Cell Phone Early Termination Fee Class Action Set For Trial

The second class action trial over cell phone providers’ early termination fees is underway in Alameda County, California.

The first class action suit reached a verdict on June 6, 2008 in favor of Sprint. This trial is to decide whether Verizon has the right to charge customers early termination fees. AT&T and T-Mobile are still litigating class certification in their cases.

The jury in the Sprint case found that customers who ended their contracts early cost the wireless provider more than $225 million in damages and that these fees were indeed legal.

For these suits, after the juries’ factual findings, the judge must decide whether the lawsuit is pre-empted by federal law. If not, then he must decide whether the cell phone companies have to return all the collected fees.

The law, California Civil Code §1671(d), states that for the early termination fees to be legal, the wireless providers need to prove that the termination fee accurately reflects the money they lost when the customer ended their contract.

Consumer advocates believe these fees are used to deter customers from switching wireless services and are unfair because they deter competition. One expert testified that these early termination fees the cell phone companies charge are around 12 times higher than the actual cost of the phone subsidy they claim to be recovering.

Now the Federal Communications Commission (FCC) is looking to get involved and may make rules about early termination fees. The agency is considering a proposal from Chairman Kevin Martin that would require consumers be given a 30-day grace period to cancel their contracts without penalty.

After the 30 days, early termination charges would then be prorated or reduced over the duration of the contract. He also proposed that fees should be based on the cost of the phone and that they should be reasonable. Martin wants the FCC to make an initial decision in July or August on how to regulate these fees. 

Many of the phone companies seem to have gotten the message from the FCC and have begun to reduce their fees and start pro-rate policies.

T-Mobile was the latest to make these changes. Beginning on June 28, early termination fees will drop from $200 to $100 for customers with one or two-year contracts if they end their contract with 91 to 180 days remaining. If they end a contract with fewer than 91 days left on it, they must pay a termination of fee of $50. This new policy only applies to new T-Mobile subscribers and customers who are renewing on or after June 28. 

Verizon was the first of the cell phone companies to try a pro-rated policy two years ago.

AT&T also announced it had changed its policy. Starting on May 25 new subscribers of AT&T will have pro-rated termination fees throughout the duration of their contract. The early termination fee will start at $175 and it will be reduced by $5 every month over the duration of the one- and two-year contracts.

Sprint also said it is going to change its early termination fees, but has not applied the new policy yet. #