Telecommunications Alert: Ninth Circuit Decision May Provide Clarity on Legality of Cable, Telecommunications, and Internet Service Early Termination Fees
4/29/2009
The Ninth Circuit U.S. Court of Appeals has agreed to consider the appeal of a federal district court decision on the legality of an early termination fee assessed on Internet service customers.1 The circuit court will review Federal District Court Judge Manuel L. Real’s decision last month that dismissed a class action suit charging that early termination fees assessed by Verizon for its FiOS Internet service violated California law. The Ninth Circuit’s decision may provide guidance on the increasingly controversial issue of early termination fees for various telecommunications and Internet services, including cable and cellular mobile services.
Suit Characterizes Early Termination Fee as Penalty Designed to Lock In Subscribers
The plaintiff charged at the district court level that Verizon’s $99 fee for early termination of a one-year subscription to its FiOS Internet service, and the $149 fee for early termination of a two-year subscription, was not a valid liquidated damages clause under California state law, but instead represented “a penalty designed to lock-in subscribers to the FiOS service and deter them from switching to alternative Internet service providers…[or] from cancelling their service.” Under California law, unless there is “a relationship between the liquidated damages and the damages the parties anticipated would result from a breach [of the contract], a liquidated damages clause will be construed as an unenforceable penalty.”2
District Court Concludes Early Termination Fee was Valid Alternative Means of Insuring Contract Performance
Citing established California case law, Judge Real held that the early termination fee imposed by Verizon was “a valid alternative means of [contract] performance, and not an unlawful liquidated damages provision.”3 Under California law, “[w]here a contract for a specified period of time permits a party to terminate the agreement before its expiration in exchange for a lump-sum monetary payment, the payment is considered merely an alternative to performance and not a penalty.”4 Judge Real also concluded that the early termination fee was not “unconscionable,” as charged by the plaintiff.
Verizon had argued that subscribers had agreed to the option of either (a) terminating early for an agreed-upon early termination fee or (b) continuing to take and pay for service at the agreed-upon monthly rate. For most customers, that meant that at least until the last few months of the agreement term, it would be less expensive to pay the early termination fee than to continue to pay the monthly fee. Therefore, Verizon argued, agreement to the early termination fee represented a rational choice for customers who wished to terminate early for any reason.
Judge Real agreed that the early termination fee was “a true option or alternative means of performance” because Verizon’s subscribers had the choice of paying the fee or continuing to pay the monthly charge. In addition, the court noted, when first entering into a subscriber agreement a customer had the option to take month-to-month service at a higher monthly rate, but without an early termination fee.
Importance of Decision
Class action cases on early termination fees are becoming more commonplace. For example, Clearwire, a wireless broadband Internet (WiMax) service, is being sued by customers in several states who allege Clearwire unfairly charges an early termination fee to customers who wish to switch providers if the service they receive does not meet Clearwire’s advertised standards of a “reliable, always-on” alternative to cable or DSL Internet access.5
Endnotes
1 Schneider v. Verizon Internet Services, Inc., No. 09-55580 (9th Cir. filed Apr. 20, 2009).
2 Morris v. Redwood Empire Bancorp, 128 Cal. App. 4th 1305, 1314 (Cal. Ct. App. 2005). See also CAL. CIVIL CODE § 1671.
3 Schneider v. Verizon Internet Services, Inc., No. 08-07856 (C.D. Cal. Mar. 18, 2009) (citing Morris, supra).
4 Morris, supra, 128 Cal. App. 4th at 1314.
5 “Clearwire Sued For Misrepresenting Network Quality, Imposing Cancellation Fees,” Washington Post, April 24, 2009.
Please contact your Mintz Levin telecommunications attorney, or any attorney listed below, for more information as we continue to follow these developments.
Howard J. Symons
Chair‚ Communications Practice
(202) 434-7305
HJSymons@mintz.com
Michael H. Pryor
(202) 434-7365
MHPryor@mintz.com
Frank W. Lloyd
(202) 434-7309
FWLloyd@mintz.com
Tara M. Corvo
(202) 434-7359
TMCorvo@mintz.com
Ernest C. Cooper
(202) 434-7314
ECooper@mintz.com
