Sheppard Mullin Financial Institutions Law Blog

Question: Is a reasonable liquidated damages provision in a consumer contract enforceable even if there were no actual negotiations between the parties?

Answer: Yes, according to the Second District Court of Appeal in Utility Consumers' Action Network, Inc. v. AT&T Broadband, 06 C.D.O.S. 630 (Jan. 20, 2006).

In this case, a cable internet service contract imposed a $4.75 late payment fee. The consumer group challenged the fee on the grounds that it was unilaterally set by the cable provider and was not the result of mutual negotiations between the provider and its individual subscribers, as arguably is required by § 1671 of the Civil Code. The plaintiff stipulated that the late fee was reasonable and that the cable providers notified their subscribers of the late fee provision before service began. The trial court granted summary judgment in favor of the providers.

The Second District affirmed. Relying heavily upon a legislative report by the California Law Revision Commission, and providing an extensive analysis of existing case authority, the Court ultimately concluded that if a standard form liquidated damages provision reflects a "reasonable endeavor" to estimate actual damages, actual negotiations with consumers is not necessary. It noted that liquidated damages "do serve an important function" and that, "[r]equiring 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 . . . ."

Click here for an electronic copy of the opinion.