AUSTIN, Texas (Legal Newsline)- Conn's Appliances has agreed to pay $4.5 million in restitution to settle claims by the Texas attorney general that the company defrauded consumers.

Texas Attorney General Greg Abbott filed the suit May 28 in Harris County, charging Conn's with failing to honor product warranties, misleading customers about the nature of its products, false advertising and other violations of the Texas Deceptive Trade Practices Act.

"Just in time for the holiday shopping season, today's agreement fundamentally reforms how Conn's does business," Abbott said. "Under its agreement with the state, Conn's must remedy its high pressure sales tactics, refrain from misleading customers about extended warranties, and fully honor the warranty agreements that it sells to customers. By redressing of improper conduct and setting aside restitution, this agreement benefits past, present and future Conn's customers."

Abbott said his office had received some-3,500 customer complaints against the company, which he alleged to have used aggressive and deceptive sales tactics to increase its extended service warranty sales for consumer appliances, electronics and other products.

Abbott was seeking up to $20,000 for each complaint, which could have attached a $40 million price tag to the suit. The attorney general was also seeking to impose a $250,000 penalty against Conn's if the retailer's conduct financially harmed persons aged 65 or older.

In addition to $4.5 million in restitution, Conn's settlement with the attorney general also requires the company to pay $250,000 in attorney's fees and $100,000 to the University of Houston Consumer Law Clinic.

Conn's brochures had claimed the extended warranties protected purchasers "for a two full years from the date (they) purchased the product."

However, customers did not actually receive two-year warranties. In fact, the replacement warranty agreements stated that they did not apply to any period covered by the manufacturer's warranty, which typically covered one year after purchase. Thus the two-year extended warranty does not begin at the time of purchase as represented by Conn's, a statement by the attorney general said.

In the event a product had to be replaced, the replacement was not covered by the warranty. And if a replacement product failed within the two-year period, it was not covered, despite the defendant's promise to provide replacement coverage "for a full two years," court papers allege.

The state's enforcement action indicated that Conn's failed to provide customers with a copy of the warranty agreement at the time of sale. As a result, purchasers were not adequately informed about exclusions, limitations, cancellation penalties and other provisions governing their warranty agreements.

Court documents show that, at the time of sale, Conn's sales personnel told warranty purchasers that replacement products would be "new, unused" items.

However, the actual terms of the warranty contract provide that the replacement products could be "refurbished" or "rebuilt," rather than the new items customers were promised by Conn's salesmen.

In an effort to increase warranty sales, Conn's instructed sales personnel to rely on high-pressure tactics to "overcome objections" voiced by customers who declined to purchase extended warranties, court papers said.

A Conn's sales manual obtained by state investigators, which was marked "not to be distributed to customers," said salesmen should "create a sense of urgency" and "make (customers) 'live' the service call... this is done by 'painting a picture' in the customers [sic] mind, calling up that sickly feeling we all get in the pit of our stomachs when something goes wrong."

The sales manual also provides a series of scripted responses to customer objections and reminds salesmen that selling more warranties would "maximize" their personal incomes.

Depending on the product, the extended warranties cost anywhere from $100 to $1,000. The commissions from the sale of these warranties accounted for about 5 percent of Conn's $900 million in annual sales revenue, court papers say.

Conn's began in Beaumont, Texas, in 1890, and was owned and operated by the Conn family for 113 years. In 2003, it became a publicly held company. There are 69 Conn's stores in Texas, Louisiana and Oklahoma.