Legal, Laws, and Regs

Monetary damages and cellphone contracts

Recovered from the Wayback Machine.

AKMA writes on a situation too many people still face: unreasonably long cellphone contracts and outrageous termination fees. I wrote of my own experiences with cellphone termination fees last year. After reading AKMA’s post, I thought now would be a good time to provide an update to the story.

First, I paid the outrageous early termination fee bill. Regardless of whatever action I would or would not take, not paying this bill puts the account into collections and that way lies a whole other nightmare. If you don’t pay the fee, you’ll get a late payment mark in your credit report, and the cellphone companies almost immediately turn the account over for collection.

Once in collection, you’ll be hounded day and night, as mystery charges get tacked on until the final bill is so bloated, it’s like a minnow has suddenly been transformed into a whale. You’ll also most likely get sued–unpaid cellphone bills account for a significant proportion of the collection law suits filed in state courts–which gives the collection company and/or the cellphone company the edge, legally. So, not paying the fee was not an option.

I then went to town, researching the laws surrounding cellphone termination fees, how to file a small claim case in Missouri, as well as people’s experiences with termination fees (usually detailed in weblogs or forums). It was when reading through weblogs that I discovered an interesting fact.

Did you know that in many states, you can’t be charged a termination fee above and beyond the actual monetary damages suffered by the party with whom you’re terminating said contract? Even if the contract includes a clause that specifies a given amount to terminate the contract early, that amount has to bear some relationship to actual, real damages suffered by the other party.

In contract law, a provision specifying termination damages is called a liquidated damages provision. The purpose of such a provision is to state what damages would be in cases where actual damages might be difficult to assess. However, when challenged the entity behind the contract must be able to defend such a provision, either by demonstrating the difficulty or impossibility of proving such damages, or by demonstrating that the charge closely matches the actual damages suffered. From the FreeAdvice site:

Sometimes business contracts contain a “liquidated damages” provision, providing for payment of a certain fixed amount in the event of a breach. These provisions typically are upheld if the actual damages would have been extremely difficult to ascertain and the amount of the liquidated damages is reasonable. Courts generally do not enforce liquidated damages that are intended to serve as a penalty or are far in excess of the amount of damages the parties may reasonably forecast.

In all my personal investigations into consumer law, one thing I’ve discovered over the years is that contracts are not ironclad or immutable. In other words, a company can write a contract and you can sign it, but that doesn’t mean the contract or any part of it is enforceable, or that you’re forced to comply with the provisions without any other recourse.

A great disservice has been done to the American people in the last hundred or so years. We have been brought up to believe that contracts are law, as well as acts of honor, a belief reinforced by companies such as Verizon and Sprint. After all, one only has to call customer service of either of the aforementioned company to hear how the how enforceable is the company’s contract, how defenseless we are to debate or quibble with any part of it.

However, it is up to the courts to truly determine the enforceability of the contracts (a right, I want to add, which companies have been attempting to erode by adding arbitration clauses). If a contract or any part of it is not enforceable, and we research our case and come to court prepared, the courts are just as likely to side with us as the companies.

As for the indoctrinated sense of “honor” when it comes to contracts, tell me how honorable is it to charge a $500.00 fee for two cellphones, 3 and 8 years old, and failing? Or to arbitrarily change contract terms? Or force a renewal of a contract, just because you want a cellphone that works? To corporations, there is no honor in contracts, only corporate benefit and enforceability.

I digress. Returning to the concept of “liquidated damages”, the reason that cellphone companies ostensibly give for the cellphone termination fee is that the cellphone company is subsidizing the cost of the equipment, i.e. the cellphones. However, as the current spate of class action lawsuits against most cellphone providers are stating, if this is true then the termination fee should prorate, reflecting the prorated value of the equipment so provided, over time.

It is ludicrous to assume that the monetary costs to the cellphone company based on them giving you a cellphone would suddenly accrue the last month you have your contract. No, the value of the equipment, and their investment in it, would depreciate over time. The termination fee should reflect this depreciation.

(Perhaps what I should have done is offer Sprint $1.83 to cover any perceived value for two cellphones. I imagine this would be more than adequate to cover any income derived from scrapping both phones.)

Armed with anecdotal accounts and actual examination of Missouri state law, I was ready to take my case against Sprint to Small Claims court. First, though, I did a look up using Missouri’s own Case Net to see how successful people were against Sprint. Lo and behold, I found that everyone who had filed against Sprint–and there weren’t many–had won a default judgement. Why? Because it costs Sprint more to defend against the case in small claims court than to just pay the judgement.

Now, I imagine that buried in all of the agreements Sprint had sent out over the years was a clause insisting on the use of arbitration rather than the courts if people like you and me want to sue the company. However, there’s another fact about arbitration that comes into play with companies like Sprint: if I initiate a suit in small claims court, Sprint would have to send in a lawyer and file a response to have the case removed to arbitration. Then, Sprint and I would go, back and forth, about arbitration law and applicability–not to mention whether Sprint’s arbitration clause was conscionable (equally fair) and so on–until the courts either sided with me, or with Sprint.

While all this back and forth is going on, Sprint is paying for the services of a lawyer who would probably charge in the first two hours the same amount as my claim–and I can guarantee taking up more than two hours. Just because the Supreme Court has bent over backwards to kiss corporate butt in favor of arbitration doesn’t mean we have to roll over and play dead. There are arguments and defenses one can make against arbitration. Nor, since the suit originated in small claims court and according to Missouri law, can I be forced to pay the lawyer’s fees even if I lose the case. I would only lose the filing fee: $35.00.

In fact, it is the cost of the attorney as compared to the possible value of an award that leads many companies, and most likely Sprint, too, to *add a provision to their arbitration clauses that would allow small claims actions. Telecommunication, manufacturing, and most other companies outside of the finance industry add arbitration clauses to prevent class action lawsuits, not “nickel and dime” small claims cases like mine. Well, not nickel and dime to me, definitely nickel and dime to Sprint.

With all this in mind, I decided I would give Sprint another chance before going to court. I submitted a claim to the Better Business Bureau, detailing not only the problem, but also the course I would be forced to take if resolution could not be satisfied via intervention by the BBB. The important aspect of all of this is that the course I would take was one I would follow. I was not bluffing, and it was important to communicate the sincerity of my intent.

Sprint did respond just before the BBB deadline, denying my claim. The BBB asked if I would be willing to compromise. I responded back that at one point in time I was willing to compromise but Sprint was unwilling. Now, there would be no compromise: I wanted a refund of the entire termination fee and state and local taxes or I would have no recourse but to take this to court.

This week I received a check from Sprint for a full refund. I’d like to think that the reason I got the check is that Sprint is beginning to realize that it would be a more successful company working with customers, rather than “trapping” us into untenable contracts enforced with unreasonable fees. Verizon was the first cellphone company to make this determination, prorating termination fees based on how far into the contract the customer is. Other companies have followed suit, including Sprint, though its prorate program came after my termination.

I’d like to think the company saw the light, but I don’t think Sprint, or any of the cellphone companies, is there yet. Until they are, challenging the contract terms and termination fees via the BBB and small claims court, though not the ideal path, did work, at least in this instance.

I’m not advising AKMA to take the same course I did. I won’t give out legal advice, as I’m not a lawyer and I’m not qualified. Hopefully though, AKMA and others with similar cellphone termination fee problems will discover some ideas in regards to their own situations from this recounting.

*I found a copy of the most recent Sprint agreement. It does allow for small claims court cases.

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