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Verizon Pays $21 Million to Settle Termination Fee Lawsuit

Other carriers watch decision carefully

By Martin H. Bosworth
ConsumerAffairs.com

July 10, 2008 

The settlement came less than a month into trial proceedings for the suit, filed in 2006 in California by plaintiffs who claimed the fees were a violation of California's state law.

The turn of events is thought to bode ill for Sprint, which faces a similar lawsuit before the same court and judge in Alameda County Superior Court. Sprint representatives declined to comment on the settlement, saying they were focused on their own legal proceedings.

California's Supreme Court has already cleared lawsuits against carriers such as T-Mobile to proceed, saying that the nature of the contracts and the punitive fees were "unconscionable" under California consumer protection law.

T-Mobile suffered another defeat when the U.S. Supreme Court refused to hear its appeal for a separate lawsuit dealing with the wireless carrier's usage of mandatory binding arbitration in its contracts, a decision which could set precedent for lawsuits against the other carriers.

All four of the major wireless carriers -- Verizon, AT&T, Sprint, and T-Mobile -- have faced increasing pressure from consumers and the media over the fees. The wireless companies say the fees are a necessary cost of providing inexpensive phones to customers, while critics say the fees lock customers into a multi-year contract and prevent them from shopping for better alternatives.

Congress considers

The outcry against termination fees led to calls for investigation and new legislation from Congress that would mandate prorating termination fees over the life of a contract, and would restrict the levying of new fees as well as requiring disclosure of a potential fee charge when customers upgrade a handset or change a plan.

In response to the criticism and attempts to preempt new regulation from Washington, all four carriers recently agreed to modify their contract policies to prorate termination fees, and limit or remove fees for contract changes.

Verizon Wireless then partnered with the FCC to introduce plans for federal regulation of the fees, which would include a nationwide standard for the fees and how they can be prorated, and would give consumers a window to try a phone and cancel the service without incurring a penalty.

In exchange, the FCC would block the ongoing lawsuits over the fees, and would restrict the ability of state lawmakers to control the fees in favor of the federal laws.

The proposal was heavily criticized by consumer advocates and even members of the FCC itself, who saw it as a power grab by the major telecom companies and Washington at the expense of state regulators and consumers.

The proposal was also seen as a strategic thrust by Verizon Wireless, as industry insiders claimed a reduction in termination fees would enable it to pick up customers from struggling rivals such as Sprint.

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