Judge Rules Sprint Termination Fees Excessive
Sunday, August 3, 2008; 12:19 AM
A California judge may have disrupted the way in which cellular carriers charge early termination fees (ETFs) to discover who want to exit a contract before the period they agreed to. Sprint was ordered to repay subscribers $18.2 million and stop collecting $54.7 million that subscribers had refused to pay.
ETFs have long been a point of contention. Carriers fought number portability for years, where cellular numbers could be as easily transferred among carriers as they could among landline providers. The mobile phone companies suspected that once customers could keep their number and escape, that there would be enormous churn. This has turned out to be true, with nearly 10 million subscribers leaving carriers each quarter, presumably for other carriers.
With portability came longer-term contracts. Where 1-year contracts were often the norm a few years ago, 2 years is now de rigeur, especially for attractive, exclusive phones, like the iPhone or Sprint's Samsung Instinct. Carriers in the U.S. typically subsidize phones, for which they pay hundreds of dollars, and argue that they can't recover the cost by either reclaiming the phone for an early termination, or making enough profit from monthly fees. That's certainly partly true, although this is coming from companies that charge 20 cents to a 140-character text message that costs them nearly nothing to deliver.
But ETFs, until recent rumbles from the FCC changed matters, didn't decline over the life of a contract, when the cost of a phone would clearly have been recovered. Now most carriers offer some form of pro rata ETF, dropping from $175 or $200 down to closer to $50 after a year or more.
The case itself might not result in any precedent being set, and could be overturned in appeal. The judge overturned a jury's verdict, and made a decision in California over a matter that the carriers argue is federal in scope and not within a state's right to regulate or adjudicate.
Still, there's no question that the winds of change are blowing, and ETFs will be handled differently in the future. Verizon settled a California lawsuit, and the FCC is considering regulation if the carriers don't figure out a decent policy on their own.