ADT targeted over early termination fees, unilateral price increases

WALNUT CREEK, Calif.—It's standard practice for security companies to charge customers early termination fees, but now a federal class-action lawsuit is targeting ADT for the penalties it imposes for early termination and also its unilateral price increases on monitoring contracts. The practices violate federal and state consumer protection laws, the lawsuit contends.

“Just because something is a long-standing practice doesn't mean that it's legal,” L. Timothy Fisher, one of the attorneys representing ADT customers in the lawsuit, told Security Systems News. “That's why we brought the case—we think it's illegal.”

He said his law firm, Bursor & Fisher, which is based here, brought similar legal challenges against cellphone companies over their standard practice of using early termination fees. “We had settlements with those companies, including a $21 million settlement with Verizon, and we got a ruling that Sprint's early termination fee here in California was illegal,” he said.

Fisher said cellphone providers have changed their practices as a result of that litigation. “In my cellphone cases, that industry has reformed itself and now has gone from a flat early termination fee to a prorated early termination fee that declines over time,” he said.

Two ADT customers—Emily Hogan of California and Pamela Rubeo of Illinois—are the lead plaintiffs in the lawsuit against ADT, filed in U.S. District Court in the Central District of California late in 2012. The termination fees and unilateral price increases are a violation of the federal Truth in Lending Act and also consumer protection laws in California and Illinois, the lawsuit asserts.

It states that there are at least 100 people who have been similarly impacted by ADT's practices, which the lawsuit calls “deceptive and unlawful.” But Fisher predicts many more will end up being part of the lawsuit.

“We think it's probably vastly more than that because the class includes anybody nationwide who paid the early termination fee,” Fisher said. “We don't know the exact number but we think it's going to be a substantial number of people.”

As of mid-March, ADT had not filed a response to the complaint in court. Sarah Cohn, director of media relations for the Boca Raton, Fla.-based The ADT Corp., declined to discuss the case, citing the company's policy of not commenting on pending litigation.

But Cohn noted that “termination fees are common in the industry when a company absorbs the upfront cost of the installation.”

Les Gold, an attorney who specializes in the security industry and is a partner at Mitchell Silberberg & Knupp, a law firm with offices in Los Angeles, New York and Washington, D.C., said he couldn't comment directly about the lawsuit because he hadn't read it in detail.

But speaking generally about termination fees, Gold told SSN, “on the face of it there is probably nothing wrong with an early termination fee. … Normally one would be entitled to a loss of profit and so frequently they just determine what a loss of profit is and it's considered an early termination fee.”

But the lawsuit called early termination fees “the linchpin of ADT's 'never let them go' strategy” and claims they are used “simply as an anti-competitive device and not to compensate ADT for any true costs” it incurs when a customer ends a contract prematurely.

Also, the lawsuit says, “the penalty is also extracted from customers who contracted with ADT to simply monitor a system that was previously installed, requiring no equipment to be installed and resulting in a windfall to ADT upon termination. By charging the early termination fee, ADT gets paid for years of monitoring without doing any monitoring to earn those fees.”

Also, when customers remain under contact, ADT unilaterally increases their rates without adequate prior notice or properly informing customers or getting their consent, the lawsuit contends. “ADT bases its 'right' to do so on small-print boilerplate in the contract that is not signed or highlighted for the customer in any way and that simply declares ADT's right to increase fees unilaterally,” the lawsuit asserts.

It says that Hogan, the California plaintiff, signed a contract with ADT in July 2008 and ADT increased her rate in August 2011 without prior notice and again in March 2012.

“Emily Hogan's agreement requires notification of any rate increase. The contract provides that Ms. Hogan would have the right to challenge, in writing, any rate increase within 30 days of notice of the increase. The contract further provides that ADT may then agree to waive the increase. However, if ADT does not do so, Ms. Hogan would have to provide 30 days' notice of termination,” the lawsuit states. “This provision provides another disguised penalty fee for ADT. If ADT does not waive its increased fee, a customer would be charged that fee for at least another month or two before ADT would allow them to terminate.”

Rubeo, the plaintiff from Illinois, signed a contract with ADT in March 2011, a few months before her home was burglarized in September 2011, even though her alarm was activated that morning, the lawsuit says.

It says ADT told her that the alarm she had bought from an authorized ADT dealer “was obsolete and was not being sold by ADT.”

“Because Rubeo had not realized that the alarm they purchased could so easily be bypassed, she elected to terminate her relationship with ADT and its authorized dealer,” the lawsuit states. She provided notice of the cancellation in writing and was told by ADT she wouldn't be charged a penalty, according to the lawsuit.

However, it says that Rubeo “was subsequently billed $743.19 for early termination of her contract. After having been burglarized and lost thousands of dollars' worth of possessions, she was now being penalized by the very company that was supposed to protect her home in the first place.” Worried about her credit rating, she ended up paying a reduced amount that ADT and the dealer agreed to accept, the lawsuit says.

This isn't the first time ADT has been sued over such fees, according to Jana Eisinger, another attorney in the case. A similar case previously was brought in California, she said.

"The Contra Costa [County] District Attorney's Office filed a suit against ADT in 2008 which made the same allegations,” Eisinger said.

That case was settled, but California residents who received restitution as the result of that settlement may still be entitled to recovery under this lawsuit, according to Fisher and Eisinger.

“It's our desire [for] anybody who has paid this illegal fee to have them made whole, to get them justice,” Fisher said.

He said the specific amount of damages sought has yet to be determined. “That's something that we will ascertain by discovery and consultation with the expert witnesses we retain who help us determine the actual amount that's been collected unlawfully from our clients and class members,” Fisher said. “But we suspect it's going to be a substantial amount of money.”