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America Online agrees to refund customers for inability to get online

January 30, 1997

NEW YORK (AP) _ Bowing to a surge of criticism and legal threats, America Online on Wednesday agreed to give refunds to customers unable to get online to settle accusations it sold them a product it couldn’t reliably deliver.

The nation’s largest online service recently signed up hundreds of thousands of new customers without the means to accommodate the heavy usage. Many customers who enrolled in the company’s new monthly plan _ $19.95 for unlimited online time _ repeatedly encountered annoying busy signals. Further straining the company’s network was a massive advertising push to expand its membership.

Several states had threatened to sue America Online unless it promised refunds and stopped promoting the plan. The company also was named in lawsuits brought by individuals who said the company effectively breached customer contracts.

``Under the consumer fraud laws of this state and many other states, you can’t offer something to a subscriber and then not be able to deliver,″ said Jim Ryan, attorney general of Illinois, the lead state in America Online’s agreement with 36 states, which applies nationwide.

``They were victims of their own success,″ Ryan said.

Under the agreement, those of the company’s 8 million customers with recent trouble logging on can request a refund of all or part of the $19.95 monthly fee, or a month’s free access to the online service.

America Online did not admit any wrongdoing. But in an acknowledgement it attracted more customers than it could handle, it agreed to largely stop advertising its online service in February and add a disclaimer to ads thereafter if people continue to encounter delays logging on.

In addition, the company agreed to make it easier for people to cancel its service, adding phone operators, more lines for customers to fax in their cancellations and detailed online instructions.

``We have acknowledged with members we underestimated″ the company’s ability to handle the online usage, AOL chief executive Steve Case said in a phone interview.

``Our focus is really and has been on serving the needs of members.″

Case declined to estimate the cost of the refund program to America Online. If every member was able to get a full refund for the two months, an highly unlikely scenario, the agreement would cost America Online about $320 million.

America Online stock shot up 5.7 percent, or $2 a share, to $37 on the New York Stock Exchange. Analysts viewed the settlement as a necessary move by America Online to get past a barrage of negative publicity at a time when its online service is threatened by people’s easy access to the Internet.

``A long, drawn-out litigation would inevitably distract management at a time when AOL needs to critically focus on the right mix of gaining new customers and retaining existing customers in the threat of the wild frontier of the Internet,″ said Peter Kastner, an analyst at Boston-based Aberdeen Group.

Refunds will be based on how many hours each customer recently has been able to get online. The refunds apply to AOL members since December, when the flat-rate service began.

Customers who request a cash refund can get back their full $19.95 monthly fee for each of the two months they used the service for less than two hours. Customers who used the service less than eight hours during either of the two months will get back 50 percent of that refund.

Customers who used more than eight hours but less than 15 will receive 25 percent refunds. Customers who used more than 15 hours will receive no refunds.

Instead of cash, consumers can opt to receive a free month of online service. They do not need to show that they had difficulty logging on for this option.

In addition to frequent busy signals for subscribers attempting to log on during peak periods, America Online also has been plagued with a recent rash of technical glitches such as e-mail ``brownouts″ as it attempts to upgrade its network to accommodate the new users.

America Online has previously said it is selectively giving refunds to people who complain about their difficulty getting online. But until now, it had declined to give blanket refunds.

America Online has said it is spending $350 million between now and June to upgrade its network, including buying new modems, building a new data center to house computer equipment and adding more customer support representatives.

The problems in getting online are expected to decrease as the new equipment is installed.

Case would not say whether the company plans to increase its spending on system upgrades, but state consumer protection officials said they were reassured by AOL’s insistence that it was fixing the problems.

America Online agreed to report to the states its progress on giving refunds, accepting cancellations and its latest advertising.

``We’re not going away. We’re planning on holding them to the terms of this deal,″ said Attorney General Dennis Vacco of New York, one of the states that threatened to sue.

___

Editor’s Note _ AOL customers can apply for cash refunds by calling 1-800-827-6364, or instead opt for a free month of service by writing P.O. Box 511, Ogden, Utah, 84402-0511. They can cancel service by writing P.0. Box 1600, Ogden, Utah 84401, or faxing 1-801-622-7969.

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