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Saturday, November 15, 2008

Terminating Early Termination Fees

by: Brian Savage, Associate Editor, MTTLR

Two former Qwest customers have filed a putative class action lawsuit against Qwest seeking to end termination fees for broadband Internet subscribers. This is one of the first challenges to broadband service termination fees. Both former customers were charged 200 dollars when they canceled their broadband service. One customer, Rory Durkin, intended to cancel service but decided to continue paying for monthly broadband service when he learned of the termination fee - even though he did not have a working computer.

The other customer, Robin Vernon, allegedly called to cancel service, was told on the phone by a Qwest customer service representative that there was no fee to cancel, but later received a bill for a 200 dollar early termination fee (ETF). When Vernon demanded to see a contract, Qwest informed her that the contract was made orally on the telephone by Mrs. Vernon's husband and that neither a written copy of a contract nor a recording of the telephone conversation was available. Shortly thereafter, she started receiving calls from a collection agency.

Qwest markets its broadband services as requiring a two-year commitment, but customers do not agree to this in a contract. Customers typically order the broadband service over the telephone. After becoming a subscriber, Qwest mails a "Subscriber Agreement" to the new customer that is not signed by Qwest or the customer. The Subscriber Agreement states "IF YOU ORDER SERVICE WITH A TERM COMMITMENT, YOU AGREE TO MAINTAIN THAT SERVICE FOR THE ENTIRE TERM COMMITMENT PERIOD." The Subscriber Agreement, however, does not mention an ETF and the only term of service mentioned is a month-to-month commitment.

The complaint alleges that the ETF is an unlawful penalty under common law contract principles because "(a) it is wholly disproportionate to the harm, if any, that early cancellation may cause Qwest; (b) it is not based on a bona fide reasonable estimate of the damages, if any, that Qwest incurs from an early cancellation; and (c) the actual damage, if any, Qwest may suffer as a result of early termination is not difficult to ascertain." The complaint also asserts an unjust enrichment claim and other state law claims.

So, what is the likelihood of success in this action and what could this mean for you as a broadband subscriber? Other recent challenges to termination fees in a cellular phone context suggest that if this action against Qwest is successful, customers will likely be able to choose monthly plans without ETFs.

Verizon Wireless agreed to a 21 million dollar settlement in a California class action suit regarding ETFs and now offers plans with month-to-month commitments. Customers can still choose to pay a lower price for the phone and enter into a long-term contract, or the customer can choose to pay full price for the phone without a long-term contract and its accompanying ETF. A California judge also ordered Sprint Communications to pay back 18 million to customers who had paid ETFs. Many phone companies (Sprint, AT&T) are now adjusting their plans by either offering prorated termination fees, so that customers pay less if they cancel later in their agreement, or offering monthly plans like Verizon.

The plaintiffs' successes in the cell phone cases suggests that the broadband case will be successful as well. Cell phone carriers, because they offer cheaper handsets when customers enter into a long-term contract, can argue that the ETF is appropriate since customers keep their phones after cancelling service. The argument for overturning broadband termination fees is arguably stronger because former broadband customers do not keep anything from the company. The end of broadband termination fees, therefore, may be near.

Allowing customers to cancel their service at any time without an ETF and to switch providers may allow for smaller companies with competitively priced plans to more easily build a customer base and compete with the larger companies. This could result in lower prices for everyone.

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