FCC Expands Early Termination Fee Probe

FCC Expands Early Termination Fee Probe

The Federal Communications Commission has expanded its investigation into the early termination fees wireless companies charge consumers who leave their contracts early. After initially targeting Verizon Wireless, the regulatory agency Jan. 26 sent letters to AT&T, Google, Sprint and T-Mobile asking how ETFs are charged and if consumers are adequately informed of the ETFs.

This inquiry follows the Jan. 20 launch of the FCC's Consumer Task Force, which was established to promote cross-agency collaboration on the commission's consumer agenda.

"I commend the commission staff for its ongoing and proactive examination of the consumer experience in the wireless marketplace," FCC Chairman Julius Genachowski said in a statement. "This inquiry is the first action by the FCC's Consumer Task Force, which was launched last week to tackle these kinds of issues. I look forward to reviewing the responses to the letters and the recommendations from staff regarding next steps."

Wireless service providers usually require customers to sign two-year contracts in exchange for deeply discounted handsets. ETFs allow carriers to recover their handset investments if consumers opt out of the two-year contract.

Verizon Wireless first sparked the FCC's interest in ETFs Nov. 15 when it was disclosed the wireless carrier would double the penalty fees to $350 for certain subscribers who leave their contracts early. Verizon customers purchasing a smartphone with a service agreement would be subject to an ETF of up to $350 if they disconnected service prior to the minimum term. The $350 ETF would decrease $10 for each month of service completed.

Genachowski said Verizon Wireless' response to questions about its ETF policy raised more questions than it answered. Later, it was disclosed T-Mobile planned to charge an ETF to purchasers that exceeded the price of Google's Nexus One if purchased without a contract.

"These fees are substantial ... and have an important impact on consumers' ability to switch carriers," read the FCC letters sent to the carriers. "We therefore believe it is essential that consumers fully understand what they are signing up for." 

FCC Expands Early Termination Fee Probe

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CTIA, the trade association for major wireless carriers, quickly responded to the FCC inquiry.

"While we understand that the FCC's Consumer Task Force is only looking into the issue of early termination fees, we hope that there is a recognition by the FCC that these fees are part of the ... rate structure that allows wireless carriers to, among other things, subsidize phone purchases," the association said in a statement.

"Additionally, consumers of all of the carriers that received letters from the FCC have multiple options when it comes choosing plans and devices without early termination fees. About 20 percent of Americans have chosen a prepaid plan without a contract. It is also important to note that consumers can avoid ETFs by completing the contract terms."

Free Press, the digital rights group, praised the FCC for pressing the carriers on ETFs.

"The FCC should be cheered for continuing to press for more information about the widespread anticompetitive practice of restricting consumer freedom through shockingly high early termination fees. Consumers should not have to pay $350-or more-to cancel a bad service, but the harm is even greater when this penalty comes as a surprise," Free Press Policy Counsel Chris Riley said in a statement. "The FCC is right to express concern that disclosure of these penalties and their justification follows no clear format. We urge the FCC to clarify that the 'discount' offered on devices should be measured relative to the wholesale price of the device and not to the artificial, meaningless and uncompetitive 'retail price.'"

Late in 2009, four U.S. senators, led by Sen. Amy Klobuchar of Minnesota, introduced legislation to set limits on ETFs. The Cell Phone Early Termination Fee, Transparency and Fairness Act would prevent wireless carriers from charging an ETF that is higher than the discount on the cell phone that the company offers consumers for entering into a multiyear contract. For example, if a wireless consumer enters into a two-year contract and receives a $150 discount with the contract, the ETF cannot exceed $150.

The legislation would also require wireless carriers to prorate their ETFs for consumers who leave contracts early so that the ETF for a two-year contract would be reduced by half after one year and prorated down to zero by the end of the contract term. In addition, the bill would mandate that wireless carriers provide "clear and conspicuous disclosure" of the ETF at the time of purchase.