This week, Alameda County Superior Court Judge Bonnie Sabraw ruled that early termination fees are illegal. Overall, she said Sprint Nextel must pony up $18.2 million to consumers who already paid for severed contracts and ordered the carrier to cease its efforts to collect another $54.7 million from others who haven't yet forked over the money to pay their fees.
While Sprint has the right to appeal, Sabraw's ruling could open the door for consumers in other states to go after their cellular phone carriers to recoup or void the early termination fees they had been assessed. In California's case, the class-action suit suggests that nearly 2 million residents were slapped with fees.
Sprint Nextel argued in the lawsuit that early termination fees were outside the purview of California law, the San Jose Mercury News reported. But Sabraw rejected that argument.
"We're disappointed," Sprint spokesman Matthew Sullivan told the Mercury News, adding that Sabraw's ruling was tentative and that she has given Sprint Nextel's lawyers the opportunity to file a rebuttal before she considers making it permanent. Sullivan added that similar suits have been filed in other states, but this weeks' decision was the first he knows that declares early termination fees illegal.
Sabraw is also considering other termination fee-related lawsuits. Earlier this month Verizon Wireless agreed to a $21 million settlement in a similar suit.
Sabraw's ruling comes as the FCC investigates early termination fees, a charge from the carriers when a subscriber ends their contract early, which can sometimes mount up to $200.
Last month, FCC Chairman Kevin Martin confirmed that the FCC was reviewing early termination fees and acknowledged that his agency is looking into how to curb the fees to protect consumers. As part of his investigation, Martin outlined a set of rules that would help control early termination fees and protect consumers.
The FCC's involvement, however, sparked concern that a federal mandate would free wireless carriers, like Sprint Nextel, from being sued in state courts by consumers upset about the excessive charges.
According to Martin, in 2006 and 2007 the FCC received more than 3,700 complaints about early termination fees. He said many consumers receive their first bill and are surprised by the amount, only to learn that the trial period has ended and cancellation could result in a $150 to $200 whack for early termination.
"It is essential that we examine ways to protect consumers and ensure that they understand the fees associated with the communications services," Martin wrote in a statement.
Carriers have maintained that early termination fees can act as a legitimate way for them to recoup costs, usually the subsidies they provide for handsets that let consumers obtain them at a discount or, in some cases, for free; enable consumers to get popular or promotional service plans; and other up-front costs and discounts.
Martin said that if the FCC takes responsibility for early termination fees, it must set rules that adequately protect consumers. Martin suggested a list of five potential rules for early termination fees:
- The early termination fee should be reasonably related to the cost of the equipment the consumer receives. For example, a $500 phone should not have the same early termination fee as a $50 phone.
- The early termination fee should be pro-rated over the life of the contract.
- Any contract for service should be for a reasonable length of time.
- When a consumer renews his contract without receiving new equipment, the early termination fee should not be extended.
- Finally, consumers should be able to take the phone home and receive their first bill to make sure the service and bill are consistent with what they expected before an early termination fee kicks in.
Martin also acknowledged that while states play a strong role in protecting consumers, he is skeptical that class action lawsuits are the best method for consumer protection because not all consumers benefit from the lawsuits and each state will set their own varying regulations.
Most wireless carriers are currently working to ease consumer tension when it comes to early termination fees. In May, AT&T began prorating early termination fees for customers with one- or two-year contracts. AT&T is also taking $5 off the termination fee for each month the contract was active before it was severed. Verizon Wireless also put a prorated fee plan in place, where fees can be whittled down to $60. Sprint, too, has been looking into putting a prorating plan into action.
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