designed to look like billing invoices.
Tom Corbett, attorney general of Pennsylvania, one of the states involved, said: "This deceptive or perceived scare tactic method to renew a magazine is at best unfair and at worst illegal."
Bill Lockyer, California attorney general, said: "Every consumer has a right to be fully informed about the products they buy, and a right to not be charged for products they never asked for and do not want."
The payout, which has been reached without any admission of wrong doing by Time, will pay for the states' investigation costs and to plough into a fund to pay back consumers with wrong billing claims.
It is estimated that around 108,000 magazine readers, who received the renewal notices between 1998 and May 2004, may be eligible for compensation.
Time Inc, which is owned by Time Warner and also publishes People and Entertainment Weekly magazines, said in a statement that it already provides clearer disclosure of automatic renewal subscriptions.
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