The FCC is currently considering whether to formally preempt state regulation and state law actions on wireless carriers’ use of early termination fees (ETFs). In place of state law, the FCC would adopt federal consumer protection standards on ETFs. The wireless industry has generally supported federal preemption of ETF regulation, since this would (1) establish a uniform, nationwide policy in place of a patchwork of varying state laws and requirements; and (2) effectively bring a halt to the filing of class action lawsuits alleging that wireless carrier ETFs violate state contract and/or consumer protection laws.
In recent years, many wireless carriers have been targeted by class action lawsuits regarding their ETF practices. For example, a state court in California recently held that Sprint Nextel’s ETF was an unlawful penalty under California state law and entered a judgment against the carrier totaling $73 million. Just one month prior, Verizon Wireless settled a California class action suit for $21 million, and similar cases remain pending against AT&T and T-Mobile. However, class action lawsuits involving ETFs are not limited to the national carriers; similar suits have been filed against smaller regional carriers as well.
The FCC first looked into ETF issues in 2005, when it received petitions asking for a formal ruling that ETFs are “rates charged” under Section 332(c)(3)(A) of the Communications Act, and thus not subject to state regulation. Although nothing happened for some time, the FCC’s interest in ETFs was reawakened in 2008, most likely in reaction to the latest round of class action lawsuits against wireless carriers, as well as the introduction of a bill in the Senate that would establish a federal “bill of rights” for wireless consumers while preserving state authority over the use of ETFs.
At a public FCC hearing on ETFs in summer 2008, Chairman Martin appeared to express a preference for federal regulation of ETFs, stating that he does not believe that “a patchwork of 50 different sets of regulations with widely varying protections benefits consumers or the industry.” Chairman Martin also expressed his skepticism that class action lawsuits are the best way to guarantee consumer protections.
However, Chairman Martin also stated that if the FCC were to take responsibility for regulating carrier ETFs, it should protect consumers from abusive practices, including rules guaranteeing that: (1) ETFs are reasonably related to the cost of the equipment the consumer receives; (2) ETFs are prorated over the life of the contract; (3) any contract for service is for a reasonable length of time; (4) when a consumer renews a contract without receiving equipment, the ETF is not extended; and (5) consumers are given time to review their first bill before becoming subject to an ETF.
Although Chairman Martin was reportedly planning to take action on ETFs in August 2008, a draft order has still not been circulated to the other commissioners for review. It is therefore uncertain when (or even if) the FCC will act on this issue.