Sprint Ordered To Refund Early Termination Fees to Customers

October 13, 2008 by Michael Law
Filed under: Business Law

A termination fee that amounts to about $200 is a large amount of money for most people. Apparently, a state judge has agreed with those hit with this termination fee.

Late July of this year, the California Judge Bonnie Sabraw has decreed that Sprint Nextel must refund $18.25 million to their customers who have paid this fee for early termination of their contract - ordinarily with a length of one or two years. Part of the decision still to be ironed out is the forfeit of the $54.75 million levied and collected but unpaid by the consumers in the said state. The suit mentions that about 2 million Californians had this fee collected due to early termination.

Several of the major wireless carriers have recently reconstructed their early termination fees as a move to avoid embroiling their companies in lawsuits. Among them are T-Mobile, AT&T and Verizon, the last of which has already shelled out $21 million in settlements for similar charges. These companies have agreed to implement pro-rated fees in their rectified fee schedules which now charge the consumers a more reasonable amount of penalty depending on the duration elapsed before the cancellation of the subscription and contract. Cases like these have caused the Federal Communications Commission (FCC) to consider the regulation of early termination fees nationwide, as not only are they an issue in the state of California but in the entire United States. Along with this FCC review will come an evaluation as to whether to prevent class action lawsuits like the one in Sprint Nextel’s case.

There are many consumers that have expressed agreement and relief over the court’s ruling. Some consumers view it as a decision that’s been a long time coming, since included in the reference for the decision is the mention of a California law from the 1980’s, particularly the civil code 1770 (a) (19) that prohibits and finds it unlawful for a company to raise high fees to prevent a customer from leaving the service.

The bottom-line is that the legal departments of the respective telecommunication companies should not have disregarded the previous mandates, which could have possibly averted this possible loss of millions of dollars and legal costs due to the court charges.

However, there are some that seem to think the errors lie on both sides. Many feel that a multimillion penalty should not be shouldered by Sprint Nextel, or any telecommunication company for that matter, when both parties have signed a legally binding contract. This contract, including the $200 early-termination fee, is subjected to the consumer’s approval before being considered legal, hence the agreement is made to subject oneself to the $200 charge. If a one or two-year contract seems to be unsatisfactory or too long for a consumer, there are also options available such as prepaid plans or plans that do not have binding contracts, which may be useful especially if the service is yet to be proven.

The public views may vary but it’s official that the court has decided the best course is for a refund to the consumers. These early termination fees, according to Sprint and other telecommunication companies, are imposed for the subsidy of the handsets and the monthly rates. More state decisions and laws concerning the mobile industry, especially since the number of cell phone users is growing rapidly, are expected to be touched on and reviewed as well in the legal community.

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Comments

3 Comments on Sprint Ordered To Refund Early Termination Fees to Customers

Dean on Sat, 25th Oct 2008 8:07 pm

This is rediculous. Without early termination fees, the cell phone companies will not be able to offer discounted pricing on new phones and upgrades. So instead of possibly paying $200 for ending the contract early, now you are going to have to pay something like $150 more UP FRONT to purchase your phone in the first place, since the cell company has no way of guaranteeing you won’t just take your brand new phone to another company the next month, etc. If you wait until the end of the contract, there is no ETF and you got a great price on your original phone. Let’s take a look at the following three possibilities, and you decide which is most appealing. ONE: you pay a mandatory extra $150 up front since your new phone is not discounted because there is no contract agreement. TWO: there is a contract, you get a great discount on your phone and pay nothing up front, and you only pay $200 at some later point if you do indeed end the contract early…OR you pay nothing at all if you ride the contract out (but you still got a great price on your phone when you signed up). THREE: Pay $200 security deposit, which you get back after 2 years unless you port to another carrier. You get the phone discount, but $200 of your money is locked up for two years or so. I’d rather have that money in my hands during that time, and just promise to pay it if I end service early. No matter how you look at it, contract service with ETFs give the best value to the customer so long as they don’t terminate service early.

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Andre Kibbe on Sun, 26th Oct 2008 9:24 pm

First, service contracts impose ETFs even if you bring your own phone. Second, the ETFs aren’t prorated. Third, the discounted price of phones is a promotion, not a subsidy. Think of game consoles and digital cameras with technology equivalent to what goes into a cell phone with a higher list price. The price tiers are industry norms that bear no relation to production costs. Economies of scale are much higher on cell phones than, say, digital cameras, so naturally they should cost less. There is nothing to “subsize.” If carriers want to keep customers in the free market, they need to either provide better service than their rivals or offer lower prices. Then prices and services would self-regulate.

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Dean on Sun, 26th Oct 2008 11:46 pm

Actually, Verizon now offers the ability to go month to month if you provide your own equipment, with no early termination fee. Also, all Verizon ETFs are now variable. They start off at $175 and decrease $5 per bill cycle. Not quite full proration, but fair enough. As far as the discounted price of phones go, cellular carriers generally lose money on the phones they sell at two-year pricing. Some phones are even given away for FREE. They do this, of course, because they generally make their money back along with a profit during that two-year agreement. Subsidy or not, call it whatever you’d like. Game consoles often work similarly. Sony, for example, sells its PS3 at a sizable loss, knowing that in most cases the game revenue generated during the life of the console will more than make up for the initial loss. Sony, however, doesn’t deal with contracts and has to put a lot more trust into the customer. The current $399 price is already discounted nearly a hundred bucks from the cost of manufacture. I wouldn’t mind signing a 2 year contract with Sony, promising to buy one game a month, if it meant that I would get a PS3 for say, $225, with an ETF of $175 (If I cancel early, then 225+175=$400, which is no more than the original cost that I WOULD HAVE OTHERWISE PAID ANYWAY!).

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