Most alarm companies realize that federal law provides consumers three days to cancel a residential installation and service agreement. The devil is in the details though. In my experience, too many alarm companies fail to comply with all of the rule’s requirements; thus, here is a brief tutorial on a residential subscriber’s right of cancelation.
The Door-to-Door Sales Act is a Federal Trade Commission (FTC) rule that requires a seller, in any sale of consumer goods or services in excess of $25, to comply with certain notice requirements if any portion of the transaction takes place at a location other than the seller’s place of business.
The rule has a number of specific requirements – for example, the seller must provide the subscriber with two copies of the required form of notice of cancellation – one to keep and one to return if they cancel. The required notice must be separate from the underlying contract and include a nearly page long of text that the rule sets out verbatim. Likewise, a specific form of notice must appear next to the contract’s signature block and you need to get the notice form signed by subscriber acknowledging receipt. The seller must also provide a copy of the contract, and it must be in the same language as the sale (i.e., Spanish if you spoke Spanish).
Under the rule, the consumer can cancel a contract – for any reason – simply by depositing the notice (i.e., the separate document) in the mail addressed to seller and postmarked no later than midnight on the third day following the sale. Once cancelled, the seller must return the money within 10 days and the consumer must make the goods available to the seller at the consumer’s premises. The rules apply to electronic contracts as well as original wet ink contracts.
You can read the complete rule at www.ftc.gov.
Legal Ramifications of Non-Compliance
In my experience, many operators think they are in compliance when they are not. For example, many put the required notice text on the contract but fail to provide the separate notice – even though the contract text specifically refers to the “attached” or “provided” notice. This failure (or any other) means non-compliance; and that means a number of potential legal problems.
First, violation of the FTC’s rule means you have broken a federal law – that could open your company up to an investigation and fine by the FTC or the state attorney general where subscriber is located. Note that most states have laws similar to the FTC rule; however, the state law often has a broader scope –meaning it could apply in other contexts, such as telephone sales. Be sure you know and comply with state laws where your subscribers are located.
Second, the agreement may be voidable by subscriber – meaning the subscriber can elect to have a court set aside the contract. This can arise in the context of a collection matter against the subscriber or, worse yet, in the defense of a catastrophic liability case where the alarm company is sued for negligence and plaintiff’s counsel seeks to set aside the contract – and the protections you thought you had.
Worse, some industry insurance policies require an enforceable “liquidated damages” clause (in my opinion, what you really want is a limitation of liability clause, but that is grist for another column). If a court determines the contract is void, then you have no liquidated damages clause and possibly no more insurance coverage. Try funding litigation, settlement and a judgment on your own – it could bankrupt even the most profitable company.
Third, failure to comply with the rule could jeopardize your exit since not many buyers want to pay a hefty multiple for your mistakes. Likewise, lenders are risk averse and, at a minimum, are likely to require that you take steps to address these issues before agreeing to loan you cash.
Check your paperwork now and make sure you comply before it becomes a problem.
Eric Pritchard is a Philadelphia lawyer who works to make the world safer for security and life safety providers. Contact him at [email protected]. This column does not constitute legal advice; please contact an attorney with questions.
