Monday, March 7, 2011
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C.A. Rules That Sprint’s Early Termination Fees Were Illegal
Charges Were Illegal Penalties, Did Not Qualify as Liquidated Damages, Panel Says
By KENNETH OFGANG, Staff Writer
The First District Court of Appeal has upheld a ruling that a wireless telephone carrier violated consumer protection laws by charging customers $150 or $200 each to terminate their contracts early.
Div. Five Thursday affirmed Alameda Superior Court Judge Bonnie Sabraw’s order finding the fees to be illegal and granting a partial new trial to determine what setoff, if any, Sprint Spectrum, L.P. is entitled to against damages awarded to its customers between June 1999 and March 2007.
Sabraw ruled that the fees constituted illegal penalties under Civil Code Sec. 1671. The issue of damages was tried to a jury, which found that the class had paid $73.776 million in termination fees, but that class members breached their contracts by terminating early and cost Sprint $225.697 million by doing so.
The damages to Sprint were in the exact amount that Sprint, according to the evidence, had charged, but not collected from class members.
Sabraw issued a statement of decision in which she rejected Sprint’s claim that the entire suit should have been thrown out because the fees are “rates” within the meaning of the Federal Communications Act, and thus cannot be regulated by the state. The fees were actually intended as liquidated damages, the judge said, and are illegal because the company failed to show that it made a genuine effort to estimate how much money it was likely to lose as a result of early terminations.
Because the fees were not lawfully imposed as liquidated damages, she said, they constitute penalties and violate the Consumer Legal Remedies Act, the Unfair Competition Law, and the common law regarding unjust enrichment.
Restitution Order
She ordered the company to pay $73.776 million in restitution; enjoined it from attempting to collect unpaid fees assessed during the period covered by the action, which was from June 1999 to March 2007; and ordered the company to notify collection agencies or other third parties to which it had assigned its rights to the unpaid fees of the court’s order.
The judge, however, also granted a setoff based on the jury verdict, which would have completedly eliminated the monetary recovery by the class.
In moving for a new trial on actual damages and setoff, the plaintiffs’ lawyers argued that the jury must have been confused by the judge’s rulings and instructions, and erroneously believed that it had to presume that the fees were valid, that nonpayment of the fees constituted a breach of contract, and that it had to award the amount of unpaid fees rather than calculate the actual damages suffered by Sprint.
Sabraw agreed, in part.
‘Comprehensive and Complex’
She said it was “inconceivable” that jurors, after hearing “days of comprehensive and complex testimony,” concluded “that Sprint’s actual total economic damages from all class members were exactly equal to the amount of unpaid ETF’s due from those class members who had not paid the ETF.” She also held that the “finding that Sprint’s actual damages were $225,697,433 compels the conclusion that the jury did not follow the instructions to determine Sprint’s actual total economic damages.”
The judge declined, however, to order a new trial with respect to the finding that the class members breached their contracts with Sprint, saying there was substantial evidence to support the finding. Both sides appealed.
Justice Terrence Bruniers, writing for the Court of Appeal, said the trial judge correctly ruled that there is no federal preemption of the plaintiffs’ claims.
The 1993 amendments to the Federal Communications Act, he explained, provide in part that states may not regulate “the rates charged” by mobile phone companies, but my regulate “the other terms and conditions” of mobile phone service.
He also noted that the act has a savings clause, providing that remedies provided for in the act are in addition to those “now existing at common law or by statute.”
The trial judge, Bruniers said, conducted a “fact intensive” inquiry into whether Sprint imposed the ETFs as part of its rate structure, and concluded, with support in the record, that the decision was based on marketing considerations. Since there is a presumption against preemption, which Sprint failed to rebut, Sabraw’s decision on the issue must stand, the justice said.
The evidence similarly shows that Sprint, because it was primarily concerned with avoiding a loss of customers, did not undertake a “reasonable endeavor” to determine how much money it would actually lose as a result of early terminations, Bruniers wrote.
In an unpublished portion of his opinion, the justice agreed with Sprint, and with the trial judge, that there was substantial evidence the class members breached their contracts through early termination. He cited testimony that every class member had, in fact, had their service terminated prior to the expiration of the contract, solely as a result of nonpayment.
As for the grant of new trial on the issue of Sprint’s damages, Bruniers wrote, also n an unpublished portion of the opinion:
“We agree with the trial court that this is such a case and that the verdict cannot be reconciled with any reasonable view of the evidence or correct application of the law.”
The case is Cellphone Fee Termination Cases, A124077.
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