BILL ANALYSIS
SENATE JUDICIARY COMMITTEE S
Charles M. Calderon, Chairman B
1995-96 Regular Session
6
1
0
SB 610 (Leonard)
As proposed to be amended
Hearing date: April 25, 1995
Civil Code
GEH:ilc
LATE FEES
CABLE TELEVISION CONTRACTS
HISTORY
Source: California Cable Television Association
Related Pending Legislation: None known
KEY ISSUES
1. SHOULD LATE FEES OF AT LEAST 5 DOLLARS CHARGED BY CABLE
TELEVISION COMPANIES BE VALID IF CERTAIN CONDITIONS RELATED TO
TIMING AND NOTICE ARE SATISFIED?
A. IS THERE SUFFICIENT EVIDENCE TO JUSTIFY THE FIVE DOLLAR
AMOUNT?
B. IS IT APPROPRIATE TO CHARGE LATE FEES TO CUSTOMERS WHO
PAY FIFTEEN DAYS LATE?
(more)
2. SHOULD LATE FEES WHICH EXCEED 5 DOLLARS BE VALID IF THE FEE DOES
NOT EXCEED THE AVERAGE COSTS AND DAMAGES CAUSED OR INCURRED AS A
RESULT OF LATE PAYMENTS?
A. SHOULD COURTS BE ABLE TO INCREASE THE FEE, BUT NOT
DECREASE THE FEE?
B. SHOULD CABLE COMPANIES BE EXEMPTED FROM THE RULE
LIMITING RECOVERY OF INDIRECT COSTS?
(more)
SB 610 (Leonard)
Page 3
C. SHOULD THERE BE A CONCLUSIVE PRESUMPTION THAT 30 PERCENT
OF BILLING, ACCOUNTING AND WORD PROCESSING COSTS ARE CAUSED
BY LATE PAYMENTS?
3. SHOULD LOCAL AGENCIES BE PRE-EMPTED FROM REGULATING CABLE
TELEVISION LATE FEES?
PURPOSE
The purpose of this bill is to provide that California's general
statute applicable to liquidated damages does not apply to contracts
for cable television services, and that such contracts may assess
fees for late payments of at least $5.00, provided that certain
conditions are satisfied.
General Law on Liquidated Damages and Late Fees:
Liquidated damages clauses are clauses in contracts which specify
the specific amount of damages to be paid by a party breaching the
contract. Until 1977, California law frowned upon such provisions.
The rule was that parties should not be subject to a penalty for
breaching a contract; they should only be responsible for paying the
damages caused by the breach, which can only be determined after the
breach, not at the time of entering into the contract.
In 1977, the Legislature adopted recommendations by the Law Revision
Commission, and reversed the previous presumption against liquidated
damages clauses. However, the presumption was retained for consumer
contracts. Section 1671 of the Civil Code provides that liquidated
damages clauses in contracts for goods or services primarily for a
consumer's personal, family, or household purposes are void, unless
it would be impracticable or extremely difficult to fix the actual
damage.
Section 1671's retention for consumer contracts of the presumption
against liquidated damages incorporates the previous case law on the
requirements for upholding liquidated damages clauses. See Law Rev.
Comm. comments on 1977 amendments to Section 1671. Under that prior
case law, the amount of damages to be paid under the clause "must
represent the result of a reasonable endeavor by the parties to
(more)
SB 610 (Leonard)
Page 4
estimate a fair average compensation for any loss that may be
sustained." Garrett v. Coast & Southern Fed. Sav. & Loan Assn.
(1972) 9 Cal.3d 731. 739.
In Garrett, the California Supreme Court held that, even if a
contract provision for the payment of late fees is a void
liquidated damages provision, it is permissible to recover damages
from the consumer "measured by the time the money was wrongfully
withheld plus the administrative costs reasonably related to
collecting and accounting for a late payment." Garrett, supra at
p. 741.
(more)
SB 610 (Leonard)
Page 5
In Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383 1403, the
court held that, under Garrett, late payment damages could not
include the costs of maintaining an "in place" infrastructure for
dealing with late and overlimit activity generally. The court held
that there must be a "direct causal link" between the specific
breaches (the late payments) and the actual damages caused by those
specific breaches.
Specific Statutory Late Fee Provisions:
Section 1671 specifically provides that it does not apply to types
of contracts for which another statutory provision prescribes the
requirements for liquidated damages clauses. ( See Law Rev. Comm.
comments on 1977 amendments to Section 1671 for a list of such
provisions.)
Last year, in response to Beasley, which related to fees for late
payments of credit card bills and for exceeding the limit on one's
credit card, the Legislature enacted a new provision making Section
1671 inapplicable to such charges (SB 1333 (Lockyer), c. 1079.) SB
1333 prescribed a schedule of permissible credit card late fee
charges, ranging from 7 to 1$5.00 depending upon the lateness of the
payment.
Also last year, the Legislature modified the late fee provision in
the Unruh Act regulating retail installment sale contracts (SB 1583
(Hughes), c. 168.) SB 1583 increased the permissible late fee
charge in such contracts from 5 percent of the balance or $5.00
(whichever was less), to a flat $10 dollars.
Existing Law Governing Cable Television Billing and Late Fees:
The Video Customer Service Act, Section 53088 et. seq. of the
Government Code, prescribes, among other things, the requirements
for the timing of cable bills and the assessment of late payments.
Under this Act, the due date for a cable bill must be at least 15
days after the bill is mailed to the customer. A late fee may not
be assessed until the 22nd day after the bill has been mailed. The
Act requires notice prior to termination of service, but it does not
require notice prior to the assessment of late fees.
(more)
SB 610 (Leonard)
Page 6
The Act provides that disputes concerning its provisions shall be
resolved by the local agency which serves as the franchising
authority for the cable company involved in the dispute. The Act
also provides that it does not prevent local agencies from adopting
and enforcing service standards and consumer protection standards
exceeding those established in the Act.
The Act does not prescribe the amount of late fees charged by cable
companies. Therefore, the amount of such fees are governed by the
general liquidated damages provisions of Section 1671.
(more)
SB 610 (Leonard)
Page 7
Proposed Legislation:
This bill would establish a new statutory late fees provision for
cable television contracts, thereby making the general liquidated
damages requirements of Section 1671 inapplicable to such contracts.
Under the scheme established by the bill, if cable television
contracts provide for late fees which are not in excess of $5.00,
the late fee shall be valid, if all of the following conditions are
satisfied:
a) At or before the time a consumer enters into a contract for the
cable service, the consumer is provided with written notice that
a late fee will be charged;
b) At least 10 days prior to the late fee being imposed, the
consumer is warned in writing or otherwise that a fee will be
charged for delinquent payments;
c) The consumer's invoice specifies a due date;
d) The fee is assessed no earlier than 15 days after the due date
specified in the invoice, which means that the late fee may be
charged 30 days after the bill is mailed.
e) The fee is assessed on a delinquent balance of more than $10
dollars.
The bill provides that a late fee which exceeds $5.00 shall also be
valid, if that late fee is not more than the "average costs" and
damages caused or incurred as a result of late fees.
The bill defines "average costs" as including, but not limited to,
interest on the particular delinquent balance incurred subsequent to
the date.
The bill provides that in determining costs, it shall be
conclusively presumed that 30 percent of the total billing,
accounting, and data processing costs incurred in the necessary and
ordinary conduct of the business, whether directly or through a
third-party billing service, are a direct result of the need to
(more)
SB 610 (Leonard)
Page 8
account for, age, monitor, track, notify, and collect late paying
accounts.
The bill applies only prospectively: to contracts entered into on or
after January 1, 1996.
COMMENT
1. Validating late fees of at least $5.00 in cable television
contracts
(more)
SB 610 (Leonard)
Page 9
a) Dispute over the five dollar amount
i) Proponents' evidence and arguments
The sponsors of the measure, the California
Cable Television Association, have requested its
introduction as a result of several class action suits
which have been filed against cable companies alleging
that their late fees were invalid liquidated damages
provisions under Section 1671.
The cable industry argues that these class
action suits cause additional costs to consumers, and
that such additional costs will continue unless the
Legislature clarifies what type of late fees are
permissible.
The industry believes that it is unnecessarily
burdensome for them to have to justify their late
fee-related costs on a case-by-case basis, and that no
mater how reasonable their fees, someone will always
sue them because of the vagueness of the standard that
fees must be reasonably related to costs. Therefore,
the Legislature should set a predetermined amount which
the industry can charge.
The industry cites two cases as evidence of the
reasonableness of the 5 dollar figure. First, they
cite evidence submitted in a judicial proceeding to
approve a settlement agreement in a case against a
cable operator in San Francisco. In that proceeding,
the defendant's expert testified that costs were $19
dollars per late payment, and the the plaintiff's
expert testified that they were 5 to 8 dollars. The
judge ultimately approved a settlement providing for a
two tiered late fee of $4.25 for most late-paying
customers, and of $14.25 for a the latest-paying
customers.
Second, the proponents cite the consent decree
entered into between the San Diego County District
(more)
SB 610 (Leonard)
Page 10
Attorney and a cable operator which had been charging
$10 dollar late fees. The restitution payments
provided for in the consent decrees were based upon the
difference between the $10 dollar fee and a $5.00 late
fee. After the consent decree, the operator lowered
its late fee to $5.00.
The proponents have not provided the committee
with any documentation showing the methodology used to
calculate the $5.00 figures used in the San Francisco
and San Diego settlements.
(more)
SB 610 (Leonard)
Page 11
The industry points out that its proposed $5.00
fee for consumers who pay 15 days after the due date is
only half the amount of the $10 dollar fees authorized
last year in SB 1333 and SB 1538 for consumers paying
credit card and retail installment sale contract bills
15 days late. They also point out that the $30 dollar
average monthly balance for retail installment sale
accounts is similar to the average monthly bill for
cable services.
The proponents argue that late fees are a
substantial problem for their industry. They cite
figures from one cable company that between 5 and 7
percent of its customers pay a month late or more.
These figures vary considerably depending upon the
service termination policies of the company.
The industry points out that, instead of
charging late fees to customers paying fifteen days
late, they could cut out their costs in collecting late
fees by terminating service instead. They argue that
it is better for both consumers and companies to have
late fees than it is for the company to have draconian
termination of service policies.
ii) Opponents' evidence and arguments
The consumer advocates, local cable franchising
authorities, and district attorneys which oppose this
bill argue that cable companies are only being subject
to class action suits because they are flagrantly
violating the law.
The opponents argue that a $5.00 late fee is
disproportionate to the costs incurred by cable
companies. They have submitted a variety of estimates
of the actual costs incurred by cable companies as a
result of late fees. As with the proponents, the
opponents have not provided the committee with
supporting documentation for these estimates.
(more)
SB 610 (Leonard)
Page 12
According to the Sacramento Cable Television
Commission, it retained a consultant to study the costs
of Sacramento Cable, and the consultant concluded that
the company's costs are less than 50 cents per late
payment.
According to Utility Consumers Action Network,
research by the FCC indicates that a "$2.00 late fee is
much more in line with the actual costs associated with
late cable service payments." (Cable industry
(more)
SB 610 (Leonard)
Page 13
representatives acknowledge this FCC research, but emphasize
that the FCC has never issued a decision as to the
appropriate amount of late fees).
According to the California District Attorneys
Association, "Research currently underway by the Santa
Clara County's District Attorney's Office indicates
that the cost of collecting on overdue accounts is no
greater than $3."
The opponents also argue that the late fees
charged by cable companies are much higher than other
large vendors or utilities. They indicate that P,G&E,
SMUD, Cellular One, and the Sacramento Bee all charge
no late fee, and that Pacific Bell charges only 1.5
percent of the amount due.
By contrast, the opponents point out that the
$5.00 late fee authorized by this bill would be 20 to
45 percent of the average cable bill in most areas. In
response to this point, the industry argues, with
merit, that Section 1671 does not allow them to vary
their late fees on the basis of the amount due, since
their costs are the same regardless of the amount of
the late payment.
iii) Discussion
The only thing that seems clear amidst all of
these disputed figures is that the committee has not
been provided with sufficient evidence to set a
statewide late fee charge. Before passing last year's
two bills, the legislature was presented with
substantial evidence verifying the costs incurred by
banks and retailers.
SHOULD THE COMMITTEE DELAY ACTION ON SETTING A
STATEWIDE FEE UNTIL THERE IS MORE VERIFICATION OF THE
COSTS INCURRED BY CABLE COMPANIES?
b) Charging late fees for payments which are 15 days late
(more)
SB 610 (Leonard)
Page 14
Of the five conditions which must be satisfied under
this bill in order for a company to charge late fees (listed
as "a)" through "e)" in the "Purpose" section above), only
one seems to be controversial: the ability to charge late
fees to customers paying 15 days after the due date.
This provision has been criticized despite the fact that
it is more restrictive than present law, which allows late
fees to be charged 7 days after the due date.
(more)
SB 610 (Leonard)
Page 15
One of the reasons for the criticism is that the cable
industry generally bills for its services a month in
advance. Bills are sent at the beginning of the month to
prepay for that month, and the payment is due in the middle
of that month. Opponents therefore question how "late" a
customer really is if he or she pays for the service at the
end of that month, i.e. on the day the service has been
completely provided.
The San Diego Cable Television Review Commission and the
Utility Consumer Action Network have both suggested that it
would be more reasonable to allow customers an additional 15
days after the end of the month for which payment is sought.
The cable industry responds to this criticism by
pointing out that prepayment is the standard in the
entertainment industry, i.e. paying before you receive cable
programs is just like paying before you gain admission into
a movie theatre or a concert. Since it is appropriate to
charge before the customer receives entertainment, it should
be appropriate to measure the lateness of the payment from
the time the prepayment is due, not from the time the
entertainment service has been completely delivered.
The second criticism of this provision is levied by
several local franchising authorities which cite a history
of cable company billing abuses.
For example, San Luis Obispo County writes:
"In Los Osos some citizens have received bills are due
as soon as the following day.... The cable operator blames
it on the post office and continues to impose the five
dollar late fee unless a customer specifically calls them
about it. Most customers do not call and the company
collects an unwarranted fee...."
The San Mateo Cable Television Authority writes:
"The cities and county continually are deluged with
complaints from cable subscribers claiming that a reasonable
(more)
SB 610 (Leonard)
Page 16
amount of time is not being given from receipt of their
cable bills until the payment due date. Cable bills bear no
postmark, so subscribers have no proof to substantiate their
complaints."
These franchising authorities argue that this measure's
30 days-after-mailing rule will be ignored and abused to the
same extent that the present 22 day rule is.
(more)
SB 610 (Leonard)
Page 17
Technical amended needed: The bill should be amended to
prevent any confusion over the conflict between its late-fee
requirements and those in the existing Video Customer
Service Act, either by amending that Act, or by providing
that this bill's requirements apply notwithstanding that
Act.
SHOULD NOT THIS TECHNICAL AMENDMENT BE MADE?
2. Allowing late fees which exceed $5.00
a) Allowing courts to increase late fees, but not to
decrease them
The $5.00 figure in this bill is a floor, not a ceiling.
If a company charges a $5.00 late fee and its billing
procedures meet the requirements discussed in comment #4,
the fee is automatically deemed valid. However, a late fee
of more than $5.00 is also valid, if the fee is not more
than the average costs and damages caused or incurred as a
result of late payments.
This provision makes this bill notably different than
the other statutory late fee provisions, which specify a
ceiling for late fees, and do not allow a company to argue
that its costs justify a higher fee.
The cable industry argues that this provision is
necessary so that the $5.00 figure does not become
out-of-date over time, and that it is consistent with
existing law to allow them to charge higher fees if they can
justify higher costs.
In arguing for a flexible ceiling, but a rigid floor,
the industry seems to be talking out of both sides of its
mouth at once: case-by-case determination of whether fees
reflect costs is appropriate if it means higher fees for the
industry, but case-by-case determination is inappropriate if
it means lower fees for industry.
(more)
SB 610 (Leonard)
Page 18
SHOULD NOT ANY STATUTORILY FIXED AMOUNT BE A CEILING?
b) Exempting the cable industry from the rule limiting
recovery of indirect costs
The specific language of this "flexible ceiling"
provision appears to exempt the cable industry from the rule
on measurement of damages articulated in Garrett, supra and
Beasley, supra, as that rule would apply to cable television
contracts.
(more)
SB 610 (Leonard)
Page 19
That rule severely limits recovery of "indirect costs"
-- the general costs of maintaining an infrastructure for
dealing with late payments generally, and requires direct
causation between the particular late payments which were
charged the fee, and the costs attributed to those late
payments. In Beasley, supra, at p. 1403, the court stopped
short of adopting a bright line rule disallowing all
indirect costs, stating that such overhead and
infrastructure maintenance costs could be compensable if
they meet this direct causation test.
This bill provides that the fee must not be more than
the average costs and damages "caused or incurred as a
result of late payments." Further, the bill provides that,
in determining costs, it shall be conclusively presumed that
30 percent of the total billing, accounting, and data
processing costs incurred in the necessary and ordinary
conduct of the business are a direct result of the need to
account for, age, monitor, track, notify, and collect late
paying accounts.
It seems clear that these are the type of indirect costs
disallowed under the Garrett/ Beasley rule. Because this
bill does not abrogate this rule generally (by amending
Section 1671, for example), the cable industry would be
treated more favorably than any other industry when it went
to court to justify that its late fees reasonably reflected
its costs.
Aside from this inequity, it does not seem appropriate
to abrogate the rule on indirect costs at all. The logic
behind this rule is that every business must have a billing
system, and all billing systems must incorporate methods for
addressing inevitable late payments. No particular
late-paying customer causes the business to incur these
costs. The late-paying customer only causes the business to
use a system which the business must have in place in any
event.
Therefore, any particular late payment causes only the
costs of using that system to collect from that particular
(more)
SB 610 (Leonard)
Page 20
late-paying customer, i.e. the costs incurred in printing
and mailing a statement or telephoning a reminder, etc. If
the defendant is able to show a direct causation between
particular late payments and particular indirect costs, then
the rule allows recovery of those costs.
IF CABLE COMPANIES ARE ALLOWED TO JUSTIFY AN INCREASE
OVER THE STATUTORILY FIXED FEE, SHOULD NOT THE GENERAL RULE
ON INDIRECT COSTS APPLY TO THEM?
(more)
SB 610 (Leonard)
Page 21
c) 30 percent presumption
Even if it was appropriate to abrogate the indirect
costs rule, this bill's 30 percent conclusive presumption
would not be appropriate.
This presumption is further evidence of the cable
industry's result-oriented position on whether case-by-case
determination of costs is appropriate. If they want to
charge more than $5.00, they can show that the facts of a
particular case justify that cost. But, in doing so, the
actual facts of that case won't be examined; the court must
presume, regardless of the facts, that 30 percent of the
costs of maintaining a billing, accounting, and word
processing infrastructure are a result of the business's
general need to address the late payment problem.
The wording of the presumption is also obviously
overbroad; it does not even limit the accounting and word
processing costs to billing-related accounting and word
processing costs. The costs attributable to typing general
correspondence and marketing brochures, and the accounting
costs of preparing the company's annual statement and tax
return could be figured into the equation.
In supporting the 30 percent figure, the cable industry
indicates that the third party vendors with which they
contract for their billing services have informed them that
40 percent of their costs are attributable to late payments.
The industry concedes that it does not have any independent
verification of this statement by its contractors.
IF CABLE COMPANIES ARE ALLOWED TO JUSTIFY AN INCREASE
OVER THE STATUTORILY FIXED FEE. SHOULD NOT THEY HAVE TO
SPECIFICALLY JUSTIFY THE AMOUNT OF THEIR INDIRECT COSTS?
3. Pre-empting local regulation of late fees
By providing that a $5.00 late fee provision in a cable
(more)
SB 610 (Leonard)
Page 22
television contract "shall be valid", this bill pre-empts local
agencies from requiring late fees to be set at an amount of less
than $5.00.
The local agencies opposing this bill argue that the Federal
Communications Commission, pursuant to the federal Cable
Television Act of 1992, has granted local franchising
authorities the power to regulate the amount of late fees
charged by cable companies. 58 Fed. Reg. 29736. The industry
argues that the FCC rule is not clear on whether such power was
granted to local franchising authorities or to states.
(more)
SB 610 (Leonard)
Page 23
Assuming local franchising authorities have this power, three
would seem to be very good arguments for having them set late
fee amounts, rather than having such rates set on a statewide
basis. None of the other industries, like banks and retailers,
whose contractual late fee provisions are regulated by specific
statutes are regulated by local agencies like cable franchise
authorities.
As the entities which evaluate customer complaints and monitor
cable company performance, local franchise authorities are in a
much better position to determine whether particular companies
are engaging abusive practices, and to judge the costs which are
incurred by particular companies in assessing late fees.
The difference in the cost figures for assessing late payments
presented by the opponents may reflect no more than the varying
conditions of the different local markets. The cable industry
disputes this, arguing that there is little difference between
costs in different localities, and that the differences in the
estimates is caused by the opponents failing to count costs
which the industry believes are legitimately related to late
fees.
The cable industry also argues, correctly, that without a change
in state law, companies which complied with a locally regulated
late fee would still be vulnerable to suits. A plaintiff could
still allege that the locally set rates do not reasonably
reflect costs, and that they therefore violate Section 1671.
However, this bill could be amended to avoid that problem, by
providing that Section 1671 would not apply to any late fee
which complied with a local late fee regulation.
Another option would be for this bill to establish an amount,
like $5.00, but also provide that local agencies could require a
lesser amount.
A third option would be to provide that a fee complying with a
local regulation would be rebuttably presumed to be valid under
Section 1671, unless the regulation was not supported by some
deferential standard of review, like "substantial evidence", or
(more)
SB 610 (Leonard)
Page 24
"arbitrary and capricious."
SHOULD THE BILL BE AMENDED TO ALLOW FOR LOCAL REGULATION OF
RATES?
Support: California Cable Television Association
Jones Intercable
VIACOM Cable
Southwestern Cable TV
(more)
SB 610 (Leonard)
Page 25
Opposition: Consumers Union
Utility Consumers' Action Network
Consumer Attorneys of California
League of California Cities
California District Attorneys Association
Sacramento Metropolitan Cable Television Commission
County of San Diego Cable Television Review Commission
San Luis Obispo County
San Mateo Cable Television Authority
City of Thousand Oaks
Kemnitzer, Dickinson, Anderson & Barron
City of Los Angeles, Chief Legislative Analyst's Office
Prior Legislation: SB 1333 (1994) Chaptered
SB 1583 (1994) Chaptered
*******