3.9.23 – Security Info Watch –Paul Rothman
After a frenzy of media attention in the mid-2010s, a massive punitive judgment against Vivint last week has once again put the issue in the spotlight for the alarm industry
This article originally appeared in the March 2023 issue of Security Business magazine.
Back in December 2014, David Bleisch, who was at the time the Chief Legal Officer for ADT, appeared on the ABC News show 20/20, warning about rival companies “lying and swindling people into switching, unknowingly switching their monitoring company.”
He said ADT had received around 4,200 complaints in 2014 alone from customers who said a door-to-door salesman who claimed and appeared to be from ADT tricked the customer into signing up with another home alarm company.
The exposé was the beginning of a five-year effort by the company to publicly clean up these sorts of tactics. With Bleisch at the helm, ADT offered $25K rewards for hot tips and worked closely with the Better Business Bureau. The company won its initial deceptive sales lawsuit against the notorious Alder Security, whose deceptive sales tactics were caught on undercover video for the TV program Inside Edition.
ADT went on to win judgments against Alliance Security and Capital Connect. In 2018, ADT scored its largest payoff, a $10 million settlement with Vivint, followed closely by a $4 million judgment again over Alder Security, and a $3 million settlement against Northstar Alarm – and the issue finally seemed to fade into the background.
Lesson Not Learned
In late February, the alarm industry was jolted back into the discussion by a whopping $189 million judgment in a North Carolina court against Vivint for doing pretty much the same thing – only this time it was to CPI Security. Perhaps Vivint will be the next company to earn that “notorious” moniker?
“First, the sheer size of the verdict – nearly $190 million dollars – is very substantial,” explains Security Business legal expert Timothy Pastore of
Montgomery McCracken Walker & Rhoads LLP. “Second, the largest component of the award was not for direct or consequential damages but was for punitive damages – meaning the jury intended to punish Vivint for what the jury determined was deceptive and unfair business practices.”
Pastore explains that customer theft is a big threat in the security industry, particularly for residential customers. “This is because residential customers are susceptible to claims that, unless they sign up with a new company, their security system will not work,” he says. “Sometimes the claim is that their existing alarm company went out of business; here, the allegation made by CPI is that Vivint claimed it merged with CPI. In either case, the customer simply wants a functioning alarm system.”
“The jury found that Vivint misled customers and caused them to believe that their system would not work unless they signed a new contract with Vivint,” Pastore adds. “While Vivint has every right to appeal, the jury very clearly intended to send a message to anyone else who might consider competing for customers in this way.”
The judgment has now called into question the pending $5.2 billion acquisition of Vivint by NRG Energy as well. NRG released a statement to financial website Seeking Alpha that the company is “continuing to evaluate the decision and our options. As we shared during our recent earnings announcement, NRG’s acquisition of Vivint is pending and has not yet closed.”
Vivint’s stock price (NYSE: VVNT) also took a hit on the news, dropping by as much as 7.98% last week before slightly rebounding. For its part, Vivint released a statement that it would be appealing, saying “the amount of damages awarded are egregious.”
Door-to-Door Sales in Sharp Decline
“The deceptive sales issue has faded over the past few years, primarily because (with the possible exception of Vivint), the level of door-to-door sales activity has significantly declined over the past five years or so,” explains Merlin Guilbeau, CEO and executive director of the Electronic Security Association (ESA).
Along with the obvious slowdown in door-to-door sales due to the pandemic, Guilbeau cites several factors that contributed to a sharp decline, including increased activity in the DIY space, fewer dealer programs, and operational and financial challenges faced by door-to-door sales companies.
“The financial challenges are due to…a significant decrease in [these companies’] access to capital, which has been due to a variety of factors, such as banks exiting the industry, large alarm companies closing down or scaling back their dealer programs, etc.,” Guilbeau explains.
Guilbeau adds that in the past few years, ESA has increased online sales classes as part of its National Training School, as well as sales-related best practice sharing sessions in the annual Electronic Security Expo’s (ESX) educational lineup.
“The best way to rid our industry of deceptive sales practices is to keep decision makers well-informed – and that is an initiative ESA is very much still committed to,” Guilbeau adds. “As it relates to ESA, each member signs a Code of Ethics agreement that attests to sales practices that are ethical and transparent. We know companies with higher ethical standards experience greater customer loyalty, satisfaction, and referrals – and we believe educating the industry about sales best practices that ensure every lead, prospect or customer is treated with respect, fairness and honesty is the most effective way to reduce these unfortunate instances.”
Guilbeau said that Vivint is not a member of the ESA.