On January 2, 2014, the Eleventh Circuit Court of Appeals found that the Fair Debt Collection Practices Act prohibits collection agencies from charging consumers a percentage fee of the balance of their debt unless the consumer has explicitly agreed to such a fee arrangement.  In Bradley v. Franklin Collection Services, Inc., a unanimous panel ruled that the defendant violated the FDCPA by forcing the plaintiff to pay a collection fee of 33.33% of his debt.

Specifically, plaintiff failed to pay medical bills, and, as a result, his debt was sent to the defendant for collection.  The collection contract between the health care company and the defendant stated that the health care company would add 33.33% to a debt prior to transferring the account to the defendant.  In the plaintiff’s underlying agreement with the health care company, he agreed to pay all reasonable costs necessary to collect on any debt.

According to the appeals court, the collection fee added to plaintiff’s account was a form of liquidated damages in disguise.  Citing section 1692(e) of the FDCPA, the court ruled that, “[b]ecause there was no express agreement between [the health care company] and [plaintiff] allowing for collection of the 33 and ⅓% fee, that fee violates the FDCPA.”  The court based its ruling on an Eighth Circuit decision holding that a debt collector violated the FDCPA when it charged a consumer a collection fee based on a percentage of the debt instead of the actual costs of collection.

Notably, the Bradley decision did not hold that collection of a percentage-based fee is always in violation of the FDCPA.  The court suggested that a percentage-based fee would be appropriate if the contracting parties agreed to it, thus allowing for a potential alternative approach.  The court emphasized, therefore, that it was the nature of the agreement between the health care company and the plaintiff that violated the FDCPA, not the amount of the fee.

Charging consumers miscellaneous fees and charges for add-on products and services has become a top area of regulatory concern and presents litigation risks for consumer companies of all types.  Bradley teaches that in the specific area of the FDCPA, charging fees needs to be supported by adequate contractual language or an authorization under controlling law.