Do early termination fees (ETFs) included in wireless service contracts fall under the category of wireless "rates" or under "other terms and conditions"? That's the question that was presented to the U.S. Supreme Court in Sprint v. Ayyad, a class-action lawsuit involving California customers charged ETFs for terminating their wireless service contracts. But the Supreme Court took a pass on answering that question, issuing an order denying certiorari on November 7.
The case was an appeal of a decision by the California Court of Appeals that held that, at least under the facts of the case, non-prorated ETFs charged by Sprint were not intended to be an element of the rates charged by the carrier for service but were instead intended as a liquidated damages clause to reduce churn. The California Appeals Court applied a presumption against preemption and found that, as a liquidated damages clause, the ETFs constituted "other terms and conditions" subject to California common-law remedies. As one may recall, in 1993 Congress amended the Communications Act by providing in Section 332(c)(3)(A) that states are preempted from regulating the entry of or rates charged by wireless carriers while states can continue to regulate other terms and conditions of wireless services.
The class action plaintiffs' attorneys were confident enough in their position in Sprint v. Ayyad that they waived their right to respond to Sprint's petition to the Supreme Court. However, there are weighty arguments to me made on both sides. Without addressing them in detail, it's worth recognizing that the handful of trial courts across the country that have considered the question of whether Section 332(c)(3)(A) have reached contrary conclusions. Even the California Court of Appeals acknowledged that:
It is certainly possible that elimination of ETF's may indirectly affect Sprint's rates to the extent that Sprint incurs costs in pursuing alternative remedies for contractual breach or that it would reserve for losses attributable to a potentially higher level of customer defaults. Sprint would presumably factor actual or projected lost revenue into its rate structure.
By declining to hear Sprint v. Ayyad, lower courts will likely continue to make contrary rulings as to whether or under what circumstances federal law preempts ETFs. And for its part, even the California Court of Appeals' decision left standing may offer lower courts little guidance due to the facts of that case. As a general matter, wireless carriers now universally include grace periods and prorated ETFs in their wireless services contracts.
The Supreme Court's order denying review might have been influenced by pending petitions seeking an FCC declaratory ruling that ETFs are "rates charged" under federal law. However, as the California Appeals Court noted in its ruling, "[i]t appears safe to say that any action by the FCC on this issue is not imminent."
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