FCC May Prod Carriers to Lower Cell Phone Cancellation Fees

Cell phone companies routinely charge customers US$175 or more for quitting their service early. Under a proposal to the Federal Communications Commission , the wireless industry would give consumers the opportunity to cancel service without any penalty for up to 30 days after they sign a cell phone contract or until 10 days after they receive their first bill.

The proposal also would cap such fees and reduce them month by month over the course of a contract based on how long customers have left, according to people familiar with the offer speaking on condition of anonymity because the FCC has not accepted it. The plan would not abolish cancellation fees entirely.

Verizon's Proposal

In exchange for the government's approval, the agreement would let cell phone companies off the hook in state courts where they are being sued for billions of dollars by angry customers. If approved by the FCC, the proposal also would take away the authority of states to regulate the charges, known as "early termination fees."

The nation's No. 2 wireless company, Verizon Wireless , offered the proposal to the FCC for its review after high-level meetings with senior FCC officials. It did so in consultation with other leading wireless companies, whose executives indicated they would not oppose its provisions, people familiar with the offer told the AP.

The FCC declined to comment.

Extreme Fees

Consumers who have paid such fees describe them as exorbitant.

"It's ridiculous," said Ric Causey of Allen, Texas, who paid $600 in termination fees to Sprint (NYSE: S) on contracts for three cell phones after he canceled service because of what he said was poor reception around Dallas.

"I understand the fine print, but I ended up paying $200 per phone just to switch service," Causey said. He complained to executives to no avail. "I never got any satisfaction," he said. "I figured I'd deal with it later, but I never got reimbursed."

Causey, a freelance video producer, said he never imagined refusing to pay the fees out of fear it would hurt his credit rating.

Wireless companies said the cancellation fees are necessary to recover the cost of cell phones, which they subsidize under long-term service contracts, and to defray their costs for signing up new customers. Consumer groups said the fees are unreasonable and intended to discourage customers from switching among providers.

The expensive fees have led to class-action lawsuits in several states and legislative proposals on Capitol Hill and in state legislatures around the country.

Class Action Suits

The industry's proposal would link cancellation fees to actual costs incurred by a wireless company, and it would require companies to prorate any fees over the course of the contract. Verizon Wireless currently reduces such fees but never below $60. Other major providers, including AT&T (NYSE: T) , have announced plans to prorate fees.

The proposal also would prohibit a wireless company from imposing a termination fee on customers who change terms of their contract or end one contract period and begin another.

Verizon Wireless is a joint venture between Verizon Communications and the Vodafone Group (NYSE: VOD) of Britain. Verizon Wireless, with about 66 million subscribers, is the second-largest wireless company behind AT&T, with 70 million customers.

The wireless industry is increasingly worried about a series of long-running, class action lawsuits in state courts. One lawsuit against Sprint Nextel is under way in California, and plaintiffs in a New York case in arbitration are seeking $1 billion in refunds.

Efforts in Washington

Federal law prohibits states from regulating wireless rates but gives them authority over some terms and conditions under wireless contracts. The industry's Washington lobbying group, CTIA, previously asked the FCC to consider cancellation fees to be rates, which would preclude state governments and courts from any jurisdiction over them.

In September, Sens. Amy Klobuchar, D-Minn., and Jay Rockefeller, D-W.Va., introduced the "Cell Phone Consumer Empowerment Act," which would require prorated fees and a 30-day window for customers to exit a contract.