Blockbuster Settles State Probes Into Late-Fee Ads

Blockbuster Inc. said Tuesday that it would pay $630,000 to settle investigations into claims that the nation’s second-largest video rental chain misled customers with its heavily advertised “No Late Fees” promotion.

The money will go to 47 states and the District of Columbia. Dallas-based Blockbuster also agreed to give refunds to customers who were charged for movies they didn’t return on time or who paid restocking fees after they brought rentals back. In addition, Blockbuster said it would do a better job of explaining its “No Late Fees” policy.

The deal came a month after several state attorneys general formed a committee to investigate Blockbuster’s late fees advertising campaign and New Jersey filed a civil suit accusing the video rental giant of duping customers.

The attorneys general concluded that the campaign, launched with much fanfare late last year, was misleading because customers could potentially get stuck buying movies or games that they failed to return on time. They were automatically charged the full sales price if an item wasn’t returned by the eighth day. Even when customers returned rentals within 30 days and weren’t docked the full amount, they were hit with a $1.25-per-DVD restocking fee.

“Blockbuster’s ‘No Late Fees’ campaign may have had a catchy slogan and clever ads, but it did not tell the truth,” said California Atty. Gen. Bill Lockyer, whose office is collecting $23,000 of the settlement. “This agreement ensures consumers no longer will be misled and that those who were deceived can get their money back.”

The $630,000 is intended to reimburse the states for the costs of their investigations.

Attorneys general from Florida to Texas to Oregon made separate announcements about the settlement.

“Consumers deserve clear and complete information about retail offers,” New York Atty. Gen. Elliot Spitzer said. “In this case, an offer that sounded good carried significant hidden costs.”

The agreement ends a public relations annoyance for Blockbuster but won’t deliver much financial pain. Blockbuster spokeswoman Karen Raskopf said the company expected the total refund amount to be small because fewer than 4% of the movies and games rented since January ended up being automatically purchased by customers.

Blockbuster’s shares slipped 18 cents, or 2%, to $8.74 on Tuesday on the New York Stock Exchange.

As part of the settlement, Blockbuster agreed to clarify in its marketing campaign that there are, in fact, limited late fees; any franchise store not participating in the clarification program must remove all “No Late Fee” signs.

“Our customers will be glad to know that we are not changing our ‘No Late Fees’ program, but we are adding some additional communications pieces to support the program,” said Nick Shepherd, president of Blockbuster’s U.S. store operations. “More people are renting from us more often, so customers clearly like ‘No Late Fees.’ ”

The state of New Jersey didn’t participate in the settlement and is still pursuing its lawsuit. Blockbuster’s Raskopf said the company was negotiating with New Jersey and hoped to resolve the matter quickly.

New Hampshire and Vermont also didn’t join in the settlement.