Ben Everard · June 2009
77 GEO. WASH. L. REV. 1033 (2009)
Few technological developments in the modern era have impacted the day-to-day lives of Americans more significantly than the cell phone. The development of cell phones and the first cellular networks emerged in the latter part of the twentieth century. By 2007, half the global population was “subscribed” to at least one cell phone, making it one of the most ubiquitous electronic devices in the world. With the advent of this mobile communication device, telecommunications giants arose to feed a growing consumer demand. Today, companies such as Verizon Wireless, Sprint Nextel, AT&T, and T-Mobile are household names.
As cell phones and wireless service providers proliferated, so too did monthly service contracts. Americans are all too familiar with the “cell phone plan.” Service providers routinely offer discounts on popular cell phone models—a $299 Motorola Razr for as little as $29.99, for instance—in exchange for subscribers’ commitments to one- or two-year contracts. The plans offer a set number of daytime minutes and text messages, along with various other add-on features. Indeed, an individual could easily walk into a service provider’s store and within minutes be ready to communicate with seemingly anyone in the world from any city in the country. Ah, but with this simple convenience comes a catch—buried in the fine print.
Enter the infamous “Early Termination Fee” (“ETF”). If a subscriber cancels, for instance, a two-year contract before the two years are up, the service provider charges an early termination fee, generally ranging from $150 to $200, depending on the provider and the particular service plan. Whether the subscriber cancels the contract on the same day the plan is first activated or on the day before the contract is to expire, the timing of the cancellation makes little difference: in most instances the provider charges the same fee regardless, although some providers do award a $5 credit for each month paid. Nor do one’s reasons for cancelling the contract affect the ETF calculus—mere cancellation triggers the charge.
Understandably, this irks many. John Waudby, for instance, began using Verizon wireless cellular service in 2002. He then upgraded his phone in 2006 and was forced to sign a new two-year contract. The new phone dropped calls repeatedly, causing Waudby to place more than fifty calls to Verizon in an attempt to remedy the problem. The service did not improve, and Waudby understandably cancelled his contract. Subsequently, Waudby discovered that Verizon charged him a $175 early termination fee pursuant to the terms of the contract.
In early 2007, Waudby, on behalf of himself and others similarly situated, filed a class action lawsuit against Verizon. The complaint alleged, among other things, violations of several states’ consumer protection statutes; specifically, the complaint alleged that Verizon “disguises a fee to recover equipment costs as a liquidated damages clause, which is an illegal penalty when the damages are readily calculable.”
Waudby is not the first to file a suit accusing service providers of violating state consumer protection statutes. In fact, whether ETF contract provisions fall within the reach of state consumer protection statutes has been (and continues to be) litigated contentiously. Outcomes have varied, with some courts holding that state regulation of ETFs is preempted by federal law, other courts holding that state regulation of ETFs is not preempted by federal law, and still other courts staying proceedings until the Federal Communications Commission (“FCC”) determines whether ETFs are “rates charged” within the meaning of the relevant statutory provision of the Federal Communications Act (“FCA”).
The FCA, which regulates certain aspects of wireless service providers and their relationships with consumers, provides, in pertinent part, that “no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service, except that this paragraph shall not prohibit a State from regulating the other terms and conditions of commercial mobile services.” Courts divide on this provision’s arguably ambiguous language as to whether state-law claims challenging ETFs are preempted.
The ambiguity stems in large part from the meaning of the terms “rates charged” and “other terms and conditions.” This ambiguity has proved very costly for service providers. In 2005, to stem the wave of litigation over the issue, and to ensure the preservation of ETF revenues, the Cellular Telecommunications & Internet Association filed a petition with the FCC seeking a declaratory ruling that ETFs are “rates charged” for wireless services within the meaning of § 332(c)(3)(A). Such a ruling, of course, would preempt state consumer protection statutes; state laws purporting to regulate ETFs as illegal penalties or liquidated damages thus would be unavailable to potential plaintiffs. But opposing service providers are state consumer protection advocates, who are seeking to have ETF provisions eliminated from service provider contracts altogether. They contend that ETFs undermine competition and are unfair and unreasonable penalties imposed on consumers.
Settling this dispute is no small matter. Whether ETFs are “rates” within the meaning of the statute places potentially hundreds of millions of dollars at stake. And so it comes as no surprise that judicial resolution of this question is necessary, both from the standpoint of service providers and consumer protection advocates. This Essay explores the merits and demerits of both sides’ arguments. Part I addresses the argument of service providers. Part II presents the counterarguments of consumer protection advocates. Part III notes a relatively easy arithmetic fix for service providers, suggesting that ETFs be calculated and imposed as actual damages rather than liquidated damages. Part IV examines the congressional purpose underlying the FCA and correspondingly argues that federal preemption of state-law claims challenging the validity of ETF provisions should obtain.
