FAQ: Why you're still paying early-termination fees

It's been almost a year since a judge in Alameda County, Calif., ruled that Sprint Nextel's early-termination fees are illegal, and yet Sprint and every other major U.S. wireless operator still charges customers a fee for canceling their services before a contract expires.

So what gives? Why are these pesky early-termination fees still around if they are against the law?

That's a good question and one that many readers have asked me over the past year. Because I get so many questions about these fees, I decided to put together this FAQ to help people understand what the recent court decisions mean for them and to provide some information about where cell phone early-termination fees stand today.

Let's start with the most obvious question: What did the court decide in the cell phone early-termination fee case in Alameda County Superior Court in California?
In July 2008, the judge in the case found in a preliminary ruling that Sprint Nextel's early-termination fees were unlawful. In December, the court issued its final judgment upholding that preliminary ruling in favor of the plaintiffs.

Does this mean that the people involved in the class will get some money?
Well, the case is still being appealed by Sprint. But as it stands now, it is unlikely that anyone in the class will get money. And here is why. The court ruled in favor of the class members and ordered Sprint to pay damages of about $74 million. But before the judge's ruling, a jury had upheld Sprint's contract. And the jury found that members of the class had violated their Sprint contracts. As a result, the jury awarded Sprint about $226 million in damages. In the end, members of the class still ended up owing Sprint about $150 million. But Sprint waived its right to collect the money, so the net result was that no one gets any money.

But the court in California found that the Sprint early-termination fees are illegal. Does this mean that I don't have to pay an early-termination fee if I decide to leave Sprint now?
No, it doesn't. For one, the class involved in the lawsuit was only certified for members in California. So for anyone living outside of California, the ruling means nothing, because the court doesn't have jurisdiction.

What if I am a cell phone subscriber in California? Do I still have to pay an early-termination fee?
Yes, cell phone subscribers in California still have to pay the early-termination fee specified in their original contract. The reason is that the judgment in this case only took into consideration the specific facts involved in this particular case. It was not a blanket decision that all early-termination fees are illegal. Rather, the court ruled that this specific type of early-termination fee imposed by Sprint is unlawful in its current form.

In short, this means that cell phone companies can continue to charge early-termination fees. And if they are challenged in court--even in Alameda County or anywhere in California--the court might decide something different based on the specific facts in that case. So technically, it's not accurate to say that early-termination fees are illegal anywhere. Instead, the early-termination fee Sprint charged to consumers in the manner and for the time specified in this case was deemed unlawful. That's all.

What's more, the jury in this case deemed Sprint's contract valid, which means that anyone who doesn't pay their early-termination fee is breaking their contract and subject to the terms of that contract.

A Sprint representative has clarified the company's position:

"Sprint will continue to enforce contracts with current customers," said Matt Sullivan, a Sprint Nextel spokesman. "The court in its ruling did not prevent Sprint from charging an Early Termination Fee when a customer terminates his contract early."

Weren't there other lawsuits over early-termination fees? What was the outcome of these cases?
Yes, there have been a few other cases. Verizon Wireless was also being sued in California over early-termination fees, but the company settled the case in July 2008, agreeing to pay $21 million to former subscribers, who argued that the company's ETF was unfair and excessive.

Sprint is also defending itself in another class action lawsuit that is certified for a nationwide class. The case is being handled in New Jersey, but will cover plaintiffs from former Sprint subscribers in every state, except California. A Sprint spokesman said that the company is close to a settlement in this case and that the terms are similar in scope to the ones in the settlement that Verizon Wireless agreed to last year. A settlement in this case would also lay to rest all other cases against Sprint for early-termination fees, except for the case in California, which is still in litigation.

So it seems like all these class action lawsuits haven't really had much of an effect on the industry since I still have to pay an early-termination fee. Is that true?
Well, not really. The lawsuits and consumer outrage over these fees, likely prompted Congress and the Federal Communications Commission to take notice, which resulted in some public hearings regarding early-termination fees. The FCC had even considered regulating early-termination fees to establish a national policy. But the agency decided to back off, because the industry was taking action on its own.

What have cell phone operators done to change their early-termination fees?
Over the past few years, all four of the major wireless operators in the U.S. have begun prorating their cell phone contracts.

Verizon Wireless was the first to adopt a pro-rated policy in 2006. And now almost every Verizon subscriber has a prorated early-termination fee as part of their contract. AT&T was next. As of May 25, 2008, all new AT&T subscribers have had their termination fees prorated over the life of their contract. For both Verizon and AT&T subscribers, the early-termination fee starts at $175 and is reduced by $5 every month over the life of the one- and two-year contracts.

T-Mobile USA began prorating its early-termination fees on June 28, 2008. Since then, new customers with a one-year or two-year contract have seen their early-termination fees drop from $200 to $100 if they end their contract with 91 to 180 days remaining on their agreement. If they end a contract with fewer than 91 days left on it, they pay a termination fee of $50. Customers who terminate their service in the last 30 days of their contract either pay the $50 fee or their standard monthly charge, depending on which one is cheaper.

Sprint Nextel was the last of the four major wireless operators to offer a prorated contract. As of November 2, 2008, Sprint adopted a policy that drops the $200 early-termination fee by $10 increments beginning in the sixth month of the contract. This means that by the 15th month of the contract, the ETF is down to $100. The new policy applies to both new customers and those who are renewing service agreements, so long as they signed up or renewed their contract after November, 2, 2008.

How can I avoid signing a contract with my wireless provider and avoid an early-termination fee altogether?
All four major wireless carriers offer customers alternatives to contracts. There are prepaid services that allow customers to pay in advance and do not require a contract. Most of the providers also offer the option to buy a handset at full retail price without committing to a contract. Of course, this also means that customers have to pay full retail price and cannot get a free or subsidized phone. Customers then pay service charges on a month-to-month basis.

A few consumer advocacy groups have recently asked the four major wireless operators to waive their early-termination fees for people who have been laid off and can't afford to pay their cell phone bills anymore. Are any of them considering doing this?
No, but wireless operators aren't completely heartless. Most of them allow customers to downgrade their plans to save money without restarting the clock on their contracts or incurring penalties.

But what if I can't afford my pricey data plan anymore? Can I get rid of that and downgrade to a voice-only service?
This is a tricky one. And before you decide to do anything you should check with your carrier about their policy.

Verizon spokesman Tom Pica said that the company deals with these types of issues on a case by case basis. Customers who are having trouble paying their bills can talk to Verizon customer service to work out a solution. But Pica advises people who are struggling to contact customer support sooner rather than later.

A Sprint spokesman said that if a customer with a separate data plan wants to drop that plan and go to a voice only plan or go to a lower data monthly plan, there is no early-termination fee. But, if the customer has a BlackBerry device, which requires a BlackBerry data plan, the customer must swap out his handset to avoid an early-termination fee. If the customer buys a new handset, the two-year contract clock restarts, but if he activates a handset he already owns, there is no early-termination fee.

A customer with a phone and separate 3G wireless data card for his laptop who cancels his data service will be charged an early-termination fee for the data card service. The easiest way to think of it is that the early-termination fee goes with the equipment.