California judge rules Sprint's early termination fees illegal

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.

Early termination fees have been around almost as long as cell phone service. Wireless operators impose the fees, which can be as high as $200 per line, on customers who cancel service before their contracts have expired.

Phone companies say they must impose these fees to recover the cost of subsidizing handsets and for guaranteeing low monthly service charges. But consumer advocates don't buy that argument, and they say the fees are excessive and restrict customers' ability to switch services.

Lawsuit divided
Cell phone users fed up with these fees took their complaints to a California court and formed a class in a lawsuit against the four major carriers in 2006. The court separated the cases and has been dealing with them individually.

Sprint initially won the first battle in its courtroom war. Alameda County Superior Court Judge Bonnie Sabraw had further split the case leaving a jury to answer the question of whether customers had in fact broken their contracts with Sprint. In June, the jury found that indeed customers had broken their contract with Sprint. The jury found that Sprint customers had paid $73.8 million in early termination fees, while the company had lost $225.7 million.

But it was the judge, herself, who decided whether or not the contracts were even legal. And earlier this week, Sabraw issued a preliminary finding that stated these contracts were not legal. She ordered Sprint to pay $18.2 million to customers who had already paid these fees. And she ordered the company to stop trying to collect the $54.7 million from other customers who haven't yet paid the charges they were assessed.

But it's still unclear if Sabraw's preliminary ruling will stand. Both parties in the suit have an opportunity to file additional arguments to sway the judge before she issues her final opinion.

"We are disappointed by the judge's tentative decision," Matt Sullivan, a spokesman for Sprint said. "But we are now focusing on our response to the court."

Legal experts say that even if she stands by her initial opinion, it's likely that Sprint will appeal the decision.

Sprint may also get relief from the federal government. The Federal Communications Commission is currently considering a proposal by chairman Kevin Martin, which would give the FCC authority to regulate these fees. It's also unclear how a move by the FCC might affect the current litigation.

In June, the FCC held a hearing in which unhappy customers and consumer advocates railed against the companies for their business practices. Chairman Martin said he believed the fees were excessive.

But Martin's proposal could retroactively exempt carriers from legal challenges at the state level. And in this case, it could potentially even void any decisions handed down in California.

Consumer advocates agree that something needs to be done to protect consumers from these fees. But Jay Edelson, a managing partner at the law firm KamberEdelson headquartered in Chicago, says that even if the federal government regulates the fees, wireless operators should be held accountable. Edelson, whose firm has represented clients trying to reclaim fees paid for erroneous charges on cell phone bills, was not involved in the early termination fee cases, but he has been watching the outcomes closely.

"Early termination fees are hurting consumers and they're illegal," Edelson said. "If the federal government takes jurisdiction and preempts states' authority, then there should be a federal law that replaces it and protects consumers."

Wireless operators say they are adapting their practices to customers' concerns, and they've begun adjusting their fees to prorate them so that customers who terminate later in their contract pay less. Verizon Wireless was the first to offer pro-rated early termination fees. And now AT&T and T-Mobile offer prorated rates. Sprint Nextel said it will offer prorated fees later this year.

[Pete Bardo]

"Fees that can be as high as $200 per line on costumers who cancel service". Do you mean to tell me I had to be wearing a costume when I bought my cell phone plan to be part of the class action suit?

All kidding aside, those termination fees are really high, but I'm curious as to what law they violate. The consumers should have known about the terms before signing the contract. Early termination fees are nothing new. So why are cell phone contracts any different?

[russkeller]

They don't violate any laws. It's part of the contract. Trick is they all do it as basically a hidden fee. You know how you sign up for a 30 dollar a month contract but then after fee's it's 60 a month same kinda BS. They need to go after that stuff too.

[Lerianis]

Actually, they do violate quite a few state laws, that state that if someone decides to drop service with a phone company (using a landline but it would apply to cell phones as well the way most are written), they CANNOT be charged any fees for that.

[stevenmusil]

Thanks for pointing out the typo. The spelling has been altered for a better fit with the sentence.

[edaboy51]

Let not the carriers worry.
Bush will push, and congress will go along with a retroactive immunity for the telecoms.
The fees will stand

[fangodango]

Due consideration - That is what is wrong with it.

Cell Phone is a utility, no longer a luxury item and hence the Government needs to ensure that customers have access to good service all the time and can move between carriers. The number portability was supposed to fix this, but carriers instituted 2 yr. contracts. This is highway robbery.

I bought an iPhone (First Gen.) for $499 and signed the ATT contract. ATT did not susidize that phone in any way. I used the ATT service for about 5 mos. after which I decided that the quality was much better with T-Mobile and ATT did not even work at my new work location. ATT refused to acknowledge the fact that for 9 hours in a day my phone was uselss. I had to move to T-Mobile and I paid $175 early termination fees... I ask you.. What did they do to deserve that Early Term. fees? They did not subsidize the handset! Their service was not as good. Their whole motivation was to lock me down for as long as they can so they would not have to invest in improvements.

[strykernyc]

First you are an idiot. Every cellphone company allow you to test their service for 30days and if you don't have service (which u should know within mins) then u can cancel the service with nothing to pay. people like you, are the reason there is a termination fee. you did not cancel the service because it took you 5months to figure out your service suck in ur crappy area. stop crying and face the fact... just say the truth. If you didnt like the ATT service then say it but don't lie.

[Lerianis]

strykernyc, apparently you have never gotten the run-around from AT&T like my father has. The lady from AT&T told my father that they were fixing towers in our area and that is why our service was so crappy in our home.
Three weeks later..... still crappy service, we still have to go outside and stand in the street to have a conversation with our relatives because we get NO SIGNAL in our home..... and we are in an area (WELL within) that we should be able to stand in a aluminum BOX and still get service according to AT&T's own maps.

No, the problem is as fangodango said: AT&T is taking all your payments for cell phone service and NOT improving their service at all or doing routine maintenance.
Time for AT&T to be sued and ONCE AGAIN broken up, because they have gotten to the point where they are that 'dirty' word: monopoly.

[aka_tripleB]

Did it work at your house? Did you move after you bought the phone? How long were you using it at your new job before you found out it didn't work there?

Just some questions that people should ask before making derogatory statements like what strykernyc made.

[kgbraden]

As someone that has their contract date posted on their outlook calendar with "DUMP SPRINT" as the appointment I can only applaud this. Sprint has been experiencing industry high churn for years now and has even gone so far as to release an ad campaign with "email the CEO" on it.

I have had terrible customer service with sprint from being lied to by sales reps (or at the very least provided with severely incorrect information that they thought was correct) to playing the "hold please while we use the magic 8 ball to come up with a solution to your problem"

The only reason that I haven't switched up to this point is that they're holding two $200 termination fees over my head on two phones that I bought at cost--no discount at all.

28 days and counting...

[strykernyc]

I couldn't agree more with you but the fact is sprint has the best service (especially broadband is top quality flawless service and 4g end of the yr) and the cheapest plans for us business users. sprint is missing the cs part. they are getting better but maybe not fast enough.

[aka_tripleB]

I don't work for any cell phone, but have had a job where I could sign customers up for several different carriers. And if you want to keep your current number, the best way to cancel your service with Sprint is to go to the carrier to want to switch to and tell them you want to port your number. That will cancel your service with Sprint, and you'll actually get to keep your number. If you go into Sprint to cancel your service, you will not be able to keep your current number. It will also save time and money because you don't have to drive to two different stores. But you do still need to wait until the end of your contract to not have to pay the early termination fee.

[JS82712]

oh please..this is nothing, the early termination fee for Rogers Wireless in Canada is $400

[aka_tripleB]

Sucks to be you. It's a same Canada isn't covered by US law. I really do feel bad for you, I just can't show it in writing.

[humanssssss]

The wireless providers are not as competitive as we think it should be. There's a large barrier to entry to drive prices down to zero profit. That's why this ruling is a good thing. Until government lowers the barrier to entry into these markets, they need to protect these providers from cheating consumers.

I don't mind if the barrier to entry is lowered to $10,000 but right now in order to operate a wireless provider like the scale of ATT and Sprint, you need at least $4B. The spectrum needs to be purchased from the FCC. If this is eliminated, yeah, when there's competition, these providers won't have the capability to lock a consumer to a phone for a cell phone service. In other word, with competition, the phone consumer buys will work with other cell phone service, right now, that's not happening because of lack of competition.

[b_abbott]

I think the suit has no grounds. If you didn't want to have to pay the early termination fee, you should not have signed the contract. Even if the fees were $50,000, I still think the carriers can do what they want, you don't have to be their customer if you don't want to. That's just like saying "I told my boss I would go to work today, but I didn't go because I just didn't want to." NOBODY WAS FORCED TO SIGN THE CONTRACT, people need to take responsibility for their actions.

[Lerianis]

Oh yeah... that is the same thing that PYRAMID SCAM operators told the judges when they were taken to court.

The fact is that some of these people were conned into signing on the dotted line by the people at these stores and by Sprint/AT&T/whatever.
Just like other people are conned on an everyday basis, and we don't blame them and actually ARREST the people who conned them.

[heysprintsucks]

oh please. i was charged an early termination fee because the people at radio shack said my contract had expired - then when i ported my numbers, sprint waited over 30 day to yank over 400 out of my account for early termination fees...which apparently are illegal due to a recent court case in california...now i am sueing and i plan to get it back... If I could sue for all of the incompetant service and routine criminal overcharging of my account then I would....we'll just have to see how it play out..

but for the time being, I encourage everyone who is unhappy with Sprint to Dump them and contact Scott Bursor to avoid early termination fees... good luck all

sprint suuuuuuuuuucks

[bicparker]

The phone companies have a lot more at stake than these early termination fees. They are not the big issue with them. $18-20 million??? Come on, that is a drop in the bucket! We're talking a few hundred million $$$$'s in revenue recognition. The accounting recognition value they support is the real driver here.

These fees affect the broader wireless earnings reported to shareholders... not just the fees. These fees provide an accounting basis for recognizing maximum monthly phone revenue as early as possible on those plans under contract. Without the fees, phone companies may have to write down bad debts earlier, and not recognize as much monthly phone bill revenue at the earliest moment possible.

[robvme]

The argument that fees are used to subsidize phones is bull. The reason these fees are in place is that it costs 3 times as much to get a new customer as it does to keep a current customer. To make it little more favorable for the carriers they hold their users hostage with an early termination fee. That's fine and dandy with me. I switch all the time, and guess what? I don't pay that fee. I suspend my service or change my account to a prepaid service or the most reduced plan I can find, I don't cancel. I then switch carriers. While I may be carrying the burden of some tax and tarriff, I am no longer paying my monthly plan or it is nominal at worst. This works best when you are at least 3 months along in your contract. In the long run, they get less than the termination fee and I kill my service at the end of the term.
Also, I never opt for the so called "free phone upgrade" at the end of the term. This just traps you into 1 or 2 more years. Bottom line is, the carrier knows that you will spend more on phone calls, fees, and features over the course of contract so as to make that handset cost negligible. I buy my phone outright without any contract.
All that said, early termination fees need to be made more reasonable, and people just need to pay for their handset. And by the way, that handset should be unlocked to be used on any network,. That is the real issue. I can move my number, but not my handset? What is that?

[ittesi259]

Well if your wanting to move from T-Mobile/AT&T to Sprint or Verizon its a technology issue. GSM and CDMA are not compatible. Any GSM phone can be unlocked to work with any GSM provider's SIM card.

[pjk0]

When I was in the home electronics business in the 1980s (selling cellular phones among other things), California was the only state in the USA that prohibited "bundling" in the cellular industry - the practice of subsidizing the hardware, in return for consumers having a contractual minimum-term of service, lest they be saddled with an early termination fee.

The thinking at the time was that "bundling" distorted the market, distorted the consumer's ability to understand the true cost of the hardware and service. Unfortunately, eventually California knuckled-under and joined the rest of the states.

Clearly if people want to do away with these fees (as I do), they should not expect carriers to be giving away free or subsidized hardware as well. Just like I'm perfectly willing to pay satellite radio to give me superior service and freedom from on-air advertising, I am perfectly willing to accept potentially higher costs for hardware in order to free us all from the yoke of being married to a service provider.

I'm a Verizon customer and to be honest these days I have little reason to switch as the service is excellent and they treat their customers like royalty. But neither do I enjoy being held over a barrel of contractual obligation to any company just because I want to add a line of service.

[Lerianis]

The problem, buddy, is that they are NOT subsidizing the hardware at all. Look at the cost to manufacture the iPhone (which is done overseas, by the way)....... searched the internet yet? 50 buck to make the iPhone overseas...... THEY ARE NOT SUBSIDIZING CRAP ON THESE PHONES (yelling at the top of my lungs here!)!

The only thing that they are doing is gouging the American consumer who is STUPID enough to allow them to get away with it.

[freemarket--2008]

@Lerianis

Two problems with your comment:

1. Anyone can make an estimate. That does not make it true. Only Apple knows what it really costs and they aren't telling. Fifty is probably the lowest you could find, which just means it's more likely to be wrong.

2. Apple is making a nice profit on the phone from the carriers, so yes the carrieres are subsidizing the phone. The 3G one anyhow.

[nbitinfo]

b_abbott: Are you working for a wireless carrier or are you simply not that bright?
IF all carriers HAVE the early termination fee and we live in this world where a cell phone, as some other reader said, is a necessity, at some point we have to sign up for one plan with one of the carriers.
I can olny hope that soon enough this fee will be illegal all over the country for all wireless carriers.
Imagine what a total "disaster" this might cause, something like: lower customer frustration, harder work on quality on the carrier's part, ONLY happy cutomers will stay with a specific carrier otherwise they would switch MUUUCH often thus increasing the wireless maket dynamics, and in the end MORE happy PAYING customers!
Let's hope that enough bright minds in this country do the right thing.

[carlitos92]

1. A cell phone is not a necessity any more than cable TV is. It's a luxury that we survived for hundreds of years without. If you can't ante up, stay out of the game.
2. No carrier has anyone over a barrel or with a gun to their head. Don't want a contract? Buy the phone outright. Can't afford that? There are options: ever heard of prepaid wireless?
3. As for the 1st gen iPhone, it's really too bad that AT&T used the price points they did. But it's even worse for people to whine about it after the fact: you knew the deal going in, and the first adopters or exclusivity-seekers usually always pay a premium.
Ignorance and/or an inability to play by the rules set forth doesn't make things unfair, so quit crying already!

[vesu0073]

There was one post that hit this discussion right on the button: READ THE CONTRACT! If you break your lease, there's a penalty. If you default on your mortgages, your credit score goes in the dump. If you don't pay your car loan, your car gets repo'd. These are the basics of responsibility, folks. Be an informed consumer. If you don't like what you see in the contract, every major carrier has some kind of return policy that will avoid all these charges. The major carriers also allow for activation of handsets you purchase outside of their stores/websites that won't require a contract. And you can even buy one of their in-store phones without a contract. If you want a no-commitment service, like they do in Europe or Asia, do what they do and pony up the full cost of the phone. In the long run, if consumers get their wish and contracts go away, expect a big jump in handset pricing. Stop complaining!

[heysprintsucks]

You are over generalizing and you are wrong. There are many many things that Sprint does that is ILLEGAL and when you call customer service to get anything fixed, they are completely incompetant, rude and make you feel like you are completely screwed. they specifically told me that I would have to sue in order to avoid going to collections

which is exactly what I am doing...

email me at [e-mail] to get in...

[jeanswear25]

I adore some comments that respect contract. Yes, "A Contract is the contract as long as you sign it in writing." Respect your contract people. Otherwise, why shall your bosses respect your contract you sign to stay in your job? The Cal state and its fed judges are wicked as usual as they never respect the law they created, like Hollywood people. Either some newcomers or the oldies do come up some discounts for promotion, or you can boycott the carriers. I don't like the 2-year contract so i never sign it, but continue my old contract and getting some best unlocked GSM phone, Nokia, yes Nokia. not I-phone not LG nor Samsung, they look nice for sure "with NO QUALITY".

[drakeshipway]

"oh please..this is nothing, the early termination fee for Rogers Wireless in Canada is $400"
I know, what is all the complaining about!! bell, rogers, etc. it's all $400, $200 is nothing! why can't a Canadian judge do this (A) :)

[jskrenes]

What about the consumer that WANTS a free or subsidized phone and doesn't mind a contract? I sell phones at a retail store, and just about everybody comes in asking for the free phone when they upgrade (though they hardly ever buy that model). I encounter maybe one customer every three months that buys at full retail because they don't want a contract. And our commission is based on contracts, accessories, and data. If people in my town had to pay $3-500 for a phone and couldn't subsidize with a contract, I probably wouldn't be able to keep my job because the cost would be prohibitive to their coming to get their phones from me.

[Lerianis]

Those customers are stupid, because they are NOT subsidizing jack. The fact is that most of the phones cost a GRAND total of $25 bucks to make overseas. Read that: $25 dollars, coming straight from the consumer protection agencies and groups.
The iphone is the ONLY one that eclipses that, and not by much.

[strykernyc]

My personal opinion. The court are full of it. What about speeding tickets?????? if we don't pay we have our license suspended plus $$$$$ in fees and even though we could be 100% correct we still have to pay all this Fees that surpass the $400 mark.
The court+gov+dmv it's all a big scam..... and we still have to pay the fees.
Go fk urself judges...

[Discola16]

What happened to a contract being legally binding? If you agree to something and no longer want it a year down the road, you still agreed to it. Will this make other forms of contracts illegal or non-binding as well just because one party is unhappy? As usual a double-standard is leveled against big business.

[aerosky1229]

Ho Hum~ I like this. I am using T-mobile, so this decision does not apply to me. However, as someone already mentioned, the cell phone is now more of a common good rather than a discretionary good. Applying the expensive early termination fee should be illegal at least in the United States because such commercial tactic impedes the free competition by resorting to this type of price manipulation skim. Sherman antitrust act, Clayton antitrust act, and Robinson-Patman act are few examples of existing laws that has been enforced by the government to promote the free competition. Of course, woo should be on these giant wireless providers like Sprint, T-mobile, Verizon, and AT&T and their employees and part-time workers who can be fired due to downsizing. But, heck, the cell phone industries are rapidly growing, and the market should be transformed from the current oligopoly like system to the free competition like system. Ever heard about the Cricket, ACS, Cellcom, nTelos, Revol, Immix, and Unicel? Let's give these small yet growing mobile network operators a chance to extend and let the customers decide the best on the quality of their services -- not the punishment set by major monopolistic operators.

[markdoiron]

Just because something is put into a contract does not make it legal. That's for all those folks who said that because people signed a contract, they should be made to stick to it. However, I would agree that I read the article primarily to understand the judge's logic for saying that the contracts were illegal, but that crucial piece of logic is missing. I won't even begin to speculate, as some have, why the contracts are illegal. C/Net--How about a little more information, please? --mark d.

[ittesi259]

FYI, if your celebrating this and plan to dump your cell without paying that fee.....and you're not in California, this whole thing doesn't apply to you. That was a state judge, not a federal judge.

[heysprintsucks]

yup, but the same lawyer who won that case, is now about to file another suit in EVERY STATE for the exact same reason - EARLY TERMINATION FEES ARE ILLEGAL