Consumers Irate About Cancellation Fees

Dec. 24, 2009— -- Ardyth Metz doesn't have many warm feelings for DirecTV. First, the country's largest satellite operator installed shoddy equipment at her home, she says, and then it charged her $350 to cancel the contract.

"I went through the roof," she said, when she found out about the hefty early termination fee. Metz, 60, says she was never told about the fee when she signed up for the service and only paid up because she wanted to stop the "nasty" phone calls from DirecTV.

"They harassed me so much I paid it," she said.

Regulators log thousands of complaints each year about early termination fees, making it one of the thorniest topics for consumers, according to government data. Consumer advocates claim that large corporations, including cell phone providers, satellite TV companies and gyms lure customers with attractive introductory rates -- and then slam them with unreasonable penalties when they try to end the relationship.

"Complaints about early termination fees have peaked in the past year," says David Butler, a spokesperson at the Consumers Union. "The level of frustration among consumers is boiling over."

Companies argue that the fees are a fair way to cover the costs of pricey equipment or installations offered to customers at the start of a long-term contract.

"American consumers are used to getting devices at greatly reduced prices, and sometimes, depending on the promotion you get a device for free," said Mark Siegel, a spokesman at AT&T Wireless, which charges customers up to $175 for breaking a contract. "In exchange for a great deal on price we ask customers to enter into a two-year agreement."

Consumer advocates dispute this logic, pointing out that fees often exceed the cost of a new phone. They say the fees simply hold customers hostage.

States Try To Curb Abuses

Provoked to act by complaints from Metz and other constituents in Washington State, Attorney General Rob McKenna has sued DirecTV for its "unfair sales practices," alleging that the company lures new customers with advertisements for low prices that hide cancellation fees, equipment rental fees and automatic renewal requirements.

"The miniscule 5.5 point fine print at the bottom of a DirecTV advertisement is enough to give someone a migraine," McKenna said when he announced the suit. "Even if consumers used a magnifying glass, they still wouldn't discover that the 'good deal' they were promised came with potential expensive pitfalls."

DirecTV disputes Metz' claims, arguing that "the vast majority" of its customers understand the commitment they're getting into.

"We believe our fees are fair, reasonable and related to actual costs, such as hardware and installation," said Jade Ekstedt, a DirecTV spokeswoman, pointing out that the early termination fee is prorated until it reaches $20 at the end of the contract. "Any customer has the option of purchasing the equipment if they do not want a service commitment."

DirecTV isn't the only company forced to defend its practices. State attorneys general and class-action lawyers around the country have been suing cell phone companies about their early termination fees.

Last year, Verizon paid $21 million to settle several lawsuits around the country. Sprint settled a class action lawsuit earlier this year for $17.5 million, after making the mistake of going to court in California and being ordered by a judge to pay $73 million. T-Mobile and A&T have settled similar cases.

The topic gained steam in the fall after Verizon announced it would double the early termination fee on its smart phones, including BlackBerries and Droids, to $350 from the previous $175. Verizon justified the move by saying that higher fees for smartphones reflect the higher cost of giving customers pricey BlackBerries and Driods.

Federal Government May Get Involved

While state lawsuits have prompted some changes, notably forcing companies to start prorating their fees, the practice is unlikely to disappear altogether until the federal government intervenes. Consumer advocates say they hope the recent wave of attention will help bring about tougher federal standards.

It's unclear whether that will happen. The Federal Communications Commission began investigating termination fees in the wireless, cable and satellite industries in 2008 with an eye to proposing new rules, but progress has been slow. After a long lull, the agency recently revived its efforts with a letter asking Verizon to explain the doubling of its fee for smartphones. Earlier this month, a group of Democratic senators introduced the "Cell Phone Early Termination Fee, Transparency and Fairness Act," which aims among others to limit the size of a termination fee to the size of the discount a customer is receiving.

David Stoller, a landscape designer in Seattle whose complaint helped trigger the Washington state lawsuit against DirecTV, says he hopes Congress passes strong laws to prevent further abuses.

"These companies are ripping us off," he said. "They get a dollar here and a dollar there and they end up with billions of dollars."