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Cell Phone Early Contract Termination Fees Illegal
By David Najor :: Friday, August 1, 2008 :: 42937 Views :: Article Rating :: Law & Order, Business & Finance, Government & Society

California, USA - For many Chaldeans, the cell phone is a life-line to the family.  “Long hours at work, family members pulled in hundreds of different directions, constantly on the run; that’s the life of a Chaldean,” says Joseph Jirjis, store manager of Shop Cellular in El Cajon California.  “We have to stay in touch with one another.  That is how we are able to help one another and make sure everyone is safe.  Even my grandmother has a cell phone.”

Chaldeans often complained about the additional fees cell phone companies would add to a plan.  “They nickel and dime a customer to death,” Jirjis adds.  “Based on the company, we have to follow their plan, and they have all sorts of fees.  Many of our customers get shocked to see all the fees.”

The termination fee in particular upset many customers.  Cellular phone companies would sell contracts to customers and if a customer terminated their contract early an additional fee was added.    However, a Superior Court judge in California has ruled that the practice of charging consumers a fee for ending their cell phone contract early is illegal and violates state law.

In one of the most significant legal rulings in the tech industry this year, the tentative judgment orders Sprint Nextel to pay customers $18.2 million in reimbursements and orders Sprint to stop trying to collect another $54.7 million from California customers (some 2 million customers total) who have canceled their contracts but refused or failed to pay the termination fee.

“An appeal is inevitable since the ruling could have massive fallout throughout the industry,” says Jirjis.  “Companies use the termination fee as a way to keep customers tied to a plan.  Without the penalty, cellular carriers lose the power to lock customers into contracts for multiple years at a time.”

Jirjis points out that those contracts can be heinously long, they also let the carriers offer cell phone hardware at reduced (subsidized) prices. “AT&T's two-year contract is the only reason the iPhone 3G costs $199. If subsidies vanish, what happens to hardware lock-in? Customers would be forced to pay for expensive hardware if contracts were open.”

Of course, the carriers aren't going to take this lying down. Early termination fees are seen as critical to business, so carriers are expected to look for ways to reclassify the fees (such as by calling them "rates," part of the arcane set of laws that covers the telecommunications industry). The industry is also pushing for the federal government to step in and claim oversight over the early termination fee issue, which would invalidate any state ruling. The FCC is generally more tolerant of such fees, though Chairman Kevin Martin has proposed a plan whereby the fees are decreased the closer you are to the end of your contract.

The FCC may also buy the argument that, since carriers are nationally based (and consumers can use their phones anywhere in the country), that a single policy should apply across the nation, rather than creating a patchwork of legislation that could lead to confusion and chaos caused by having 50 different policies.

“Is the early termination fee dead?” We asked Jirjis.  “Not yet, but it's looking a little haggard,” he says.