Making sure your alarm contracts comply with the law: Part 2

Civil case could have huge ramifications on current industry practices

Editor’s note: This is part two in a two-part series from SD&I and SIW legal contributor Eric Pritchard on a California civil suit, Hogan vs. ADT. Part one looks at what dealers need to know about laws regarding early termination fees. Part two examines a company's right to increase RMR during a contract's term. 

In my last article, I discussed plaintiffs’ allegation that ADT unlawfully charged subscribers an early termination fee (ETF) when terminating their contract before the expiration of the initial term.  The two plaintiffs, who seek to represent a class of ADT subscribers, claim that ADT used early termination fees to “tether” subscribers to ADT for as long as possible – part of what the plaintiffs assert is part of ADT’s alleged “never let them go” strategy. 

I will now consider plaintiffs’ second claim – that ADT improperly increased the amount of RMR charged during the initial term of the parties’ agreement.  Specifically, plaintiffs allege that ADT’s practice of instituting unilateral price increases during a multi-year contract term violated state and federal consumer protection laws. 

Many electronic security industry contracts permit companies to increase RMR during the initial (or renewal) term, including contracts with a multi-year term.  These contracts usually require companies to provide subscribers notice of the increase and provide that the increase is effective if a subscriber fails to object.  The Hogan class action appears to challenge this common industry practice and raises important legal issues for companies that seek to increase RMR during the term of subscriber contracts.  

Plaintiffs’ Factual Allegations

At this stage in the litigation, plaintiffs have filed their complaint but ADT has not responded to the plaintiffs’ allegations. (ADT has filed a motion to transfer the case from federal court in California to a federal court in Florida, the location of ADT’s principal place of business). The complaint includes a number of factual allegations regarding ADT’s practice of increasing RMR during the initial term.  According to plaintiffs, the ADT form of agreement consists of multiple pages.  The first page sets forth the equipment to be installed, the services to be provided and the price to be charged, including the amount of RMR, handwritten on the form.  The subscriber signs the agreement on this page and none of the other forms are signed or initialed.  The contract has a fixed term (usually 24 or 36 months) and renews automatically on a month-to-month basis after the initial term.  The contract gives ADT the right to increase the amount of RMR to be charged after the first 12 months of the contract’s term, a provision the plaintiffs allege is buried in “boilerplate” text hidden within the contract.  The contract requires ADT to provide notice of the increase, and the subscriber has 30 days to object.  

The plaintiffs also make a number of allegations with respect to ADT’s practices, including that the company routinely failed to provide the required notice, expecting subscribers to overlook increases because they simply appeared as a small increase on the subscriber’s bill.   ADT’s failure to provide the required notice, plaintiffs allege, precluded subscribers from timely objecting.

Plaintiffs’ Federal Truth In Lending Act Allegations

According to plaintiffs, the manner in which ADT presents price in its form contract - the monthly fee handwritten on the front page with the right to increase the fee hidden within the boilerplate -  was likely to deceive a reasonable customer as to true costs of service during initial term.  Plaintiffs also claim the contract fails to set forth the total amount of all required monthly payments during the initial term, in violation of the Federal Truth in Lending Act (TILA) and its implementing regulations, known as Reg. Z, and state consumer protection laws.  

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