Cellphone Fee Termination Cases.
| Decision Date | 03 March 2011 |
| Docket Number | A124095,A124077,No. JCCP No. 4332,No. RG03121510,A125311,RG03121510,JCCP No. 4332 |
| Parties | CELLPHONE FEE TERMINATION CASES. |
| Court | California Court of Appeals Court of Appeals |
CERTIFIED FOR PARTIAL PUBLICATION*
These consolidated appeals are from a judgment after trial in a consumer class action against wireless telephone carrier Sprint Spectrum, L.P. (Sprint), challenging its policy of charging early termination fees (ETF's) to customers terminating service prior to expiration of defined contract periods.1 The trial court found the ETF's to be unlawful penalties under Civil Code section 1671, subdivision (d), 2 enjoined enforcement, and granted restitution/damages to the plaintiff class in the amount of ETF's collected by Sprint during the class period, $73,775,975. A jury found that class members who had been charged ETF's had violated the terms of their contracts with Sprint, and that Sprint's actual damages exceeded the ETF charges Sprint had collected. The resulting setoff negated any monetary recovery to the class. The trial court, reasoning that the juryhad failed to follow its instructions on Sprint's actual damages, granted the plaintiffs'3 motion for a partial new trial new on that issue.
Sprint appeals the decision invalidating the ETF's and enjoining their enforcement, and the court's grant of the motion for partial new trial on damages. Plaintiffs cross-appeal, alleging that the trial court erred in permitting Sprint to assert damage claims as setoffs to class claims for recovery of ETF's paid. In the published portions of this opinion we address the issues of federal preemption and the application of section 1671, subdivision (d). We affirm in all respects.
Sprint is a national cellular service carrier, providing cellular telephone service in California. In 2003, lawsuits were filed in Alameda County and in Orange County against Sprint and other cellular service providers4 alleging that the ETF's violated California consumer protection laws and constituted unauthorized penalties under section 1671.5 This action and others were coordinated under Judicial Council order (Code Civ. Proc., § 404.3; Cal. Rules of Court, rule 3.524) before Judge Ronald Sabraw in the Alameda County Superior Court as the Cellphone Termination Fee Cases (JCCP No. 4332).) (See Gatton, supra, 152 Cal.App.4th at p. 575, fn. 1.)
On June 9, 2006, Judge Ronald Sabraw, the then designated coordination judge, certified a class in the related cases defined as:" 'All persons who (1) had a wireless telephone personal account with [Sprint] with a California area code and a Californiabilling address[] who (2) cancelled the account at any time from July 23, 1999, through [March 18, 2007], and (3) were charged an early termination fee in connection with that cancellation.' "6 The class certification was "expressly predicated" on an "aggregate approach to monetary relief and the related setoff and cross-claim issues." Thus, if the ETF's were found to be illegal and unenforceable, the wireless carriers would still potentially be entitled to offset against any class recovery for their actual damages in the form of lost profits.7
Pursuant to case management orders in the coordination proceedings, the ETF claims against Sprint were separately pled in a consolidated amended complaint. Plaintiffs alleged that, among other things, Sprint's ETF's violated section 1671, subdivision (d) because they were "penalties" which generated "substantial revenues and profits" and were intended "to prevent consumers from readily changing wireless telephone carriers."8 The court granted Sprint leave to file a cross-complaint seeking monetary damages and equitable relief against class members for breach of contract in the event the ETF's were found to be unenforceable penalties. The court denied Plaintiffs' request to certify a cross-defendant consumer class on the basis that only setoff, and not affirmative relief, would be available if Sprint prevailed on its cross-complaint.9
By orders of December 10, 2007, and April 4, 2008, this case was severed and remanded for trial before Judge Bonnie Sabraw. In a March 17, 2008 pretrial order, the court considered which issues would be tried by the court and which by the jury. The court declined to bifurcate the case into separate court and jury trials, but identified the allocation of issues as follows: Since the court anticipated significant overlap between the evidence relevant to both the court-tried issues and those the jury would be required to decide, it ruled that all issues would be presented in a single trial, and that the court and jury would then decide their respective issues at the conclusion of the evidence. By order dated April 17, 2008, the court denied Plaintiffs' motion to try the issues of federal preemption, alternate performance, and invalidity of the ETF's to the jury in an advisory capacity. Trial commenced on May 12, 2008.
Plaintiffs contended that the ETF's were adopted and utilized by Sprint to stop erosion of its customer base by penalizing early termination of customer contracts, and asa revenue opportunity. The majority of Plaintiffs' case was presented through the deposition testimony of Sprint employees, and through their expert Dr. Lee L. Selwyn.10
Testimony concerning Sprint's initial decision to adopt a $150 ETF was presented by Plaintiffs through the video deposition of Bruce Pryor, Sprint's vice president of consumer marketing. In 1999, Sprint began to study the concept of term contracts with ETF's as a means to reduce its "churn" rates, 11 and tested use of ETF's in selected markets. Sprint reported monthly wireless churn rates in 1998 of 3.3 percent, and in 1999 of 3.4 percent. Sprint adopted term contracts incorporating the $150 ETF nationwide in May 2000. Sprint reduced its churn rate to 2.8 percent in 2000.
The decision to implement ETF's was made by Pryor and members of Sprint's marketing team, including: Rob Vieyra, director of pricing; Chip Novick, vice president of marketing; Chuck Levine, chief marketing officer; and Andy Sukawaty, president of Sprint's wireless division. Sprint had no surviving documentation relating to its decision to adopt ETF's. Plaintiffs introduced contemporaneous Sprint internal documents referring to the ETF as a "$150 contract penalty fee," and as a "Penalty or Contract Cancellation Fee."
After Sprint's August 2005 merger with Nextel, Sprint increased the amount of the early termination fee to $200. Sprint's postmerger $200 ETF was based on Nextel's premerger ETF. There was no evidence of any cost study made in connection with Nextel's initial adoption of its $200 ETF (also in 2000), and Nextel did not prepare any written analysis of its decision to implement ETF's.
It was undisputed that Sprint assessed ETF's totaling $299,473,408 during the class period, and collected $73,775,975. Dr. Selwyn opined that, as a result of early contract terminations, Sprint avoided capital expenditures and variable costs which wereequal to about 98.6 percent of its monthly recurring charges. He calculated Sprint's total lost profits from early terminations over the entire class period at $17,619,322.
ETF's are included in one-year and two-year term contracts, which offer heavily subsidized handsets and relatively low monthly charges, but are not included in month-to-month service plans. Sprint's experts contended that an ETF is a part of the price the consumer pays for the "bundle" of the handset and cellular service, and is part of the quid pro quo for the rate reductions included in long-term plans. (See In re Ryder Communications, Inc. v. AT&T Corp. (2003) 18 F.C.C.R. 13,603, ¶ 33.) Therefore, Sprint argued, any state law claim challenging use of ETF's was preempted under federal law by the provisions of the federal Communications Act of 1934 (FCA), as amended in 47 U.S.C. § 332(c)(3)(A) (hereafter, § 332(c)(3)(A)).
To contest Plaintiffs' claims that the ETF's were unlawful liquidated damage provisions, and in support of its cross-complaint, Sprint sought to prove that its actual damages were substantially greater than the fees charged. Its trial evidence included information concerning Sprint's costs, revenues, the frequency and timing of early terminations, and its efforts to collect ETF's. Douglas M. Smith, Sprint's chief technical operations officer, testified concerning Sprint's network capacity. Wallace Souder Jr., vice president of pricing, testified as to Sprint's costs and pricing practices, and Jay Michael Franklin, director of wireless service revenue, explained Sprint's collections practices. Sprint presented three expert witnesses. Christian Dippon testified about the size of the Sprint ETF Payer Class, the timing of the contract terminations, and the revenues that Sprint contended that it lost as a result. Jeffrey Baliban gave evidence concerning costs that Sprint avoided as a result of the early terminations. Dr. William E. Taylor calculated the amount of damages Sprint claimed as a result of the early terminations. Sprint calculated that: the Payer Class had 1,986,537 members; early terminations, on average, occurred with 13.25 months left...
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