Wireless

Beginning Nov. 15, Verizon subscribers looking to get out of their smart-phone contracts early will pay $350 for the privilege. That early-termination fee is double the current one, but Verizon insists it's justified because of the higher prices of today's phones.

"The cost of smart phones is considerably higher than feature phones for which the early termination fees were created years ago at $175," said Verizon spokesman Jim Gerace. He added that the new $350 ETF declines by $10 per month through the life of the contract and customers can avoid it by buying their devices off contract and paying full retail price.

(Credit: All Things Digital)

An interesting move for Verizon, which just last year agreed to pay $21 million to settle a class-action lawsuit filed by California consumers over the very early-termination fees it is now increasing. The plaintiffs in the suit alleged that Verizon's ETFs were illegal under California law and that they were designed to unfairly lock consumers into long-term contracts and prevent them from switching carriers. When Verizon settled the suit, it denied any wrongdoing, insisting that early-termination fees are simply a means of recovering legitimate costs. And to some extent Verizon does have a point.

Full retail price for the Motorola's new Droid is $559.99. With a two-year contract, Verizon sells the handset for $199.99. Theoretically, that's a $359.99 subsidy (I have no idea at what price Verizon purchases Droid from Motorola). So if Verizon allowed subscribers to break their contract after a month without paying an early-termination fee, the company would stand to lose money. And subscribers who did so could subsequently sell the device online and potentially make a profit, though a small one.

So it's certainly understandable that Verizon and other carriers want to protect the subsidies they dole out for these new smart phones. And as noted earlier, Verizon's new ETF drops by $10 each month a subscriber remains under contract. But at this rate, subscribers are still bound to pay a $110 termination fee in the 23rd month of a two-year contract. The contract is nearly over, the subscriber obligation to Verizon almost fulfilled, yet the company can still slap its customers with nearly a third of the full ETF if they break it at that time.

By month 23 of a two-year contract, does Verizon really stand to lose $110 if subscribers decide to switch carriers? Doesn't seem likely if subscribers can walk away just a month later without consequence, taking their handsets with them.

Since Verizon is pro-rating the ETF, why isn't it doing so in such a way that it zeroes out by the end of the contract?

And isn't the fast pace of innovation in the smart-phone sector such that prices-for both component and device-are dropping so quickly that high ETFs aren't really justified? Remember, you can get Apple's iPhone for $99 today. When the iPhone debuted in 2007, it commanded a price of $499/$599, depending on model.

I've put those same questions to Verizon and will update here when I hear back. In the meantime, here's what Consumers Union policy analyst Joel Kelsey has to say on the matter: "When people want to switch wireless services, the biggest cost they face is early termination fees. These fees are designed to lock people into long-term contracts and stop them from getting better deals. Early-termination fees make the marketplace less competitive. Verizon's move is painful proof that it's time for lawmakers to crack down on these fees."

UPDATE: Verizon Wireless spokesperson Nancy Stark offers the following answers to the questions I posed above:

Your first question regarding the balance at month 23 or 24 assumes that, at that point, we have recovered all of our subsidy and up-front costs for every device. That simply is not so.

On your second question, while the pace of innovation plays a role in prices coming down somewhat, it also plays a role in driving up costs as more and more complexity that customers want is added to phones-from premium HTML browsers to high-resolution MP cameras with optical zoom; videoplayers; music players; dual processor chipsets; WiFi; very high display resolution, operating systems such as BlackBerry, Windows Mobile, Palm, Android-ALL with the added value (vs a desktop) of mobility, and ALL in one tiny device that ALSO allows you to talk to anyone from anywhere. phew! (by comparison, I recently paid $200 for a camera and all it can do is take pictures, and it has only middle of the road capabilities.)

But getting back to ETFs specifically. The most important point is that Verizon Wireless customers do not have to have an ETF at all if they do not want to. ETFs allow customers to have it either way: They can have no ETF and pay full retail for their device. OR, they can get a greatly discounted device by having an ETF.

Story Copyright (c) 2009 AllThingsD. All rights reserved.

Class action suits against carrier early termination fees (ETFs) are nothing new, but now it appears one case may come to an end.

Though it has yet to be approved by the court, T-Mobile has proposed a settlement in an $11.5 million class action suit filed in August 2008 in the U.S. District Court for the District of New Jersey. The suit alleges that T-Mobile broke federal and state laws when charging the ETFs.

The settlement would cover T-Mobile subscribers who were charged a flat-rate ETF from July 23, 1999 to February 19, 2009, or those whose service contract included an ETF during the same time period. The settlement would resolve several other pending cases that challenge T-Mobile's flat-rate ETFs.

T-Mobile customers who file a claim form will be eligible for one of three awards, according to the terms of the settlement. Customers who paid an ETF can receive up to $125. Customers who were charged an ETF but did not pay and did not receive a full credit within 30 days, can receive up to $25.

"Non-cash" relief will be provided for customers who had an ETF in their contract. Such relief could include 50 bonus minutes a month for three months, 100 bonus text messages a month for three months, "T-Mobile HotSpot" access for three days, or the right to have your contract with T-Mobile contain a prorated ETF. T-Mobile began prorating ETFs in June 2008.

It's been almost a year since a judge in Alameda County, Calif., ruled that Sprint Nextel's early-termination fees are illegal, and yet Sprint and every other major U.S. wireless operator still charges customers a fee for canceling their services before a contract expires.

So what gives? Why are these pesky early-termination fees still around if they are against the law?

That's a good question and one that many readers have asked me over the past year. Because I get so many questions about these fees, I decided to put together this FAQ to help people understand what the recent court decisions mean for them and to provide some information about where cell phone early-termination fees stand today.

Let's start with the most obvious question: What did the court decide in the cell phone early-termination fee case in Alameda County Superior Court in California?
In July 2008, the judge in the case found in a preliminary ruling that Sprint Nextel's early-termination fees were unlawful. In December, the court issued its final judgment upholding that preliminary ruling in favor of the plaintiffs.

Does this mean that the people involved in the class will get some money?
Well, the case is still being appealed by Sprint. But as it stands now, it is unlikely that anyone in the class will get money. And here is why. The court ruled in favor of the class members and ordered Sprint to pay damages of about $74 million. But before the judge's ruling, a jury had upheld Sprint's contract. And the jury found that members of the class had violated their Sprint contracts. As a result, the jury awarded Sprint about $226 million in damages. In the end, members of the class still ended up owing Sprint about $150 million. But Sprint waived its right to collect the money, so the net result was that no one gets any money.

But the court in California found that the Sprint early-termination fees are illegal. Does this mean that I don't have to pay an early-termination fee if I decide to leave Sprint now?
No, it doesn't. For one, the class involved in the lawsuit was only certified for members in California. So for anyone living outside of California, the ruling means nothing, because the court doesn't have jurisdiction.

What if I am a cell phone subscriber in California? Do I still have to pay an early-termination fee?
Yes, cell phone subscribers in California still have to pay the early-termination fee specified in their original contract. The reason is that the judgment in this case only took into consideration the specific facts involved in this particular case. It was not a blanket decision that all early-termination fees are illegal. Rather, the court ruled that this specific type of early-termination fee imposed by Sprint is unlawful in its current form.

In short, this means that cell phone companies can continue to charge early-termination fees. And if they are challenged in court--even in Alameda County or anywhere in California--the court might decide something different based on the specific facts in that case. So technically, it's not accurate to say that early-termination fees are illegal anywhere. Instead, the early-termination fee Sprint charged to consumers in the manner and for the time specified in this case was deemed unlawful. That's all.

What's more, the jury in this case deemed Sprint's contract valid, which means that anyone who doesn't pay their early-termination fee is breaking their contract and subject to the terms of that contract.

A Sprint representative has clarified the company's position:

"Sprint will continue to enforce contracts with current customers," said Matt Sullivan, a Sprint Nextel spokesman. "The court in its ruling did not prevent Sprint from charging an Early Termination Fee when a customer terminates his contract early."

Weren't there other lawsuits over early-termination fees? What was the outcome of these cases?
Yes, there have been a few other cases. Verizon Wireless was also being sued in California over early-termination fees, but the company settled the case in July 2008, agreeing to pay $21 million to former subscribers, who argued that the company's ETF was unfair and excessive.

Sprint is also defending itself in another class action lawsuit that is certified for a nationwide class. The case is being handled in New Jersey, but will cover plaintiffs from former Sprint subscribers in every state, except California. A Sprint spokesman said that the company is close to a settlement in this case and that the terms are similar in scope to the ones in the settlement that Verizon Wireless agreed to last year. A settlement in this case would also lay to rest all other cases against Sprint for early-termination fees, except for the case in California, which is still in litigation.

So it seems like all these class action lawsuits haven't really had much of an effect on the industry since I still have to pay an early-termination fee. Is that true?
Well, not really. The lawsuits and consumer outrage over these fees, likely prompted Congress and the Federal Communications Commission to take notice, which resulted in some public hearings regarding early-termination fees. The FCC had even considered regulating early-termination fees to establish a national policy. But the agency decided to back off, because the industry was taking action on its own.

What have cell phone operators done to change their early-termination fees?
Over the past few years, all four of the major wireless operators in the U.S. have begun prorating their cell phone contracts.

Verizon Wireless was the first to adopt a pro-rated policy in 2006. And now almost every Verizon subscriber has a prorated early-termination fee as part of their contract. AT&T was next. As of May 25, 2008, all new AT&T subscribers have had their termination fees prorated over the life of their contract. For both Verizon and AT&T subscribers, the early-termination fee starts at $175 and is reduced by $5 every month over the life of the one- and two-year contracts.

T-Mobile USA began prorating its early-termination fees on June 28, 2008. Since then, new customers with a one-year or two-year contract have seen their early-termination fees drop from $200 to $100 if they end their contract with 91 to 180 days remaining on their agreement. If they end a contract with fewer than 91 days left on it, they pay a termination fee of $50. Customers who terminate their service in the last 30 days of their contract either pay the $50 fee or their standard monthly charge, depending on which one is cheaper.

Sprint Nextel was the last of the four major wireless operators to offer a prorated contract. As of November 2, 2008, Sprint adopted a policy that drops the $200 early-termination fee by $10 increments beginning in the sixth month of the contract. This means that by the 15th month of the contract, the ETF is down to $100. The new policy applies to both new customers and those who are renewing service agreements, so long as they signed up or renewed their contract after November, 2, 2008.

How can I avoid signing a contract with my wireless provider and avoid an early-termination fee altogether?
All four major wireless carriers offer customers alternatives to contracts. There are prepaid services that allow customers to pay in advance and do not require a contract. Most of the providers also offer the option to buy a handset at full retail price without committing to a contract. Of course, this also means that customers have to pay full retail price and cannot get a free or subsidized phone. Customers then pay service charges on a month-to-month basis.

A few consumer advocacy groups have recently asked the four major wireless operators to waive their early-termination fees for people who have been laid off and can't afford to pay their cell phone bills anymore. Are any of them considering doing this?
No, but wireless operators aren't completely heartless. Most of them allow customers to downgrade their plans to save money without restarting the clock on their contracts or incurring penalties.

But what if I can't afford my pricey data plan anymore? Can I get rid of that and downgrade to a voice-only service?
This is a tricky one. And before you decide to do anything you should check with your carrier about their policy.

Verizon spokesman Tom Pica said that the company deals with these types of issues on a case by case basis. Customers who are having trouble paying their bills can talk to Verizon customer service to work out a solution. But Pica advises people who are struggling to contact customer support sooner rather than later.

A Sprint spokesman said that if a customer with a separate data plan wants to drop that plan and go to a voice only plan or go to a lower data monthly plan, there is no early-termination fee. But, if the customer has a BlackBerry device, which requires a BlackBerry data plan, the customer must swap out his handset to avoid an early-termination fee. If the customer buys a new handset, the two-year contract clock restarts, but if he activates a handset he already owns, there is no early-termination fee.

A customer with a phone and separate 3G wireless data card for his laptop who cancels his data service will be charged an early-termination fee for the data card service. The easiest way to think of it is that the early-termination fee goes with the equipment.

Sprint will change course and start prorating early termination fees, the company's CEO said Tuesday. In an interview with the Associated Press, CEO Dan Hesse said the carrier could initiate the practice as early as December, after updating its billing software.

Sprint has been the lone holdout of the major carriers in trimming ETFs as customers near the end of their two-year contract. T-Mobile started prorating fees in June following the lead of Verizon Wireless and AT&T.

Though ETFs have long been the been the bane of consumers, carriers maintain that they are a way for them to recoup costs for offering free or heavily discounted new phones to customers. The Cellular Telecommunications Industry Association, which represents carriers in Washington, supports ETFs for the same reason.

Currently, ETFs are not regulated by the the federal government, but the Federal Communications Commission is considering taking some oversight. During a hearing with the FCC in June, carrier representatives said they would be willing to accept some limitations on ETFs as long as the carriers could be absolved from class action lawsuits over the fees.

Verizon Wireless is offering cell phone subscribers the chance to go month-to-month with their cell phone service without signing a pesky contract.

The second largest wireless operator in the U.S. announced Monday that it will offer month-to-month service for all its current wireless plans. Monthly subscribers will pay the same rates as those with long-term contracts, but month-to-month customers won't be required to sign contracts.

This means that month-to-month customers won't have to pay an early termination fee if they decide to quit Verizon's service and go elsewhere. In exchange for not being bound to a contract, customers will have to pay full retail price for their Verizon phone. The other option is for customers to use their existing Verizon phone or buy a pre-owned Verizon phone. Existing Verizon Wireless customers can switch to monthly plans after completing their current contracts.

The move to offer month-to-month service comes as mobile operators face pressure from customers, Congress, and the Federal Communications Commission to open up their networks and loosen contract terms.

Earlier this year, Verizon Wireless settled a class action lawsuit in California over early termination fees. The FCC and federal lawmakers have also been putting pressure on wireless operators to reduce the cost or even do away with early termination fees. All four of the major wireless operators are now offering pro-rated contracts, which reduce the cost of early termination fees over time.

Wireless operators have long argued that early termination fees are necessary to help them recoup the cost of subsidizing handsets. For example, Verizon offers the new LG Chocolate for free with a two-year contract. But without that subsidy it will charge customers about $300 for the phone.

Other carriers have also started offering month-to-month service. T-Mobile offers a similar service plan called "FlexPay." Sprint Nextel's no-contract option offers customers 200 minutes of talk time, plus nights and weekends for $39.99 per month. The plan works with all phones except the Instinct and other PDAs and includes 200 minutes, unlimited night and weekend minutes starting at 9 p.m., and nationwide long distance. AT&T offers a month-to-month plan, but it isn't available for all their phones.

A judge in California has ruled that Sprint Nextel's early termination fees are illegal and said the wireless operator should pay back $18.2 million in collected fees to consumers, a decision that could help sway decisions on similar cases throughout the country.

The preliminary decision released earlier this week is a major blow to Sprint and to other phone companies in their battle to defend themselves against angry consumers who say the fees imposed on them when they leave the companies' services are unlawful.

Verizon Wireless, which was also being sued in California, has already settled its case, agreeing to pay $21 million to settle all claims against the company. And after the decision against Sprint, there's a chance that cases against T-Mobile and AT&T could also be settled.

Verizon Wireless agreed to pay $21 million to settle a lawsuit filed by customers who claim the company's early termination fees are excessive and unfair.

Details of the settlement aren't public. But a Verizon spokeswoman said that the settlement will put to rest claims filed by customers in California as well as customers that are part of a nationwide class action lawsuit.

Verizon denied any wrongdoing. And the spokeswoman pointed out that Verizon Wireless was the first cell phone operator in the U.S. to establish a pro-rated early termination fee that decreases over the time of the contract. Since then, the other three carriers, AT&T, Sprint Nextel, and T-Mobile, have all pledged to go to prorated fees.

The settlement comes as these cell phone operators take heat from the Federal Communications Commission and Congress over the fees. The FCC held a hearing in June in which unhappy customers and consumer advocates railed against the companies for their business practices.

FCC Chairman Kevin Martin said he believed the fees, which in some cases have exceeded $200, were excessive. And he said he was concerned the early termination fees were not being used as a means to recover legitimate costs, but rather as a means to lock customers into a service provider.

The phone companies have argued that the fees are necessary to recover costs. Specifically, they say the early termination fees help cover the cost of phones, which the carriers subsidize and offer as part of a service contract.

So far the legal battles brewing against the phone companies have been a mixed bag. Cell phone users in California initially formed a class in 2006 for a lawsuit against all four major carriers: AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless. But the court separated the cases and each carrier is battling the lawsuits on their own.

Sprint Nextel won a victory in its battle when a jury decided last month that customers had indeed broken their contract with the carrier and that they owed the company $225 million, far more than Sprint Nextel was able to collect to from customers terminating their services early.

Now the judge in the case will have to decide whether the contract that Sprint imposed on its customers was even legal according to California law. A decision on that is expected within weeks.

But with the Verizon Wireless settlement, it looks like the plaintiffs' case may have had some legal merit. A Sprint spokesman declined to comment on what Verizon's settlement might mean for Sprint. But he said the company is confident that no matter what happens it won't be asked to pay damages since a jury already found that customers owed the company more than Sprint was ever able to collect in early termination fees.

One thing is certain. The battle over these fees is far from over. Verizon may have settled, but the issue is still very much alive in the hearts and minds of customers. And the FCC and Congress just may have to take action. The big question now is how far will the government go?

Verizon Wireless agreed to pay $21 million to settle a lawsuit filed by customers who claim the company's early termination fees are excessive and unfair.

Details of the settlement aren't public. But a Verizon spokeswoman said that the settlement will put to rest claims filed by customers in California as well as customers who are part of a nationwide class action lawsuit.

Verizon denied any wrongdoing. And the spokeswoman pointed out that Verizon Wireless was the first cell phone operator in the U.S. to establish a pro-rated early termination fee that decreases over the time of the contract. Since then, the other three carriers, AT&T, Sprint Nextel and T-Mobile, have all pledged to go to prorated fees.

The settlement comes as these cell phone operators take heat from the Federal Communications Commission and Congress over the fees. The FCC held a hearing in June in which unhappy customers and consumer advocates railed against the companies for their business practices.

FCC Chairman Kevin Martin said he believed the fees, which in some cases have exceeded $200, were excessive. And he said he was concerned the early termination fees were not being used as a means to recover legitimate costs, but rather as a means to lock customers into a service provider.

The phone companies have argued that the fees are necessary to recover costs. Specifically, they say the early termination fees help cover the cost of phones, which the carriers subsidize and offer as part of a service contract.

So far the legal battles brewing against the phone companies have been a mixed bag. Cell phone users in California initially formed a class in 2006 for a lawsuit against all four major carriers: AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless. But the court separated the cases and each carrier is battling the lawsuits on their own.

Sprint Nextel won a victory in its battle when a jury decided last month that customers had indeed broken their contract with the carrier and that they owed the company $225 million, far more than Sprint Nextel was able to collect to from customers terminating their services early.

Now the judge in the case will have to decide whether the contract that Sprint imposed on its customers was even legal according to California law. A decision on that is expected within weeks.

But with the Verizon Wireless settlement, it looks like the plaintiffs' case may have had some legal merit. A Sprint spokesman declined to comment on what Verizon's settlement might mean for Sprint. But he said the company is confident that no matter what happens it won't be asked to pay damages since a jury already found that customers owed the company more than Sprint was ever able to collect in early termination fees.

One thing is certain. The battle over these fees is far from over. Verizon may have settled, but the issue is still very much alive in the hearts and minds of customers. And the FCC and Congress just may have to take action. The big question now is how far will the government go?