A California Court of Appeal recently held that, on the facts of the particular case, contractual early termination fees (ETFs) for consumer mobile wireless (cell phone) service are not protected by federal preemption, against attack under state consumer protection laws.  The Court of Appeals found that defendant Sprint had not proven that its ETFs were part of its rates and charges which would be preempted from state control under Section 332(c)(3)(A) of the federal Communications Act, based on the court’s interpretation that preemption-protected rates and charges essentially include only prices quoted for wireless services, and that ETFs have only an “indirect and incidental” effect on such direct rates and charges for services provided to consumers.  The court further found that the defendant service provider had not followed the essential first step of documenting a cost analysis, to establish valid liquidated damages rather than an invalid penalty under California law.  The governing statute, Civil Code Section 1670 provides that liquidated damages in a consumer contract are presumed void unless there has been a “reasonable endeavor to estimate” actual damages in determining the liquidated damages amount before it is fixed in the contract.  The court declined to specify whether a “formal study” is required in advance to estimate actual damages to justify an ETF, but found against defendant here because no advance estimation effort was proven.  (Cell Phone Fee Termination Cases, California Court of Appeals No. A124077, March 3, 2011)

Thus the Court of Appeal found against the defendant wireless carrier, that its ETF was unprotected by federal preemption and was void as a consumer penalty under state law, supporting a $73 million jury verdict against it.  However the Court of Appeal also upheld the defendant carrier’s class-action counter-complaint seeking to offset its actual damages from early contract termination.  The carrier was allowed to show actual damages from having sold telephone handsets at bargain prices tied to 1 and 2-year service contracts, which had then been terminated early by the customers.  The Alameda County, California jury which awarded $73 million against the carrier, also found for the carrier on its class counter-complaint, that its actual damages exceeded and thus fully offset the $73 million of its invalid ETFs.  The Court of Appeal decision sends this last finding back to the trial court for a new trial on the issue of the carrier’s actual damages, so a hard-fought and convoluted case is not over yet.

Given the wave of ETF litigation in the cell phone industry, many providers have restructured ETFs into prorated amounts in any event, which therefore decline monthly as a fuller part of the contract term is fulfilled by a customer.


Meanwhile, the Ninth Circuit Court of Appeals recently held in an unpublished decision, that an Internet service provider’s early termination fee is valid and enforceable when it reflects a reasonable advance estimate of actual damages incurred by the ISP in agreeing to a discounted monthly rate and service installation based on a minimum contract length for revenue generation, only to have the customer terminate early after accepting the discounted charges.  The Ninth Circuit also found the ISP’s ETF was valid when considered as an “alternate” performance option, whereby the consumer agreed in advance to either fulfill the full contract term and receive discounted rates, or to terminate early for a price.  The Court further found that the ETF in question (a flat $99 ETF) is not unconscionable, as it does not shock the conscience, a finding which appears sensible though there is no assurance that any other court will behold a given ETF the same way.  The Ninth Circuit cited to the California Supreme Court’s analysis in a pre-Internet case, Blank v. Borden, 11 Cal.3d 963 (1974).  (Schneider v. Verizon Internet, gte.com, Ninth Circuit No. 09-55580, September 27, 2010)

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