CNET’s Marguerite Reardon reports:
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.
Sabraw, an Alameda County superior court judge who is about to retire, admitted she had no idea what the jury’s verdict meant and went so far as to offer four possible interpretations. Writing that the verdict was “troublesome because it can be read in several different ways,” she picked the fourth option based on her interpretation of the jury’s questions, and awarded the damages accordingly. She concluded that the early termination fee “is a violation of law.”
Sabraw appeared to base her ruling on her belief that Sprint could have charged customers a pro-rated cancellation charge, so someone who cancels with one month left pays less than someone with nearly two years to go. She wrote: “Sprint did not prove that its motivation and purpose…was to estimate Sprint’s damages.”
Her analysis means that if Sprint had charged customers higher overall termination fees that happened to be pro-rated–Sprint’s average lost monthly recurring charge per early termination was $651.12–the practice might have been perfectly legal. (Who says lawyers never help anyone?)
If this seems like muddled thinking, it’s probably because it reflects the logic of this lawsuit. Think of it: Someone has to pay for the cost of the handset. The customer either pays upfront or, if it’s subsidized by the carrier, over time in the form of an early termination fee that–in Sprint’s case–was $200.
The California law prohibits termination fees in excess of the loss that the company suffers. Those losses can be measured in a variety of ways – just the loss of the handset subsidy that the termination fee pays for, or also the cost of finding a new customer for the time required to complete the contract, or the whole cost of finding a new customer in total. If we’re taking an economic view and examining the opportunity cost from Sprint’s perspective, the last option has to be used.
But why should the law exist in the first place? It has already been used against Verizon, and will soon be used against T-Mobile. Further, the FCC is examining the question of early termination fees nationally. But as my colleagues Ryan Young, Cord Blomquist, and Ryan Radia have all pointed out, early termination fees are actually good for customers, both by enabling discounts now and providing revenue predictability and the incentive for network upgrades later. As I summarized earlier:
Early termination fees are essentially a private mechanism of enforcing long-term contracts. Instead of taking each early terminator to court every time, the two parties simply agree in advance on conditions under which the contract can be terminated. Without such an enforcement mechanism, long-term contracts would be nearly impossible. And such contracts allow wireless companies to give deep discounts on phones, provide revenue predictability, and spur innovation. Further, a paternalistic policy that bans such contracts discourages customers from reading the agreements they sign, providing a disincentive for personal responsibility.