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Topic # 24741 1-Aug-2008 11:21 Send private message

California judge rules early cell phone termination fees illegal

Thu Jul 31, 2008 12:48PM EDT

?the most significant legal rulings in the tech industry this year, 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.

The preliminary, tentative judgment orders Sprint Nextel to pay customers $18.2 million in reimbursements and, more importantly, 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.

While an appeal is inevitable, the ruling could have massive fallout throughout the industry. Without the threat of levying early termination fees, the cellular carriers lose the power that's enabled them to lock customers into contracts for multiple years at a time. And while 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? Could an era of expensive, but unlocked, hardware be just around the corner? It's highly probable.

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? Not yet, but it's looking a little haggard.

----

A sign of things to come perhaps? Although it's only in crazy California at the moment, I would think that if this were to spread throughout the industry, phone prices would surely rise! No more subsidised handsets

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Reply # 153278 1-Aug-2008 12:19 Send private message

Personally I have no issue with carriers charging early termination fees, but do think they should taper off as the contract period draws to a close.  However, I do have an issue with early termination fees if the user gets no benefit out of the reason for imposing them in the first place.

The reason for early termination fees, as I see it, is for the subsidy of hardware.  But take an example of a customer who already has their own hardware and is moving from Pre-Pay to an On Account plan.  Why should they be subject to early termination fees if they change carrier or cease using a mobile here? - The carrier is not losing any retail margin on hardware.

My take on the above article is that the Federal Government will step in and make a nationwide ruling, but it won't be in a hurry.  The probable trade-off that carriers will have to agree to is Kevin Martin's plan of decreasing fees.  This would mean that carriers would still be able offer subsidies with confidence that they'll be able to recoup their costs.

This could precipitate action in other countries around the world and see the introduction of decreasing termination fees in many places.  Would it happen in NZ? - I have my doubts.




Chuck Norris has abolished the periodic table of elements. The only element he recognises is the element of surprise!

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  Reply # 153279 1-Aug-2008 12:19 Send private message

State laws are always at odds with constitutional/national laws in the US. We're also forever hearing about burglars getting awarded compensation because they broke into someones house with the intention of stealing private property and cutting their foot on a piece of glass. In New Zealand we have the rule of unclean hands, if you're committing a crime, you can't sue your partner in crime for then stealing your share for instance. There are exceptions but we rarely find in favour of the defendant in these circumstances. I find their whole judicial system erred much too far in favour of realist law and devoid of its formalist origins.

I've no issue with ETC's, when one signs a contract they are bound by the terms and each person enters the agreement with the understanding that they are receiving something in exchange for committment to duration. Removing the term incentive would only lead to removal of subsidies. I would prefer to have the choice.

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  Reply # 153298 1-Aug-2008 13:29 Send private message

Then the smart marketers in America will start calling them "Hardware Recovery Fees" if customers cancel their plan within 'x' months.

red

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  Reply # 153784 3-Aug-2008 12:46 Send private message

mikal: Then the smart marketers in America will start calling them "Hardware Recovery Fees" if customers cancel their plan within 'x' months.


I have to agree with that. The industry has a right to protect itself in those cases. It will find a way to retain the fee under another name or condition, so it doesn't really matter what ruling comes in if any.

I miss the days I could order the latest phone on a plan that would give the biggest subsidy and then as soon as the phone arrived, I could just ring the carrier and change the service plan without any fee or even any question.



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  Reply # 153973 4-Aug-2008 11:26 Send private message

Dratsab: 
The reason for early termination fees, as I see it, is for the subsidy of hardware.  But take an example of a customer who already has their own hardware and is moving from Pre-Pay to an On Account plan.  Why should they be subject to early termination fees if they change carrier or cease using a mobile here? - The carrier is not losing any retail margin on hardware.

Agree, I have no objection to ETCs (ETFs) if they are protecting an upfront subsidy or contract monthly discount for service.  
It is not only subsidy but may also be discounting for the monthly plan rate.

In scenario above, if moving across to on account you may have been granted a hardware subsidy although you have your own handset (eg $x upfront) or a regular discounted price.  If you received a subsidy and/or discount, then the ETF should be commensurate with the combined amount of subsidy and reduce over time (which they do).

If there is no subsidy or discount, then the user should be free from contract lockin period (from time of changing plan), and just on a month-to-month contract (casual).  Would have to check, but assuming this is the case now for both voice and data plans.  (it is with data plans which are more expensive if not in contract period). With data it was $10mth cheaper over 24mths and also VMC was subsidised, therefore there is grounds on subsidy and discount as this amount has been amortised by VF over a 24mth period.

If changes come into play to abolish ETCs, then it will just be packaged a different way.  

on the flipside, if the customer is loyal to the carrier when not locked into contract period, they should also be entitled to a bonus for their tenure - but calculated/awarded post the period attained. Laughing



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  Reply # 153976 4-Aug-2008 11:32 Send private message

red: I miss the days I could order the latest phone on a plan that would give the biggest subsidy and then as soon as the phone arrived, I could just ring the carrier and change the service plan without any fee or even any question.

Unfortunately this approach is not sustainable, and also set some unreasonable expectations in the public.  
Just look at the amount of upset punters about not being able to buy an iPhone for $199 as prepay or on a little $40mth plan.  (did not help with the media with spin on the facts).  

I recall prior to launch when it was proposed that handset would be approx $1000-1200 unsubsidised some people balked and claimed double counting. Greater transparency on charge breakdown can not only diffuse unrealistic expectations, but can also illustrate the benefit gained from bundle.


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  Reply # 154161 4-Aug-2008 23:50 Send private message

It is always interesting to see how the law falls.

In the EU - where I lived until I was 38 - the general thrust is that laws are there to protect consumers not companies: witness the massive fines doled out to Microsoft and the fact that EU wide roaming charges are being severely reduced by the regulator there despite the moaning of the carriers! See below:

"After months of disagreements over what the roaming rates should be capped out, the EU finally passed legislation at the end of May and the measure was approved by the 27-nation bloc in early June. Customers will now be charged no more than 49 cents for making a call while roaming in the EU, and no more than 24 cents to receive a call while roaming.

 

The new policy took less than a year to go from idea to law, and the industry attempted to have the legislation struck down by claiming it would cut into their profit margins in an already competitive industry. As much as 18 percent of all revenues are gained from roaming charges, according to recent data.

 

However, lawmakers continued to press forward, and even got more than a dozen nations who voiced opposition to the policy late last year to change their minds. All 27 member states of the EU voted to pass the new roaming caps after agreeing to a middle ground on rates. The EU Parliament proposed rates of no more than 40 cents and 15 cents, while Germany suggested 60 cents and 30 cents."

 

 









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  Reply # 154169 5-Aug-2008 00:24 Send private message

MattD:

If there is no subsidy or discount, then the user should be free from contract lockin period (from time of changing plan), and just on a month-to-month contract (casual).  Would have to check, but assuming this is the case now for both voice and data plans.  (it is with data plans which are more expensive if not in contract period). With data it was $10mth cheaper over 24mths and also VMC was subsidised, therefore there is grounds on subsidy and discount as this amount has been amortised by VF over a 24mth period.


There are not any voice plans free of a term commitment other then the old motormouth plan, which all up is a pretty crap plan in the scheme of things with none of the addons available for it.

The buy out for the cheap youchoose is only like $20 or something, but its still a barrier to changing to another telco which is I guess why they are pushing so hard to get them right now with some positive things happening at years end for people wanting to move to a better priced or supporting provider.




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  Reply # 154171 5-Aug-2008 00:33 Send private message

They certainly should not be allowed to charge you if it is your phone. 

Your electricity company, for example, cannot charge you to end your contract if you want to swap to another provider. I do not believe that Telecom can do so if you move your landline, either. This seems pretty much the same thing.

In Australia, I think that they put the net handset cost onto your phone bill over the life of the contract, which I guess would open up a whole different kettle of fish when it comes to early termination.

If you sign an 24 month iPhone contract and get the handset for $199, what do the y charge you if you break the contract after 6 months?








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