Penalty Clauses and the Nexus One
Tech blogs are astir today at the fine print in Google’s Nexus One’s terms of sale. Turns out, if you buy a subsidized phone through google and cancel your phone contract “early”, not only must you pay a fee to the carrier, but google also wants you to pay it the difference between the list price of the phone and the sale price.
“You agree to pay Google an equipment subsidy recovery fee (the “Equipment Recovery Fee”) equal to the difference between the full price of the Nexus handheld device without service plan and the price you paid for the Nexus handheld device if you cancel your wireless plan prior to 120 days of continuous wireless service. For example, if the full price of the Nexus handheld device without service plan was $529 USD and the price you paid for the Nexus handheld device was $179 USD with a service plan, the Equipment Recovery Fee you pay will be $350 USD in the event you cancel within the first 120 days of carrier service . . . You authorize Google to charge the Equipment Recovery Fee directly to your credit card, or other payment method used to purchase the Nexus handheld device, upon cancellation of your wireless plan . . .
You agree that the Equipment Recovery Fee is not a penalty but is for liquidated damages Google will incur as a result of such cancellation. These damages may include, but are not limited to, loss of compensation and administrative costs associated with such cancellation or changing of wireless service provider(s), market changes, and changes in ownership. Please note that the Equipment Recovery Fee is imposed by Google and not your chosen carrier and is in addition to any early termination fees that may be charged by your chosen carrier in connection with termination of your wireless plan prior to fulfillment of your chosen carrier’s service agreement term.”
Notwithstanding the language of agreement that this is a liquidated damages clause, I’m pretty sure that customers could legitimately challenge this fee in court as a penalty . As many have noted, customers will end up paying more in termination fees than the cost of the phone (since both google and the carrier can charge in this model). As we all know, liquidated damages must be either a fair estimate of an uncertain harm, or be relatively close to the actual damages suffered by the promisee. The harm here isn’t at all uncertain, and I don’t think that charging more than the sales price constitutes a good measure of the seller’s actual damages. Notably, we can’t simply use the difference between list price and sales price as the lost expectation, since the sales price is inflated by the business model (sort of like health care costs charged by hospitals).
The collection method that google built into contract here is also a problem. It’s a form of self-help which customers ought to be able to challenge with their credit card companies. Indeed, the clause is so riddled with obvious legal issues that I started to wonder whether google wrote it seeking to take advantage of behavioral research suggesting that liquidated damages clauses change individuals’ feelings about breach. What do you think? Is google’s new slogan “Don’t be evil. But if you must be evil, be really good at it?”