Martin wades into ETF debate: The burning question: Federal or state oversight?

The Federal Communications Commission appears poised to begin crafting federal guidelines on early termination fees, with Chairman Kevin Martin offering a blueprint on how a national regime might look.
At the same time, it remains unclear whether Martin will pursue the far more controversial step of preempting ETFs in a way that could eliminate state oversight and wipe out the kind of class-action litigation facing national carriers in California and New York. Late last year, Martin told the Senate Commerce Committee he did not necessarily agree that early termination fees are part of wireless rates and therefore preempted by federal law.
But there are signs Martin may be rethinking that posture.
“I respect the important role states play in protecting consumers. I recognize that states play a critical consumer protection role and are particularly well-suited as they are frequently closer to consumers,” Martin stated. “However, I am skeptical that plaintiff class-action lawsuits are the most effective way to guarantee these protections. First, not all consumers even benefit from such plaintiff lawsuits. And I do not believe a patchwork of 50 different sets of regulations with widely varying protections benefits consumers or the industry.”
As such, under one likely scenario, the FCC could act in July or August to grant an industry request to preempt ETFs and initiate a rulemaking to develop a national plan for regulating fees charged to consumers who break their wireless contracts early. The mobile-phone industry claims ETFs help offset the cost of subsidized handsets and other business costs. However, serious questions have been raised in lawsuits and elsewhere about the extent to which the fees relate to phone subsidies.
Patrick Pearlman, deputy consumer advocate at the West Virginia Public Service Commission and a representative for the National Association of State Utility Consumer Advocates, urged the FCC to take a fresh look at the economic justifications and “anti-competitive effects” of ETFs. “In the meantime,” stated Pearlman in written testimony, “the commission should not interfere with states’ and individual consumers’ efforts to obtain protection from such practices underlying existing state laws.”
Wireless operators insist the business model – based on ETFs tied to one- and two-year contracts – helps consumers by lowering the cost of cellphones. The United States boasts more than 260 million cellular subscribers.
A 1993 law preempted state regulation of mobile-phone rates, but reserved to states limited jurisdiction over “other terms and conditions” of wireless service. The cellular industry asked the FCC in 2005 to rule that ETFs are part of the wireless rate structure and therefore off limits to states.
Debate continues
At an FCC hearing Thursday, representatives of the mobile-phone industry appeared to be trying to convince Martin that the FCC would be on solid legal ground if the agency pre-empted ETFs. They cited case law backing their arguments, only to have a plaintiffs’ attorney involved with ETF class-action litigation in California assert that courts repeatedly have found ETFs are not wireless rates.
Consumer and state advocates oppose federal preemption of ETFs. Some of those organizations played key roles in convincing the 11th U.S. Circuit Court of Appeals to overturn an FCC decision that preempted state regulation of line items on wireless bills. The Supreme Court declined industry’s petition to review the 11th Circuit ruling.
“We are concerned that the wireless industry has become a cozy cartel of a few dominant providers characterized by consumer lock-in and limited device offerings,” said Chris Murray, senior counsel for Consumers Union, nonprofit publisher of Consumer Reports magazine. “Instead of engaging robust competition, these carriers are charging consumers unconscionable early termination fees and thwarting real choices in the marketplace. Action from policymakers is sorely needed.”
Some consumer proponents appear inclined to support an FCC rulemaking on ETFs, so long as the agency does not tamper with federal preemption. However, Anne Boyle, chairman of the Nebraska Public Service Commission, said consumers and the wireless industry alike would be better off if ETFs were eliminated altogether.
Another high-profile legal challenge is virtually guaranteed if Martin can secure votes from the two other Republican commissioners to pre-empt ETFs. Such action could also trigger a showdown with Sen. Amy Klobuchar (D-Minn.), lead sponsor of a wireless consumer protection bill and an opponent of federal preemption. Klobuchar underscored that view at the FCC hearing.
Confusion over Sprint Nextel suit
Class-action ETF lawsuits against the four national wireless carriers and a 49-state class action against Verizon Wireless appear to be driving the resurgent interest in a controversy largely dormant at the FCC in recent years. A major development in the class-action ETF suit against Sprint Nextel Corp. surfaced during the FCC hearing, creating a bit of a stir and subsequent confusion.
The jury, according to a court document, found that California consumers paid $73,775,975 in ETFs to Sprint Nextel and that the No. 3 mobile-phone carrier suffered $225,697,433 in damages as a result of subscribers breaking their contracts.
Sprint Nextel viewed the jury verdict in a positive light.
“The jury verdict speaks for itself. We’re pleased that upon hearing all the testimony and examining all the evidence, the jury recognized that Sprint makes a significant investment in its customers through reduced handset prices and discounted monthly rates,” the carrier said in a statement. “Sprint offers choices when selecting a service plan, whether it’s month-to-month, pre-paid or a term agreement. Above all, we are committed to continually enhancing the customer experience through competitive pricing, an expanding range of service features and a wireless network that is operating at best-ever levels. . We will continue to defend the claims brought in this case and we are focused on the remaining proceedings.”
Plaintiffs’ lawyers put forth a different interpretation of events, however, saying “the jury rejected Sprint Nextel’s contention that it suffered over a billion dollars in actual damages as a result of plaintiffs’ early termination of their cellphone contracts. At the trial it was uncontested that Sprint Nextel had charged the class $299 million in ETFs and that the class paid $73,775,954 of those charges to Sprint Nextel. The jury found that Sprint Nextel suffered a total of $225,697,433 in actual damages from the early terminations, rejecting Sprint Nextel’s claim that the terminations caused over a billion dollars in damages to the carrier. The trial now moves to the next stage in which the court will determine whether Sprint Nextel’s ETF provision was an illegal penalty under California law and thus the class should be refunded $74 million in illegal fees.”
Meantime, jury selection begins Monday in a class action ETF suit against Verizon Wireless. AT&T Mobility and T-Mobile USA Inc. are next in the queue.
Verizon Wireless, which announced it would pro-rate ETFs in November 2006, said a federal policy with a light regulatory touch is needed to avoid a patchwork of policies throughout the country.
“Faced with the prospect of multiple state policies on this issue, Verizon believes that appropriate federal action to establish a national policy is preferable,” said Tom Tauke, executive VP of public affairs and communications at Verizon Communications Inc.
However, 31 states do not regulate wireless at all. But industry is quick to point out that litigation can nonetheless ensue in such states. The FCC’s Martin argues a national ETF policy is needed precisely because so many states do not regulate the wireless industry. He said ETFs should be reasonably related to the cost of handsets many consumers get when obtaining service. The FCC chief also said ETFs should be prorated over t
he life of the service contract; that ETFs should not be extended when a consumer renews his or her contract; and that consumers should be given a grace period to check both the service and their first bill before being subject to an ETF.
Other national carriers have committed to pro-rating ETFs.