The suit claims that the company’s early termination fees violate laws in several states as well as the Federal Communications Act.
By Marin Perez
November 6, 2008 05:00 AM
Sprint Nextel (NYSE: S) is facing a $1.2 billion class-action lawsuit over claims that it wrongly charged customers early-termination fees.
In July, a California judge ruled that the third largest U.S. wireless carrier had to pay $73 million over these cancellation fees. The attorney in that case, Scott Bursor, has now filed a federal lawsuit which claims the $150 and $200 fees violate laws in every state as well as the Federal Communications Act.
Sprint has not responded to press inquiries regarding the national ETF lawsuit, but the company did recently finalize a new pro-rated ETF policy. The mobile operator said its $200 fee will be reduced by $10 per month after month six. The adjusted cancellation fee will only apply for new contracts, but existing subscribers can get it by renewing their service agreement.
All four major U.S. wireless carriers have a cancellation fees, and nearly all of them have faced multimillion-dollar lawsuits over them. The mobile operators say these fees are crucial in recouping costs of heavily-subsidized handsets, but consumer advocates say they are overly punitive and stifle consumer freedom to switch carriers.
The Federal Communications Commission has even leapt into the discussion, and is mulling a plan to create a nationwide policy.
“While I’m respectful of state regulators, I have been skeptical that lawsuits are a good way of ensuring protection for all consumers,” said Kevin Martin, the FCC’s commission chairman.
Secondly, if your phone was portable across carriers, then they wouldn’t have a way to force new equipment on us (with their associated contracts): people would buy their own phones, and if the carrier didn’t take good care of them, they would be free to switch their phone over to another carrier. By keeping their equipment locked into a single network and imposing a service contract to “offset equipment costs”, they don’t have to worry about providing good service.
Which brings me to the actual equipment costs…Do you really think the phone company is giving you a $700 or $800 phone for free (or even for $299)? You’re just kidding yourselves! There’s no way a business is going to subsidize the purchase price by $500 if they charge an ETF of $200…it just doesn’t make sense, even if they expect to recover the cost over a 1 or 2 year period. To subsidize $500, you would need to recover $20/month over 2 years; either we’re way over-paying for cell phone service, or else the companies have inflated the actual amounts they’re subsidizing.
Also, you can’t justify the ETF model when it doesn’t change based on the cell phone carrier’s liability. For example, if I buy a basic phone, my termination fee is the same if someone buys the “latest and greatest with all the bells and whistles”. Yet the cell phone provider has a much-reduced liability with my basic model.
If the ETF model were based on carrier liability, then you wouldn’t need a contract for buying the phone outright or just extending your contract. (What’s their liability if I pay for the equipment outright? Maybe $5 or 10 to process my account…that’s it.) This is a revenue stream, plain and simple.
Finally, wildcatherder mentioned the “GoPhone”. People who think cellphones cost big bucks should really look at how this model operates…a basic phone is $30, nicer one is $50-60, and a good phone is about $100, and a RAZR is less than $135. This is close to the actual cost because there’s no contract to subsidize it. Yes, you pay more for your airtime, but there’s no guarantee that you’ll ever refill it often enough to offset the subsidy.
(BTW – if you lose or destroy your cell phone and the carrier tries to charge you $300 for a replacement, buy a cheap GoPhone at a department store (but dont let them register it for you!) and install your SIM card in it…ta-da! The cell phone company will try to tell you that it won’t work because they want you to spend top-dollar for the same phone, but it does. It got me through 6+ months, when my previous cell phone took a swim.)
A California judge has ruled that Sprint Nextel must pay $73 million in refunds to its former customers in a lawsuit over early termination fees. However, a Sprint spokesman says that the ruling is tentative and the company has two weeks to come up with a response to this decision.
Consumer advocates are calling this preliminary decision a victory and saying that early termination fees unfairly restrict consumers from switching service. Wireless operators, meanwhile, say that ETFs are necessary because they subsidize a portion of the cost of the device and need to recoup those expenses.
This court decision comes at a time when the FCC is considering a nationwide ETF policy for carriers. Verizon has advocated that the commission adopt rules that are similar to what the operator has in place. For example, carriers should offer opt-out or trial periods for new contracts; provide pro-rated ETFs; and offer no ETFs for contract renewals unless the consumer gets a new device as part of the deal.
Verizon recently settled a similar suit for $21 million. The carrier didn’t admit to any wrongdoing but said that $21 million, which is the maximum amount it was liable for, will be doled out to plaintiffs and will cover attorney’s fees.