Judge Rules Sprint Early Termination Fees Illegal

Antiglobalism writes to tell us that an Alameda County Judge has ruled against Sprint Nextel in a class-action lawsuit, awarding customers $18.2 million in restitution for early termination fees. "Though the decision could be appealed, it's the first in the country to declare the fees illegal in a state and could affect other similar lawsuits, with broad implications for the nation's fast-growing legions of cell phone users. The judge - who is overseeing several other suits against telecommunications companies that involve similar fees - also told the company to stop trying to collect $54.7 million from other customers who haven't yet paid the charges they were assessed. The suit said about 2 million Californians were assessed the fee."

Re:Case Law Precedent?

[riceboy50]

I thought it had to do with irresponsible lending by the banks/borrowing by home buyers. Basically, the bar was lowered considerably by taking on high-risk mortgages as ARMs (Adjustable Rate Mortgages). When they tried to adjust the rate, the risk came back to bite them in the ass and the irresponsible borrower could not afford to pay it.

Re:I don't understand

[rcw-work]

The article was light on details.. why did they decide that fees that are clearly stated in a contract before people entered the contract are now illegal?

Because cell phone companies aren't willing to negotiate contracts with consumers, and the few cell phone companies that consumers can choose from all have equally evil contracts.

Also, contracts are only valid if there's a quid pro quo - if there's no prorating, the judge may take that into account.

In the end, contracts are only binding if they are legal - you can't sell yourself into slavery, you can't contract out a hit on someone, etc etc.

Re:Judge Rules Signed Contracts Are Unenforceable

[b96miata]

More disturbing to me is the fact that he overruled a jury.

From TFA:
" On June 12, a jury in the Alameda County lawsuit ruled in favor of Sprint Nextel, determining that its customers who canceled their service early had breached their contracts with the company and that early termination fees were warranted.

But in overruling that decision, Sabraw said the jurors appear to have erred in assuming the fees were valid, and she took issue with the way Sprint Nextel determined that its customers owed the fees."

Re:Case Law Precedent?

[Red Flayer]

To be a little more complete, the easily available credit also increased demand on real estate, thus driving prices upward drastically... and the combination of tightened credit availability and a slower economy has now caused prices to fall, leaving people in a negative equity situation.

Some of the problem is people signing stupid loans (A 5-1 ARM with a ridiculous teaser rate?). Because credit tightened up, in order to sell the home (or refinance) before the fixed period was up (almost everyone's plan), they would need to take a loss... which they couldn't do because they were in a negative equity situation.

I think that more so than people choosing to live beyond their means, it was people paying too much for properties they bought... the necessary market correction in property prices left a lot of people in bad shape. Speculation that property prices would continue rising is as much to blame as bad lending practices and poor budgeting.

Key Legal Principles:

[sampson7]

Two very interesting things about this decision. First, the Judge appears to have over-ruled the factual findings made by the jury -- a fairly unusual practice, and one that is not likely to be upheld on appeal. Second, the Judge appears to have returned to "first principles" of contract law in reacher her decision -- good for her. We need more of this type of rational thinking.

There are two key points in the article (couldn't the actual opinion) hitting these points:

On June 12, a jury in the Alameda County lawsuit ruled in favor of Sprint Nextel, determining that its customers who canceled their service early had breached their contracts with the company and that early termination fees were warranted.

But in overruling that decision, Sabraw said the jurors appear to have erred in assuming the fees were valid, and she took issue with the way Sprint Nextel determined that its customers owed the fees.

Interesting; because judges are usually very reluctant to over-ride decisions made by juries. Generally, juries make findings of fact and the Judge makes the finding of law. Here, the Judge said that the Jury clearly erred in finding the contracts valid. Which makes me think that the Jury instructions were extremely poorly written, or that the Judge feels very strongly that the plaintiffs made the legal side of their case so well that "no reasonable jury" would have returned the decision that it did. (Also, I note that the Jury appears to have awarded damages despite finding that the contracts were valid -- this semi-contradictory result may have persuaded the judge to go in the direction she did.)

The second interesting argument:

"Sprint did no damage analysis that considered the lost revenue from contracts, the avoidable costs and Sprint's expected lost profits from contract terminations," she said.

YES! It is a founding principle of contract law that the non-breaching party's damage recovery is limited to its actual losses and its cost to make up the breaching party's violation of the agreement. Traditionally, a contract that agreed to damages in excess of the non-breaching party's actual exposure (i.e., punative damages) were ruled invalid and "reformed" by the court into something reasonable.

However, the courts over the past few decades have been relunctant to follow this principle -- instead, most consumer contracts today contain a "liquidated damages" clause, where the parties agree ahead of time on an estimate of what the actual damages would be. To me, fundamental principles of contract law dictate that an agreement to excessive liquidated damages clauses (particularly in consumer contracts) should not be upheld. I'm glad to see a court finally moving in that direction.

Buy me out

[Sockatume]

Also, operators (particularly resellers like Carphone Warehouse) are willing to "buy out" contracts to encourage people to switch. They eat the termination fee on your behalf. Phone Company X gets its subsidy, Phone Company Y gets its customer, Customer gets his free or cheap phone.

Re:Anybody think that this will change anything?

[Sockatume]

Most phones are locked to a carrier in Europe, too. Fortunately unlocking is ubiquitous and cheap.

Re:I don't understand

[mr_matticus]

The problem is twofold. One, the ETF is charged indiscriminately, regardless of the value of the subsidy. This means that it is a deterrent from switching carriers for those who owe no subsidy. Two, Sprint does not prorate its ETF (or did not, as of this lawsuit) like e.g., AT&T does.

Addressing both of these concerns with a subsidy-recovery fee would be perfectly enforceable. The summary's implication that this may start a domino effect is a relatively obtuse statement.

Penalties for breaking contracts are upheld daily by law if disclosed. Penalties that are in no small part cost recovery, doubly so. However, it's been clear for many years that the cellular companies don't actually care about just covering their losses--otherwise they'd be able to tell you at any given point what your prorata share of the original hardware subsidy is. You as a consumer should also have the the right to pay the remaining subsidy amount plus a nominal penalty for processing ($~25), and then be placed on a month-to-month plan or walk away.

ARMs got a bad rap on that one

[grocer]

An adjustable rate mortgage, in and of out itself is not bad. In fact, before the reforms brought on by Great Depression centralized home lending into one system, the local bank would give you a ballon loan for 5 or 10 years, then refinance it or bounce it, and so on until the house was yours. 30 year mortgages were an effect of the federal banking system and didn't become common until post-WW II.

The high risk mortgage comes in where people were allowed to outright lie about their income and took on mortgage products traditionally used by people who had sterling credit. But the key is the outright lie there...if you're making 20K and then the broker has fluffed and self-reported your income to 50K or 60K, it doesn't matter what kind of loan you have, it's going bad.

On top of that, everybody went "Real Estate always goes UP!!!" which is flat out wrong and then used that to rate a loan that should have been a D into a B or C, thus putting a whole lot less risk on paper and making mortgage backed securities look like treasury bonds when they more like junk bonds.

Changes in service terms.

[sidragon.net]

Sprint, very frequently, changed rates for various services under the contract. Contract law in most states allows one party to terminate the agreement without penalty when the other imposes material changes. In this situation, they have been known to lie [consumerist.com], which I experienced personally (specifically regarding their text message rate hikes). Glad to see both the market and now the courts punishing them for this ridiculous behavior.

Re:Case Law Precedent?

[SydShamino]

Yes, creating risky or bad debt by giving loans to people who cannot afford them was a key part of the problem.

But the reason the crisis has exacerbated, and badly hurt major financial institutions (CitiBank, IndyMac) is because the process of debt selling allowed bad debt to be masked as good debt. There were insufficient safeguards to make sure that the people (investors, businesses, financial institutions, etc.) that put their money into these debts knew that they were as risky as they truly were.

Consider the Freddie Mac situation. As a quasi-private company, Freddie Mac is directed to make a profit. However, as a quasi-government entity, they have special rights such as the right to use the Federal Reserve as their bank, and the right to guaranteed loans at preset rates. These guarantees made Freddie Mac have an impeccable credit rating, despite the fact that, to continue growing their profit, they kept buying more and more debt that was downright awful.

In other words, Freddie Mac's credit rating didn't reflect the junk nature of their assets. The same is true for CitiBank and IndyMac and other banks that held debt that they may-or-may-not have known was bad, but wasn't being shown as bad on their books.

Things that could have prevented this:
1) Congress has decided that our country is more stable when people own their own residence, so it encourages home ownership. Freddie Mac exists for this reason. I think this conflicts greatly with their charge to earn a profit. Wikipedia says this: "Both Alan Greenspan and Ben Bernanke have spoken publicly in favor of greater regulation of the GSEs, because of the size of their holdings and the widespread perception that they are government backed.", which to me indicates that they agree. This quasi-goverment thing doesn't work. They should have been government owned, or privatized completely.

2) To avoid your home-town bank from getting its fingers (and your money) dirty in less-than-reliable debt, the depression-era Glass-Steagall Act [wikipedia.org], among other things, prevented banks from offering things like investments and insurance. The late-90s Gramm-Leach-Bliley Act [wikipedia.org] repealed those parts, allowing banks, insurance companies, and investment firms to co-mingle. It's been argued that this relaxation of regulation also contributed to the crisis, as it allowed institutions that need to be stable for financial security (banks) to engage in the riskier activities of investment firms.

Re:Contract? Court Review?

[DragonWriter]

So, does this mean that any contract could potentially be reviewed by a court and parts of it thrown out?

This ruling is a product of the fact that this has been a feature of contract law in this country since before this was a country, yes. It doesn't "mean" that in the sense that suddenly now that will become the case where it hadn't been before.

Re:Judge Rules Signed Contracts Are Unenforceable

[Zordak]

Happens all the time. The judge has already decided her interpretation of the law (or even that there's insufficient evidence), but she sends it to the jury because a jury verdict is harder to overturn on appeal than a summary judgment. She was probably hoping that the jury would rule in favor of the customers, because it's less of a headache for her. They didn't, so she says, "Sorry, as a matter of law, this contract is not enforceable. So the jury's finding is moot, because it was based on the faulty assumption that the contract was enforceable." And since this is a state court, 7th Amendment doesn't apply, even if she had overturned the jury's finding. Like it or not, this is a very, very common occurrence.

Re:Interest Only makes sense for some people

[lastchance_000]

The point was that he's the *finance* guy, and the calculation was 20000/60, not usually a challenging task for someone who works with numbers all day.

Re:Case Law Precedent?

[nabsltd]

$5,000 net monthly would seem to be around $75,000 anually,

Actually, it would be around $94K gross (in a state with income tax), and it would be closer to $500K mortgage, assuming the interest rates were typical for some of the "shaky" loans that were made.

They still definitely overcommitted, but where I live, $500K doesn't buy a whole lot of house. There's no way I could afford to buy the house I live in right now, but I got lucky and bought a while ago at the bottom of the market and was close to the same state they were for a while ($1,200 house payment on about $2,800 net).

They were at 70% and I was only about 43%, but today even with a lot more pay, I'd be over 60% if I wanted to buy my house today (assuming the same percentage down payment as when I really bought it).