Internet service provider America Online has agreed to pay $1.25 million in penalties and costs to settle complaints from customers about difficulties in canceling their AOL accounts, New York State Attorney General Eliot Spitzer said Wednesday.

AOL also agreed to reform its customer service procedures and change its practice of offering incentives to customer service representatives who had succeeded in dissuading customers from canceling.

The agreement represents another tech industry success for Mr. Spitzer, the same month he and Microsoft won a settlement from spammer Scott Richter (see Spam King’s Deal with Redmond). The settlement should also help win support for his campaign for the New York governor’s office.

The settlement will also provide solace to AOL customers, who have run into obstacles trying to exit the service after succumbing to the temptation of inserting one of the free AOL disks in their computer and trying out the thousands of hours of free Internet service it promised.

Stealth Retention Programs

“This agreement helps ensure that AOL will strive to keep its customers through quality service, not stealth retention programs,” said Mr. Spitzer.

“People had problems trying to cancel their service,” said Brad Maione, a spokesperson for the New York Attorney General’s office. “We received about 300 complaints over the course of two or three years.”

AOL cooperated with the investigation, he added. Shares of Time Warner, AOL’s parent company, were down $0.26 to $17.55 at the close of trading.

AOL spokesperson Nicholas Graham contended that the company has systems in place that make it easy and straightforward for customers to cancel.

“They can cancel in a number of ways,” he said. “It exists and works, and we are happy to make modifications to make it work better for members.”

He insisted that many customers call to cancel out of frustration because they have a problem they need to fix.

“If a member calls with the goal to cancel immediately, we respond immediately,” he said.

Every day, AOL receives questions from members about cancellation, added Mr. Graham, yet the company still has 21 million members in the United States alone.

“Clearly there are instances where members require a cancellation to be processed in a more timely way, and we work to improve every minute of every day,” said Mr. Graham. “We believe those instances to be unique. We are convinced we do right by our members, and our practices are completely aboveboard.”

Retention Bonuses

When the New York Attorney General launched an investigation of the Dulles, Virginia-based company’s customer service policies, however, investigators found that AOL reps were under orders to maintain subscriber numbers.

AOL had instituted minimum “save,” or retention, percentages that service reps were expected to meet. Mr. Spitzer and his colleagues also discovered that AOL had a system of rewarding employees who successfully retained subscribers who had called to cancel their accounts.

Customer service reps could receive bonuses worth tens of thousands of dollars if they managed to retain half the people who called to cancel their AOL service. In many cases, customers were retained against their will or without their consent. AOL frequently ignored requests to cancel its service and to stop billing them.

“I always wondered if AOL had in place an incentive for their reps to maintain an account when the customer wants to cancel, and Eliot Spitzer has answered my question,” said Jonathan Spira, chief analyst of Basex, an IT research firm focusing on knowledge sharing and collaboration.

Mr. Spira had trouble canceling his own AOL account.

“By tying bonuses to reps who were able to deflect a customer’s cancellation requests, AOL ensured that the cancellation requests would end up in the circular file as opposed to the cancellation file,” he said.

“When companies create an incentive system to keep customers, they need to ensure that they are not keeping customers against their will,” said Mr. Spira.

Industry Practices

AOL insists that its practices were not unusual.

“It’s important to point out that throughout the industry the practice of having a member retention program and the practice of providing compensation to customer service consultants for good customer service and exceptional member retention is de rigueur,” said Mr. Graham.

“It’s normal and it’s part of standard industry practice in the field,” he added. “It’s something we are agreeing to modify because we feel it would result in better service for AOL members, and it would be in the spirit of the agreement we worked out with the New York Attorney General.”

The agreement with the Attorney General’s office requires AOL to eliminate any requirements that its customer service reps maintain a minimum number of “saves” in order to earn a bonus.

“We will make modifications to better align the interests of customer reps with the interests of members and those changes will begin to be made in the coming months,” said Mr. Graham.

AOL must also provide refunds to all New York consumers who claim they were harmed by AOL’s improper cancellation procedures and provide them with up to four months of service. The Attorney General’s web site provides a claim form for AOL customers in New York.

Third-Party Verification

AOL must also record all service cancellation requests and verify that it has acted upon those requests. A third-party monitor will check to see that AOL has carried out all the requested cancellations.

With the agreement, AOL will become the only major ISP that will use third-party verification, according to Mr. Graham.

“We’ve gone above and beyond the call of duty in working with federal and state regulators,” he said. “We are pleased we reached an agreement with the state of New York to assist with the validation of member intentions.”

AOL has tangled with other regulators in the past outside New York. In October 2002, AOL paid $75,000 to customers in the state of Ohio to settle customer service complaints brought by the Ohio Attorney General, but the settlement involved no admission of wrongdoing, noted Mr. Graham.

In September 2003, AOL also entered into a consent decree with the U.S. Federal Trade Commission in which AOL modified its customer retention program and rebate programs, but no payment was involved.

The New York Attorney General’s office would not comment on whether it had received similar complaints about other ISPs or phone companies, but said it would take action if it did.

“We will certainly review any complaints we receive in that regard with any industry,” said Mr. Maione.