ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, August 1, 2008

California Court First To Declare Cell Phone Early Termination Fee Illegal

Chp_cell_phoneThis just in from

Californians fed up with being charged for ending their cell phone service prematurely won a major victory in a Bay Area court decision that concluded such fees violate state law.

In a preliminary ruling Monday, Alameda County Superior Court Judge Bonnie Sabraw said Sprint Nextel must pay California mobile-phone consumers $18.2 million as part of a class-action lawsuit challenging early termination fees.

Though the decision could be appealed, it's the first in the country to declare the fees illegal in a state and could affect other similar lawsuits, with broad implications for the nation's fast-growing legions of cell phone users.

The judge - who is overseeing several other suits against telecommunications companies that involve similar fees - also told the company to stop trying to collect $54.7 million from other customers who haven't yet paid the charges they were assessed. The suit said about 2 million Californians were assessed the fee.

Whether Sabraw's ruling will stand isn't clear. Experts say an appeal is likely, and the Federal Communications Commission is considering imposing a rule - backed by the wireless industry - which might decree that only federal authorities can regulate early termination fees.

Sprint Nextel also argued in the lawsuit that such fees - which ranged from $150 to $200 - were outside the purview of California law. But Sabraw rejected that argument.

"This is a terrific ruling," said Chicago attorney Jay Edelson, who was not part of the case but has filed about 50 other suits nationwide against various cell phone charges. "The phone companies have a tremendous amount of power," he added. "They lock you into long-term contracts and then they allow all these charges to be put on your bill. We have to make sure that consumers are protected."

"We are disappointed," said Sprint Nextel spokesman Matthew Sullivan. But he added that Sabraw's ruling was tentative and that she has given Sprint Nextel's attorneys the opportunity to file a rebuttal before she considers making it permanent.

Sullivan noted that similar suits have been filed in other states, but that Sabraw's decision was the first he knows of declaring such fees illegal.

Several other industry experts agreed, including John Walls, a spokesman with the CTIA, a Washington-based organization that represents the wireless telecommunications industry.

"I don't know of any state that has gone to this extent," he said, adding that his group believes it makes more sense to have such fees solely policed by the federal government.

I haven't read the court's decision, but, from a contracts perspective, this is a thorny issue. On the one hand, consumers enter into these adhesion contracts with cell phone providers and the substantial early termination fees are arguably both procedurally and substantively unconscionable. Likewise, to the extent the fee constitutes liquidated damages for the consumer's breach, the consumer might have an argument that the fee amount is a penalty. On the other hand, cell phone companies keep the cost of the phones/devices down by building in this fee. Indeed, the reason the consumer gets the phone at below market cost is because they agree to be "locked in" to a service contract. If the consumer terminates early enough, the cell phone company might not recoup the cost of the phone. Though, this becomes less of a concern, for example, if the consumer cancels in month 22 of a two-year contract - presumably, by then, a $200 termination fee is mostly profit in the pocket of the company. Plus, all termination fees are the same under these contracts, but some phones are cheaper than others.

We've noted before that the FCC might begin to regulate these fees.

[Meredith R. Miller]

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I was surprised that this was the decision of the court. Indeed when one avails a phone service, there is a contract that needed to be signed and signing that contract means you agree in everything stated on it, including those termination charges if ever you discontinue service without availing the full term stated in the contract.
If the telecom company violated the state law, then those people who signed the contract did too.

Posted by: Cell Phone Reviews | Feb 10, 2009 11:00:49 AM

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