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Whose call?

Should the courts, the states or the FCC rule on early termination fees for cellphone contracts?

May 24, 2008

Have you ever paid a large sum to a mobile-phone carrier just for the privilege of unsubscribing? Jurors in Alameda County Superior Court may soon decide whether your former carrier owes you a refund -- unless federal regulators intervene on the companies' behalf. Testimony began this week in a class-action lawsuit by disgruntled ex-subscribers of Sprint Nextel who claim the early termination fees they paid violated California law. After that, the court will hear similar claims by disaffected emigres from Verizon Wireless, AT&T, T-Mobile and Cingular. Meanwhile, claims from the other 49 states have been consolidated into a class action before an arbitrator in New York.

Wireless companies have been pleading with the Federal Communications Commission to spare them from the lawsuits, and Chairman Kevin J. Martin seems game. He told reporters Friday that he wants to preempt the claims with a single national rule that would require termination fees to shrink over the course of a contract. That's not asking much of the companies, which already are or soon will be prorating the $175 fee they typically charge.

Although Martin didn't offer details, it's clear that his proposal is built on a faulty foundation. Federal law gives states sole power to regulate the terms and conditions of the carriers' offers, in keeping with their customary power over contracts. In order to limit termination fees, the FCC would have to declare them to be "rates," even though they appear to have no relation at all to the rates carriers charge. Besides, the FCC has left rates unregulated -- wisely -- because the market is competitive.

Wireless carriers argue that they need to impose termination fees to recover the cost of acquiring customers and providing subsidized phones. If that were strictly true, the carriers would be expected to charge lower monthly rates to customers who supplied their own, unsubsidized phones, and higher ones to those who declined to sign a contract. But they don't.

The carriers also say they shouldn't have to face a hodgepodge of state regulations on fees, but they're already protected from that by the Uniform Commercial Code. The code, which almost every state has incorporated into its laws, sets a simple rule for charges imposed when contracts are breached: They have to bear a reasonable relationship to the harm incurred. Wireless companies may be able to show that their fees are reasonable, and not merely designed to force poorly served customers to remain loyal. But that's for the courts to decide, not the FCC. Consumers who sign cellphone contracts need to recognize the consequences, but carriers shouldn't be free to set high fees just to stop customers from leaving.

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