Blockbuster faces lawsuit over unfair late fees

Industry paper The Hollywood Reporter reports today that Blockbuster is facing a class action lawsuit for unfairly charging late fees..

A law firm known for winning high-profile entertainment industry cases has filed a class-action lawsuit against Blockbuster Inc. (NYSE:BBI), alleging that the nation’s largest video rental chain unfairly penalizes its customers with excessive late fees. The lawsuit, filed Wednesday on behalf of Hollywood resident Monica Rocha by Santa Monica-based O’Neill, Lysaght & Sunn Llp., alleges that Blockbuster’s late fees exceed any real damages and are designed to unfairly penalize Rocha and other Blockbuster customers.

A Blockbuster spokesman declined comment on specifics of the complaint, but he defended the company’s late-fee policy, saying that in February the policy was “improved” to the customer’s benefit. That improvement, known as the “convenience program,” assesses a late fee according to the rental period rather than on a per-day basis, meaning that for a customer who rents a VHS tape, DVD or video game for a five-day rental period, the late fee would equal the five-day rental fee — even if the item is only one day late.

Blockbuster officials point to in-house research that shows an 81% customer approval rating for the convenience program. But it’s that very policy that is central to the class-action lawsuit filed in California Superior Court in Los Angeles.

“This practice outrages many Blockbuster customers, and those customers have the right to recover their losses,” said lead attorney Brian C. Lysaght, who won a $9.8 million judgment on behalf of writer-director Ron Shelton against 20th Century Fox Film Corp. in 1997.

Blockbuster, with more than 7,000 stores worldwide, received $203.2 million in late fees — or “extended viewing fees” — during the quarter ending June 30. That represents 16.7% of total rental revenue for the quarter, according to Blockbuster’s most recent filing with the Securities and Exchange Commission.

Under the previous late-fee policy, Blockbuster realized $164.7 million in late fees, representing 15.8% of total rental revenue for the comparable quarter in 1999, according to SEC filings. The company said in its most recent quarterly report that the increase in late-fee revenue from 1999 to 2000 was “primarily due to the increased convenience for customers who chose to keep rental product for another rental term.” Lysaght disagrees, saying the policy is designed specifically to boost revenue at the customers’ expense.

When examining the company’s six-month revenue, Blockbuster’s late fees averaged about 16% of total rental revenue, despite the fact that it added nearly 500 stores in the comparable period this year, SEC filings show. This may suggest that revenue from late fees actually decreased. Still, Blockbuster leads the industry in percentage of revenue raised from late fees, according to industry reports. Blockbuster’s publicly traded competitors don’t break out late fees in their financial reports, but media analysts agree that late fees typically represent between 10%-12% of rental revenue at most video rental chains across the nation. Before the Rocha complaint can go to trial, a judge must certify its class status. A similar late-fee case (Dickey vs. Blockbuster) filed in San Diego Superior Court was denied class certification Aug. 4 by Judge Charles Wickersham on separate grounds from those alleged in the Rocha complaint.

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