Early termination fees endangered!

Today is mooch-off-Consumerist day, and they have once again clued us in to a great consumer link. Idaho consumer lawyer Curt McKenzie represents the law firm of Greener, Banducci, Shoemaker, which is suing T-Mobile on the grounds that its early termination fee bears no relation to the damages suffered by T-Mobile in the event a customer cancels a contract before its expiration.

The law firm cancelled its T-Mobile contract for apparently poor service, and was charged a cancellation fee. But liquidated damages provisions in contracts–which is essentially what an early termination fee is–must bear some relation to the damages that would be suffered in the event of breach (early termination, in this case). The lawsuit alleges that since the fee does not change no matter when a customer terminates their contract, it cannot bear any relation to the actual damages.

The lawsuit may turn into a class action, which is good news for consumers. I applaud any measure that makes it easier to switch cell phone companies. Maybe then companies will concentrate on providing good service rather than making money on spurious fees. One has to wonder if early cancellations aren’t part of the plan, after all.

Consumerist commenter bluegus32 offered the following analysis, which I think is probably right (although I don’t think the lawsuit is brought in California). Still, I have my fingers crossed that the court thinks differently.

The $200 fee in the contract is what is known as “liquidated damages.” In California, a contract which attempts to fix the amount of damages in anticipation of a breach of an obligation is void to that extent (Cal.Civ.Code § 1670), except ‘when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage’ (Cal.Civ.Code § 1671.)

It is generally recognized that a valid agreement may be made for the payment of liquidated damages. The parties are allowed to contract for liquidated damages if it is necessary to do so in order that they may know with reasonable certainty the extent of liability for a breach of the agreement. Where it is impracticable and extremely difficult to fix the damages which may result from the defendant’s failure to render its service, the liquidated damages provision may be given great pursasive weight. (Better Food Markets v. American Dist. Tel. Co. 40 Cal.2d 179.)

The actual question of the validity of a liquidated damages clause is a little more complex than this. However, the bare fact that one signs a contract with a liquidated damages clause, does not necessarily make that clause enforceable. Likewise, a liquidated damages clause (as the one here in cellular phone contracts) will be upheld if it is within the realm of reason.

Vinny, above, in his oh-so-eloquent manner, illustrates a very good reason as to why $200 is not unreasonable for early termination of a cell phone contract. You save a large chunk of money up front in exchange for signing a 2 year agreement.

$200 is in the ballpark. We may hate it but I don’t think it’s illegal. Of course, in the end, a court may disagree with me. I certainly do admire this Boise firm for attacking this but I think they’re wrong.