California county sues ADT

Are home security systems ‘financed sales?’ Lawsuit may have industry repercussions for contracts.
Tuesday, April 1, 2008

MARTINEZ, Calif. - A Contra Costa county district attorney and an industry attorney agree that security dealers should keep an eye on a lawsuit filed late February, which claims ADT is violating California and federal laws because its contracts do not disclose all potential consumer costs.
The civil suit, filed on Feb. 25, argues that customers are required to sign up for two- and three-year contracts, but are not told that the monitoring fee may increase after the first year. The contract also, according to the suit, does not tell customers that they must pay $450 if they terminate the contract in the first year or $200 if they terminate the contract in the second year. This, says the suit, violates California’s Unruh Act, which governs retail installment contracts, as well as the federal Truth in Lending Act.
“Our point is that ADT should tell the customer what their liability is going to be at the outset,” said Lon Wixson, deputy district attorney for Contra Costa County. “They should tell them upfront, lay their cards on the table. That’s what we want them to do and so far they’ve refused.”
ADT spokeswoman Ann Lindstrom declined to comment directly on ongoing litigation, but she released a statement that said ADT’s contracts comply with California and federal law.
The contracts disclose “detailed information to customers informing them” about monitoring charges, the statement said. “While ADT can raise the charges for its monitoring services after the first year of the contract term, ADT’s customers have the right under the contract to either accept the increase or decline it and cancel the remainder of the contract without a termination fee.”
Eric Pritchard is a partner in the law firm of Kleinbard, Bell & Brecker where he regularly represents buyers and sellers in the industry as well as security alarm companies and integrators. Pritchard emphasized that he is not familiar with the particulars of contracts in question or the factual circumstances in this case. However, he said security dealers should pay attention to this case.
He said that it appears the district attorney has taken the position that the sale of these ADT systems is a “retail installment contract,” which basically means that the system is being paid for, at least in part, “in the form of monthly payments.”
If, in fact, consumers are financing any portion of the actual cost of the system or its installation through monthly monitoring fees, then “the federal Truth in Lending Act very well may apply and dealers must comply with the act’s disclosure and other regulations,” he said.
“It’s just like when you finance the purchase of a car. The company providing the financing must make certain disclosures to you as a consumer,” he said. “This includes the total amount being financed, the interest rate, the total number of periodic payments and the amount you must repay to cover interest and the principal amount of your loan,” Pritchard explained.
He added: “In general, this industry does not treat the sale of a home security system as a financed sale, even if it is,” Pritchard said. “I think it’s an issue worth paying attention to,” he added. Pritchard also noted that state laws may apply to these sorts of practices as well.
Wixson said he’s been in discussion with ADT about its contracts for about two years. If the lawsuit leads to a trial, that trial would likely occur in a year or two. If the court agrees that ADT is in violation of California’s Unruh Law, ADT would be forced to change all of its contracts in the state. If it’s found to be in violation of federal law, other states could ask ADT to change its contracts. SSN