Judge misdials in Sprint ruling on early termination fees

A California state judge handed down a surprising and oddly reasoned verdict Thursday: Sprint Nextel's early termination fees for cell phone customers are illegal.

My colleague Maggie Reardon wrote an article about the 38-page ruling, which orders Sprint to pay $18.25 million to California customers who were charged termination fees. Customers charged fees who never paid them get a credit of $54.75 million.

You can imagine how much of this will go to the members of the supposed class that was harmed, and how much to the plaintiff's lawyers. In the Grand Theft Auto: San Andreas class action suit over sex scenes, there were supposedly millions of people "harmed"--out of which a mere 2,676 actually filed the paperwork.

The Sprint suit arose after a collection of plaintiffs' lawyers claimed that the $200 early termination fee was an "unconscionable" contract, in violation of California civil code 1770(a)(19). They also claimed the fees were "unfair" because it involves "rights, remedies, or obligations" that are "prohibited by law" (1770(a)(14)).

The surprise is that Judge Bonnie Sabraw bought it. 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.

U.S. carriers seem to have concluded that Americans like paying lower upfront costs, preferring to amortize the cost over two years. This isn't really surprising, given a spendthrift U.S. shopping culture and consumers' affection for monthly payment plans. The credit markets are also deeper in the U.S., which may be another reason why two-year plans are more common than in Europe and Asia. (For comparison's sake, in Germany, T-Mobile's contract-free first-generation iPhone cost E999 ($1,560), and one with a two-year contract cost E399 ($622), a $938 difference.)

No consumer, of course, is ever forced to sign a two-year contract. I bought a Motorola Razr in 2005 and paid more to be contract-free (it was a bad move, in retrospect, since I stayed with AT&T for the next two years). It's true that the iPhone now requires you to sign a contract; you have to weigh the costs of the contract vs. the benefits of the device.

That brings us to the moral issue. If you're an adult who voluntarily signed a contract knowing that you should expect an early termination fee of $200, why would you turn around and file a lawsuit claiming you didn't like it?