America Online Agrees to Refunds in Access Dispute

America Online, the computer online network that has been staggering under the weight of its own popularity, moved Wednesday to head off a threatened wave of state consumer fraud lawsuits by offering credits and refunds to its 8 million members and taking new steps to make its network more accessible.

The company has been under siege from angry customers since December, when a new pricing plan created a surge in demand that overwhelmed AOL’s network and produced a rash of busy signals. In recent weeks, state attorneys general from around the country have taken up the issue, and several had threatened legal action.

In reaching a settlement Wednesday with the attorneys general of 37 states, including California, AOL agreed to offer customers one free month of service or refunds on a graduated scale. It will also make it easier for disgruntled customers to quit the service, and it will severely curtail its marketing efforts during February. Analysts estimated the refunds could cost AOL $65 million.

The settlement was highly unusual in that it involved such a large number of states and was put together in such a short time--just a week and a half after representatives from 20 states met in Chicago to discuss a joint consumer-fraud claim against AOL.

“You cannot offer a service to someone and charge them and then not provide it,” said Illinois Atty. Gen. Jim Ryan.

AOL’s travails highlight the volatile nature of the Internet services business. New customers are signing up by the millions, but the technical infrastructure has not always kept pace--and the industry has not adapted itself to the demands of mass consumer market that expects reliability comparable to that of the telephone or the television.

AOL, which offers electronic mail, publications and chat rooms on its own network as well as access to the broader Internet network, has nearly doubled in size just in the past year. It dwarfs all of its competitors: Nearly half of all Americans who are connected to a computer network get their connections through AOL.

The company got those customers by spending heavily on marketing and by building a service that was more consumer-friendly than most. It did, however, charge hourly fees that could add up quickly for heavy users.

But the development of the easy-to-use graphical portion of the Internet, known as the World Wide Web, made it relatively simple for consumers to connect directly to the Internet--which generally cost only about $20 a month for unlimited access. That forced AOL to go to unlimited access pricing too, at just $19.95 a month.

As Steve Case, AOL’s chairman and chief executive, admitted Wednesday, the company woefully underestimated how well its new flat-rate pricing would go over with consumers. Not only did half a million new customers sign up in December, but the average time each customer spent connected to the network in January was double what it was in September.

That double whammy overloaded the network, and many subscribers simply couldn’t get on. Among the customers unable to connect were many business owners and professionals who rely on AOL to communicate with clients and advertise their services. AOL had previously announced it would invest $350 million to expand its network, but the capacity crunch is expected to last until May.

Under the settlement, which covers December and January, customers who were connected to the network for less than two hours a month can apply for a 100% refund. Customers who logged on for between two and eight hours can get a 50% refund, and those who were connected for between eight and 15 hours may ask for a 25% refund. In lieu of a refund, all AOL customers can request one free month of service.

The settlement also requires AOL to make it easier for customers to quit the service. AOL will increase its customer service staff and allow members to cancel by phone, fax, mail and online.

To curtail growth, America Online will cease nearly all advertising for the month of February. Once marketing efforts are resumed, AOL must make it clear to consumers that they might encounter delays in getting online.

AOL investors apparently thought the company got off easy. The stock rose $2 to close at $37.25 in trading on the New York Stock Exchange.

But customers greeted the settlement with skepticism, saying neither the rebates nor the free service would make it any easier for them to connect to the network. Rob Eakins, who assembles ambulance equipment in Carlsbad, said he was unimpressed with AOL’s offer because “they had to be dragged kicking and screaming and they wouldn’t have done it otherwise.”

Analysts agreed that the company had bungled its response to the crisis. In addition to the money involved, the episode--which prompted mocking advertisements from competitors and jokes from late-night comedian Jay Leno--has tarnished AOL’s reputation.

“If they had taken proactive steps two weeks ago, they could have made brownie points by admitting their problems and offering refunds,” said Daniel Janal of Janal Communications, a Bay Area company that specializes in online marketing. “But they only did this after a lot of attorneys general twisted their arm.”

Still, California Atty. Gen. Dan Lungren hailed the settlement, saying it would improve the way AOL conducts business in the future. The deal still leaves open the possibility that the states could take up the case again if AOL’s problems continue.

AOL is also facing a legal battle directly from subscribers in California, New York, Texas and other states who are seeking approval for a class-action suit.

Times staff writer Mark Gladstone contributed to this story.

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How to Get AOL Credits, Refunds

As part of the settlement announced Wednesday, America Online members who had trouble accessing the service in December and January are entitled to refunds on a graduated scale.

To apply for a refund, AOL has asked customers to contact the attorney general’s office in their state. In California, customers can write to: Atty. Gen. Dan Lungren, 1515 K Street, Sacramento, 95814.

In lieu of a refund, AOL customer’s can request a credit for a month of free service by writing to AOL Member Refunds, P.O. Box 511, Ogden, Utah, 84402-0511. Please include your name, address, master account screen name and phone number.

The settlement also makes it easier for customers to cancel their memberships with AOL. Customers can cancel by phone by calling (800) 827-6364 or by sending a fax to (801) 622-7469.