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Tuesday, February 28, 2006

Liquidated Damages Okay in Consumer Service K

California_flag_21 Liquidated damages clauses in standardized consumer services contracts are enforceable, according to a recent decision by the California Court of Appeals.

At issue were late fees in cable television contracts, which the cable companies’ agreements specified as liquidated damages
intended to be a reasonable advance estimate of our costs resulting from late payments or non-payments by our customers, which costs will not be readily ascertainable, and will be difficult to predict or calculate, at the time that such administrative late fee(s) and related charges are set because it would be difficult to know in advance: (a) whether you will pay for the Service on a timely basis, (b) if you do pay late, when you will actually pay, if ever, and (c) what costs we will incur because of your late payment or non-payment.

A consumer activist group challenged the fees, but in Utility Consumers’ Action Network, Inc. v. AT&T Broadband of Southern California., Inc., 06 C.D.O.S. 630 (Cal. App. 2d Dist. Jan. 20, 2006), the court held that there was no need to attempt to ascertain likely damages on an individual customer basis:

Requiring a large enterprise to negotiate the terms of a late fee provision with thousands or hundreds of thousands of potential customers would effectively make it impossible to provide for late fees, even when they are warranted by the impracticability of determining damages and even when the amount selected by the business was designed to do no more than cover its damages and bore the proper relationship to the amount of such damages. We refuse to endorse such an interpretation of the reasonable endeavor requirement.

Patrick E. Premo and Karen P. Anderson of Silicon Valley’s Fenwick & West LLP provide a summary of the case and its implications in California Court Enforces Liquidated Damages in Standardized Form Contracts for Consumer Services.

[Frank Snyder]

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