Verizon invites customers to pay by phone or through its website. The website would be most convenient for me - I'm online all the time - but every time I try, their website is always broken in some way. So it just swallows up my time and effort and I end up still needing to find some other means to pay. By phone might also be workable, but it's a mode of payment that seems very dependent on phone reception, which I no longer seem to have reliably. (Thanks, Verizon.)
So I pay by check. Only last month I had a slight envelope locating problem - the check was all ready to be mailed, but it ended up stuck in my locker until I got back from Japan. Oops. But I dropped it in the mail as soon as I got back and they've now long since had the money.
Still, I wasn't surprised to see the outstanding amount on this month's bill. They got the money late, I understand. But I was surprised to see the $5 late fee tacked onto it. That's a pretty substantial penalty on a bill of $44.01 - more than 10%.
Oh, but it wasn't a penalty - it said very clearly on the bill:
"The charge is the greater of $5 or 1.5% per month as permitted by law, and are liquidated damages, not a penalty." (Emphasis added.)
They've got to be kidding - liquidated damages? Liquidated damages for what?
a) Liquidated damages apply in situations where there's been a breach of contract. There was no breach here. I performed my part (albeit imperfectly). They got my money and they continued my service, suggesting that even they themselves didn't consider the late payment a breach. Furthermore, it's not like each month's service constitutes a separate contract with its own potential for breach. The contract I have for them is for a year, and it's clearly still in effect, so again there was never any breach that could trigger a liquidated damages clause.
b) Liquidated damages are appropriate only when there's no good way for the non-breaching party to cover its losses due to the breach. These clauses come up in situations like summer camp slots (and are still subject to litigation over their appropriateness, but at least they are presumptively plausible in this context): if a camp reserves a spot for a camper who cancels at the last minute, the camp will have a hard time getting someone else to take that spot. Liquidated damages ensures they don't suffer financially as a result of the cancellation. Liquidated damages can also apply to situations where the vendor could sell to an unlimited number of customers. Maybe the vendor could find another to take the breaching party's place, but perhaps that vendor would have had that customer anyway. Liquidated damages in this kind of situation would allow the vendor to recover from the loss of the breaching party's business it was otherwise entitled to without sacrificing the additional business of the "substitute" customer.
Neither of these scenarios applies to Verizon, however. I didn't prevent them from taking any on additional business. If it were true that Verizon can only bear a certain number of customers (which does not seem to be the case, given that they continue to solicit new ones), providing me service for which I don't pay might be taking up business capacity that they'd prefer to provide to someone who did pay. But Verizon has no such limitation, like a summer camp with a finite capacity. And, again, I did pay. They still had my business, as well as any other business they managed to load up on from other customers. They suffered no loss for which they needed liquidated damages to cover in order to be made "whole."
c) The strongest argument for Verizon is that by my payment being late, they had cash flow issues which made my delay expensive for them. This I doubt: Verizon is an enormous company with enormous cash flow and is well equipped to price its services and manage its money in anticipation for the inevitable late payment by a customer. Or two. Or a hundred. Etc. I therefore doubt they suffered any real, measureable loss.
But even if they did, damage recovery is limited to the loss suffered. In the case of liquidated damages, which are predetermined in advance of any loss, they need to be reasonable in proportion to the value of any actual, eventual loss. Five dollars on a $44.01 bill is not reasonable - it's more than 10%! Even if Verizon was so destitute that it had to rush out and get a loan to cover the two weeks it hadn't received my money by, I don't think it cost it 10% of the delayed amount to do it. Plus it's incredibly unlikely that Verizon had to pursue this scenario at all. And that $5 amount is fixed regardless of the amount owed. It only becomes the more reasonable 1.5% figure at $500, an amount where I could see it perhaps becoming more expensive for Verizon to cover my late payment, and yet even at that point they would still limit the damages to 1.5%. If we assume that these "liquidated damages" really do cover costs incurred relating to cash flow, can we really believe that in the Verizon universe, it's cheaper for them to cover a large debt than a small one?
So, for all the above reasons, Verizon has no business billing me this $5 late fee. I called to tell them as much and the agent kept saying, "I can't give you back your $5," until I must have said the magic words "good customer service" at which point all of a sudden he snapped into action. Fine, whatever. But some consumer protection group may want to take a look at this - at $5 a pop, Verizon is probably walking away with a tidy sum from a lot of its customers that it has no legal entitlement to.
Edited 5/4/05. I'm also flattered to report that this post was referenced here.