Residential Security: War on Early Termination Fees

Pending class action lawsuit alleges that ETFs violate consumer protection laws


ETF provisions are not enforced where the fees were excessive and bore no relation to any costs the company may incur when a consumer cancels service. It remains to be seen whether other jurisdictions will follow the more consumer friendly decisions of California courts in their treatment of ETFs as applied to the security services contracts, or simply enforce contract terms as written — exemplified by the Northern District of Illinois's decision in Maddox.

 

ETF Strategies for Providers

There are some useful contracting principles that can help increase the chances of enforceability of an ETF; and hopefully avoid the significant costs inherent in the defense of litigation that could transition into a class action.

Companies should base the fee on objective and reasonable costs associated with early termination. Again, there is no bright-line test as to what qualifies as objective and reasonable; however, be sure to have some calculable basis for the ETF charge. Note that security providers should be cautious of implementing blanket and costly ETF fees based on the upfront costs of installation they absorbed in obtaining the customer.

The plaintiffs in the pending federal class action against ADT argue that customers who begin their contracts after moving into a property with an existing monitoring system already installed should not have to bear the burden of those installation costs in their ETFs.

Finally, the ETF should appear conspicuously in the contract. It is useful to place the ETF in its own section or paragraph, and to use bold or larger font for titling. This helps discredit customers from claiming that they were unaware of the fees associated with terminating the contract.

 

Philip R. Kujawa is a partner in the law firm Hinshaw & Culbertson LLP. For more information, please contact him at (312) 704-3558 or via email at pkujawa@hinshawlaw.com.