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FCC Chief Pushes New Rules on Phone Fees

By Cecilia Kang
Washington Post Staff Writer
Friday, June 13, 2008

The nation's chief telecommunications regulator said yesterday that he will push to establish a federal policy on the early cancellation fees charged by cellphone and other services as early as July.

Federal Communications Commission Chairman Kevin J. Martin's comments came after a jury finding hailed by Sprint Nextel in a California class-action lawsuit over penalties the company charges customers for leaving contracts early.

"While I'm respectful of state regulators, I have been skeptical that lawsuits are a good way of ensuring protection for all consumers," Martin said.

He said a "patchwork" of state rules and the early cancellation policies by wireless carriers would result in inconsistent protection for consumers. If a class-action trial that will begin next week against Verizon Wireless results in a different verdict, for example, some consumers would be unfairly penalized because of the carriers they choose, he said.

"The most effective way to protect a consumer is to become more involved with the principles and direction on what is reasonable and not reasonable," Martin said, adding that the commission will consider a petition by the wireless industry trade group CTIA that would preempt state courts from hearing cases on the cancellation penalties.

Facing potentially hundreds of millions of dollars in damages from class-action suits in several states, the nation's largest wireless service providers -- Verizon Wireless, AT&T, Sprint Nextel and T-Mobile -- have lobbied the FCC to adopt a federal rule that would protect them from state lawsuits. "Faced with the prospect of multiple state policies on this issue, Verizon believes that appropriate federal action to establish a national policy is preferable," Thomas J. Tauke, executive vice president of Verizon Communications, said at a hearing on the fees yesterday.

Consumer groups have criticized such a policy, saying consumers should have the right to sue for damages in state courts. They advocate for national rules that would rein in cancellation penalties but say state regulators are the best watchdogs of consumer abuse. "Here we are at 11th hour of the Sprint case and at the dawn of the Verizon trial, and the FCC is being asked to step in and wipe out the rights of consumers," said Jacqueline Mottek, an attorney for the plaintiffs.

One of the plaintiffs in the Sprint class-action lawsuit said he felt that legal action was his only option. Jerry Deganos of Loma Linda, Calif., said he was charged $450 for canceling his family's two-year cellphone plan with Sprint. He thought his contract was over, but his wife had unknowingly renewed for two additional years when she called a customer service representative to add roaming features for a road trip to Las Vegas.

He said he called the customer call center four times to argue against the fee, but his request was denied. Deganos said he wrote a letter to Gary D. Forsee, then chief executive, but he did not get a reply.

The Alameda County jury in the case found that early cancellations of class members' contracts cost Sprint $225.7 million. "The jury recognized that Sprint makes a significant investment in its customers through reduced handset prices and discounted monthly rates," said John Taylor, a spokesman for Sprint.

Plaintiffs' attorneys, meanwhile, said the jury's finding shows that Sprint may be forced to pay back the fees the class members paid, which amounted to $73.8 million.

Martin also pushed ahead yesterday with plans that could provide users like Deganos with stronger protections:

· Fees that would correlate with the cost of a phone, so that a penalty for a $50 phone should be less than a $500 phone, for example.

· Fees that would be prorated, or reduced over the life of a contract. Prorating has been adopted by Verizon Wireless and AT&T. Sprint Nextel has promised to begin prorating by the end of the year, and T-Mobile will begin this month.

· Contracts for a "reasonable" length of time, with no cancellation penalties for consumers who have completed a previous contract with the provider.

· Allowing consumer review of bills before they are subject to cancellation penalty.

Martin said the agency received 3,700 complaints in 2007 on early cancellation fees for cellphone contracts.

FCC member Michael Copps, a Democrat, cautioned that the hearing unearthed questions about the telecom carriers' economic arguments for the penalties. Cable providers Time Warner Cable and Comcast charge early cancellation penalties on longer-term contracts that are offered at a steeper discount. The companies said the fees are charged to recover losses from the discounted rates, can be made up only over the full term of the contract.

Verizon Wireless and Sprint have asserted that the fees recoup costs the carriers incur through subsidies that enable customers to get cheap phones. Yet the carriers also indicated that other costs were associated, including marketing fees.

"There is a lot of consumer outrage on early termination fees, and today a wireless industry representative said more than for phone subsidies, the rates are used to help finance their business plan," Copps said.

Chris Murray, senior counsel for Consumers Union, pointed to testimony by a plaintiff's witness in the Sprint case that the true cost for cellphone subsidies is about $14 -- far below what the company claims. Taylor, the Sprint spokesman, said the witness's math is not supported by figures reported by Sprint to the Securities and Exchange Commission.

Murray said early cancellation fees shouldn't include marketing costs to obtain customers and should not be used as a tactic to lock consumers into long-term contracts to avoid turnover, an important Wall Street measure of a business's health.

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