Calif. court: Sprint fees designed to keep customers from leaving

Jessica M. Karmasek Mar. 9, 2011, 1:44pm

SAN FRANCISCO (Legal Newsline) - A California appeals court has upheld the decision of a trial court that found cell phone service provider Sprint's early termination fees to be "unlawful penalties."

In an opinion filed Thursday, the First District Court of Appeal, Division Five, remanded for retrial the issue of Sprint's damages and the calculation of any offset to which Sprint may be entitled.

In 2003, lawsuits were filed in Alameda County and Orange County against Sprint Spectrum, LP, and other cell phone service providers, alleging that their early termination fees, or ETFs, violated state consumer protection laws and constituted unauthorized penalties.

The trial court found the ETFs to be unlawful penalties under Civil Code section 1671, subdivision (d); enjoined enforcement; and granted restitution/damages to the plaintiff class in the amount of the ETFs collected by Sprint during the class period, $73,775,975.

However, a jury found that class members who had been charged ETFs had violated the terms of their contracts with Sprint, and that Sprint's actual damages exceeded the ETF charges the company had collected. The resulting setoff negated any monetary recovery to the class.

The trial court, reasoning that the jury had failed to follow its instructions on Sprint's actual damages, granted the plaintiffs' motion for a partial new trial new on that issue.

Sprint appealED the decision invalidating the ETFs and enjoining their enforcement, and the court's granting of the motion for partial new trial on damages. Plaintiffs cross-appealED, alleging that the trial court erred in permitting Sprint to assert damage claims as setoffs to class claims for recovery of ETFs paid.

Justice Terry Bruiniers, who authored the appeals court's 49-page opinion, agreed with the trial court, finding that Sprint failed to meet its burden of establishing preemption.

Sprint argues that it subsidizes its charges to customers for equipment and sets its charges for service on the assumption that it will recover its costs over the term of its fixed contracts, and that the ETFs compensate it for its losses when a customer fails to fulfill the full contract term.

"But this argument actually confirms that Sprint's rates for equipment and services are established at a level to provide its full projected return on investment over the contract term, assuming that the customer fulfills his/her obligations," the appeals court wrote. "Only if a customer failed to do so would Sprint suffer any loss of anticipated revenue, with the amount of that loss dependent upon when the customer default occurred."

The appeals court said Sprint's purpose in adopting the ETF was to control churn and was implemented primarily as a means to prevent customers from leaving. In other words, the ETFs were intended not to be a collectible element of Sprint's rates, but rather to serve as a deterrent -- either coercing customer compliance with the contract rate structure or penalizing noncompliance.

"But as we discuss post, Sprint runs afoul of California consumer protections in doing so. Simply labeling an ETF as a rate because it is charged to certain customers does not make it one," the court wrote.

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