High-stakes battles over early termination fees are playing out in official Washington and California at a time when carriers face pressure to make good on commitments to open their networks and embrace consumer-friendly practices, a confluence of forces that appears to be chipping away at the foundation of a decades-old business model that could be on its way out.
Indeed, in the first of a series of class-action lawsuits in California state court against national cellular carriers, plaintiffs suing Sprint Nextel Corp. are attempting to undercut industry’s long-held argument that ETFs levied on subscribers who break contracts early are necessary to recoup costs associated with subsidized handsets.
In his opening statement in the trial of the class-action lawsuit against Sprint Nextel, plaintiffs’ lawyer Scott Bursor outlined to the jury how he intended to show that ETFs have another purpose altogether.
“We will prove that the early termination fee was marketing based, marketing created, and marketing driven,” said Bursor, according to a court transcript. “We will prove that the ETF had nothing to do with the cost of any phone. We will prove that the ETF had nothing to do with the cost of any promotions. We will prove that the ETF had nothing to do with the cost of acquiring new customers. We will prove that the ETF had nothing do with any cost at all.”
Bursor then proceeded to say plaintiffs would show the ETF was embraced as an arbitrary penalty “just to try to stop people from leaving. We will prove that Sprint never expected that it would be able to collect these terminations fees.”
Bursor and other plaintiffs’ lawyers will likely press the same line of argument in pending class actions against Verizon Wireless (which could have to shell out nearly $1 billion in ETF refunds), AT&T Mobility and T-Mobile USA Inc. in the Alameda County Superior Court. At least one other major ETF lawsuit is said to be advancing in the New York court system.
Impact could be enormous
The implications are potentially huge on a couple levels. The obvious one involves the possibility that national cellular carriers collectively could have to pay out billions of dollars in ETF refunds if they lose in court.
Another deals with the potential impact on churn if other national cellphone carriers follow Verizon Wireless’ lead and pro-rate early termination fees as they promised they’d do last year. Greater and more frequent shifts in subscribership could create havoc across the board for wireless operators, some more than others. Wall Street keeps a close eye on how many subscribers are added and lost by wireless carriers each reporting quarter.
In the nation’s capital, the ETF debate is all about policy.
Cellular association CTIA continues to lobby the Federal Communications Commission to approve a 2005 request to declare ETFs a component of wireless rates and therefore off limits to states. A 1993 law pre-empts state regulation of wireless rates, but reserves limited powers over “terms and conditions” to states.
Most recently, industry came up short in efforts to reach a compromise with leading consumer groups on a federal ETF policy, with the latter – as well as state advocates – unwilling to agree to the expansion of federal pre-emption in such a way that could effectively foreclose the ability of states and subscribers to pursue consumer safeguards and legal redress. Verizon Wireless has been aggressively lobbying the FCC and, according to sources, trying to find common ground with Consumers Union and AARP on ETFs.
Meantime, Sens. Amy Klobuchar (D-Minn.) and Jay Rockefeller (D-W.Va) are championing a wireless consumer empowerment bill that, among other things, would mandate pro-rated ETFs.
The National Association of State Utility Consumer Advocates has urged the FCC to re-examine the economic and policy assumptions underlying the agency’s 1992 cellular bundling decision to determine whether industry’s use of ETFs continue to be what federal regulators in the past viewed as “an efficient promotional device” benefiting both consumers and wireless carriers. NASUCA also wants the commission to scrutinize equipment, customer acquisition and retention costs cited by the wireless industry as justification for ETFs to assess whether such costs are being reasonably and appropriately recovered from consumers.
More controversy for Martin
FCC Chairman Kevin Martin, who signaled he’d like to find a national framework beneficial to consumers, suddenly finds himself in the middle of a controversy that caught fire recently after being relatively dormant for months. Martin and the other four commissioners are scheduled to hear testimony from major stakeholders on ETFs charged by wireless carriers and other service providers at an upcoming hearing.
“The FCC’s upcoming en banc hearing on ETFs scheduled for June 12 could be influenced by the outcome of the Sprint Nextel class-action jury trial pending in California Superior Court and the 49-state class-action arbitration in New York, both of which are expected to close” shortly, said Jessica Zufolo, an analyst at Medley Global Advisors L.L.C. “If the plaintiffs win one or both cases, it would likely cast a shadow on any potential FCC efforts to pre-empt state jurisdiction over carrier contract terms and conditions.”
Also working against the wireless industry are court decisions – including the gutting of an FCC decision to pre-empt state regulation of line items on wireless bills – that have rejected federal supremacy.
