FCC Probes More Cell Phone Termination Fees

Jan. 26 , 2010—, 2010 -- The Federal Communications Commission today expanded its investigation into early termination fees (ETF) charged by wireless carriers and is now looking closely at whether consumers are adequately informed about ETFs charged by AT&T, Google, Sprint and T-Mobile.

The agency sent letters today to the carriers asking them to answer a long list of questions about the fees, after launching a similar probe into Verizon Wireless' practices in December.

"These fees are substantial (and in some cases are increasing) and have an important impact on consumers' ability to switch carriers," reads the letter, signed by the FCC's head of consumer affairs, Joel Gurin and the head of wireless telecom, Ruth Milkman. "We therefore believe it is essential that consumers fully understand what they are signing up for."

The letter goes on to ask carriers to explain why ETFs are charged, how customers can avoid them and how widely vendors advertise them.

This letter is just the latest salvo in a battle that has raged for years against ETFs in many industries. Regulators log thousands of complaints each year about ETFs, 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.

"Because of the two-year contract, Sprint and its competitors are able to offer more devices at a lower monthly rate, making wireless more affordable," says Sprint spokesman John Taylor, pointing out that Sprint prorates its ETF after the fifth month until it hits $50 at the end of the contract.

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 consumer complaints, regulators and class action lawyers around the country have sued large companies.

In Washington State, Attorney General Rob McKenna recently sued DirecTV for its "unfair sales practices," alleging that the company lures new customers with advertisements for low prices that hide cancellation fees.

In 2008, Verizon paid $21 million to settle several lawsuits around the country. Sprint settled a class action lawsuit last 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 Droids.

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 or will at least encourage companies to reform themselves.

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 only recently revived its efforts with a series of letters asking wireless carriers for more information about their ETF policies. In December, 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.