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

April 22, 2013
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.  

If successful, plaintiffs’ Reg. Z claims could impact industry contracts.  The threshold issue is whether monitoring contracts, such as ADT’s form of agreement, are retail installment contracts governed by the act.  A retail installment contract is one in which a consumer agrees to pay for consumer goods in four or more installment payments over time.  Reg. Z addresses the regulatory concern about consumers paying interest to finance these installment transactions and require disclosures regarding the finance charges.  (Chances are when you buy a car or truck for personal use, the contract you sign at the dealership is a retail installment contract designed to comply with Reg. Z.)  Under Reg. Z, a retail installment contract must include a number of detailed, specific disclosures, including the total amount to be paid for the goods and any amount due as interest.  Plaintiffs allege the ADT form of agreement failed to make these disclosures and violate TILA. 

Whether the ADT subscriber agreement is a retail installment contract is a question the California district court may decide. From my perspective, without the benefit of a full factual record and briefing, if the RMR that ADT is charging subscribers isn’t properly attributable to ADT’s provision of services but is really attributable to financing some portion of the cost of the subscriber’s equipment and installation-related costs, the plaintiffs may have an argument that the contracts should be governed by the TILA. Any evidentiary trail indicating that, from the company’s perspective, some portion of the RMR really is attributable to installation, not monitoring services, would bolster that argument.

Subscriber agreements (including my form) that include a TILA-type disclosure about the total amount of be paid under the term of the agreement on the basic form may address this issue. The disclosure is a fairly simple matrix, and while I don’t believe that TILA applies to monitoring contracts, a court – including the Hogan court – could conclude that the Act does apply based on the facts of any particular case.  A form with this simple disclosure – and not all industry contract do – gives providers the opportunity to comply with the Act.

Does TILA and Reg. Z Mean No More Price Increases?  

Even if the Hogan court – or another court, since this class action is likely to be the first, but not the last of its kind – determines that TILA and Reg. Z, or some other federal or state consumer protection law do apply, these laws don’t prohibit security providers from increasing the RMR charged during the contract’s term. Regular, reasonable and consistent increases in RMR, where contracts allow, results in significant increases in RMR, even if the individual increases are limited to small amounts.   The challenge is how to comply with TILA and Reg. Z, which require the disclosure of the number of payments and the amount of each payment, when the contract allows providers the right to increase the periodic RMR charges during the contract’s term. 

In terms of the increase, some form agreements (including mine) adopt a fairly common industry approach – the security provider gives notice of the increase and the subscriber then can elect to object or accept the increase.  Subscriber acceptance allows the price increase to become effective, and the parties continue to be bound for the balance of the term at the increased RMR.  If the subscriber timely objects to the increase, however, the form gives the security provider a choice: It can elect to rescind the increase and continue on for the balance of the term at the original RMR or it can terminate the agreement, in which event it is no longer obligated to perform (and will no longer get paid).  This approach is fair – giving the subscriber the right to object and, if the subscriber is unwilling to continue at the increased RMR, the security provider has the responsibility to determine whether or not to move forward. 

Reasonable minds can also differ on what constitutes notice of the increase in RMR.  Subscribers will expect as much notice as possible (i.e., mailing them a clear and unambiguous statement that the RMR is being increased and setting forth an explanation of their rights with respect to the increase).  The security provider will want the notice to be as simple and inexpensive as reasonably possible (i.e., a simple notation contained in the periodic invoice sent to the subscriber that the RMR charge will be X amount in the next period). 

Finally, in terms of plaintiffs’ “hidden in the boiler-plate” argument, the law of most states includes the legal presumption that if you sign an agreement, you’ve read the agreement, understood the agreement and agreed to its terms.  One way around that presumption, of course, is if the court determines that ADT’s contract does run afoul of consumer protection laws.  We’ll keep out eyes on this and report as we learn.   

About the Author

Eric J. Pritchard

Eric Pritchard is a partner in FisherBroyles, a law firm with offices throughout the United States and in London. He spends his days trying to make the world safer for the security industry. You can reach Eric at [email protected].