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Cellphone Fee Termination Cases.

March 3, 2011


(Alameda County Super. Ct. No. RG03121510, JCCP No. 4332)

The opinion of the court was delivered by: Bruiniers, J.


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.*fn2 The trial court found the ETF's to be unlawful penalties under Civil Code section 1671, subdivision (d),*fn3 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 jury had failed to follow its instructions on Sprint's actual damages, granted the plaintiffs'*fn4 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.

I. Background

Procedural History

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 providers*fn5 alleging that the ETF's violated California consumer protection laws and constituted unauthorized penalties under section 1671.*fn6 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 California billing 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.' "*fn7 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.*fn8

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."*fn9 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.*fn10

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: "First, the Court must decide whether ETFs are 'rates' under the Federal Communications Act ('FCA'), 47 U.S.C. 332(c)(3)(A). . . . [¶] Second, the Court must decide whether the ETFs are an alternative means of performance rather than a liquidated damage clause under the terms of the contracts at issue. . . . [¶] Third, the Court must decide whether the ETFs of . . . [Sprint] are liquidated damage provisions under [section] 1671, and, if so, then whether they are lawful. . . . [¶] Finally, if the ETFs are unlawful, then a jury will determine the amount of damages under [section] 1671[, subdivision] (d), the CLRA, and the common count and the Court will determine the amount owed under the UCL and the claim for unjust enrichment." 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' Evidence

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 as a revenue opportunity. The majority of Plaintiffs' case was presented through the deposition testimony of Sprint employees, and through their expert Dr. Lee L. Selwyn.*fn11

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,*fn12 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 were equal 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.

Sprint's Evidence

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 on the term of the contract; and early terminations caused Sprint to lose $49.16 per month in monthly recurring charges. Baliban testified that costs avoided when a class member terminated early equaled about 18 percent of Sprint's monthly recurring charges. Dr. Taylor opined that Sprint suffered damages of $987 million from early terminations, consisting of Sprint's net revenue loss (monthly recurring charges lost minus costs avoided), less the amount of ETF's actually collected.

The Jury Verdict

On June 12, 2008, the jury returned a verdict with special findings as follows: "1. What is the total dollar amount of early termination fees that plaintiffs and the class members paid to Sprint? $73,775,975. [¶] 2. Did plaintiffs and the class members breach their contracts with Sprint? Yes. [¶] 3. State the total dollar amount of Sprint's actual damages, if any, caused by early terminations of plaintiffs' and class members' contracts: $225,697,433." The damages found by the jury were the exact amount of ETF's charged to class members, but which were unpaid.

The Trial Court's Statement of Decision

On December 4, 2008, after considering objections to its proposed statement of decision, the trial court issued its statement of decision. The court first reviewed the trial evidence presented and made its findings of fact. It initially accepted the jury's determination of Sprint's damages from early termination of consumer contracts in the amount of $225,697,433.

The court first held that section 332(c)(3)(A), denying states the authority to "regulate . . . the rates charged" by cellular telephone carriers, did not preempt Plaintiffs' challenge to the ETF's because the ETF's were not "rates."

The court found that the ETF in this case operated primarily as a liquidated damage clause. It also found Sprint's ETF's to be unenforceable penalties under section 1671, subdivision (d) because, although Sprint had established that it was impracticable to calculate the amount of actual damages from a breach at the inception of the contract, it had failed to meet its burden of establishing that it had made genuine and non-pretextual efforts to estimate a fair average compensation for the losses anticipated to be sustained (citing Hitz v. First Interstate Bank (1995) 38 Cal.App.4th 274, 291 (Hitz) [employing the reasonable endeavor test]).

The court determined that Sprint could not justify the ETF's as a negotiated "alternative means of performance" under the contract, since they were invoked as liquidated damages upon a breach of the contract.

As a consequence of its determination that the ETF's were unlawful under section 1671, subdivision (d), the court found that Plaintiffs had prevailed on their claims for violations of the CLRA (§ 1770, subds. (a)(14), (19)), UCL (§ 17200, et seq.), unjust enrichment, and for money had and received. The court ordered restitution to the class in the amount of collected ETF's ($73,775,975); enjoined Sprint from further efforts to collect ETF's assessed during the class period; and ordered Sprint to advise third party assignees of uncollected claims of the court's order. The court then, while questioning the validity of the jury's verdict on damages, applied the setoff in favor of Sprint resulting from the jury's verdict and determined that neither the class nor Sprint would be entitled to any monetary recovery. The setoff did not affect the injunctive relief granted.

Judgment was entered on December 24, 2008.

The Motion for New Trial

On December 15, 2008, Plaintiffs filed a notice of intention to move for a new trial on the jury's verdict on Questions 2 and 3, and the Court's calculation of the setoff. Plaintiffs contended that the court's rulings and instructions had led the jury to presume the ETF's were valid, to find breach of contract based on nonpayment of the ETF's, and to award the amount of unpaid ETF's instead of determining Sprint's actual damages.

On January 27, 2009, the trial court granted plaintiffs' motion for new trial on the issue of actual damages (Question 3) and on the setoff calculation. In granting the motion for new trial on the issue of Sprint's actual damages (Question 3), the court observed that it was "inconceivable that the jury considered the days of comprehensive and complex testimony by Dr. Selwyn, Mr. Baliban, and Dr. Taylor regarding Sprint's lost revenue and avoidable costs and determined that Sprint's actual total economic damages from all class members were exactly equal to the amount of unpaid ETF's due from those class members who had not paid the ETF" and that the "finding that Sprint's actual damages were $225,697,433 compels the conclusion that the jury did not follow the instructions to determine Sprint's actual total economic damages." It considered alternative methods that the jury could have used to reach its verdict and concluded that "[t]here is no way to read the jury's answer to question #3 that yields a result that is both reasonable and lawful. The lawful readings are not reasonable and the reasonable readings are not lawful." The grant of a new trial on damages necessarily required a new trial on the setoff to Sprint.

The court denied Plaintiffs' motion for new trial on the issue of breach of contract by the class members (Question 2), on the ground that there was substantial evidence in the record to support the jury's implicit finding that the class members only incurred ETF's as a consequence of breaching their contracts with Sprint.

The Appeals

On January 8, 2009, Sprint filed its notice of appeal from the December 24, 2008 judgment entered on the trial court's statement of decision (Appeal No. 124077). On February 5, 2009, Sprint filed its notice of appeal from the January 27, 2009 order granting in part Plaintiffs' motion for new trial (Appeal No. 124095). On February 17, 2009, Plaintiffs' filed a timely notice of appeal from the December 24, 2008 judgment (Appeal No. 125311), including the portion of the jury's verdict finding that the class had breached its contracts with Sprint.

II. Discussion

A. Federal Preemption

"Congress has the power to preempt state law under the supremacy clause of the United States Constitution (art. VI, cl. 2). [Citation.] Congress's intent to preempt may be expressly stated or implied where a federal law demonstrates an intent to ' "occupy the field" ' or a state law conflicts with a federal law. [Citation.] A conflict exists where compliance with both state and federal law is impossible, or where a state law ' "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." ' [Citations.]" (Spielholz v. Superior Court (2001) 86 Cal.App.4th 1366, 1371 (Spielholz).)

"To determine whether Congress intended to preempt state law with respect to a particular activity, we focus on the nature of the activity that the state seeks to control or regulate rather than on the method of regulation adopted. [Citations.] Preemption therefore applies not only to positive enactments by legislation or regulation but also to judicial acts that interfere or conflict with congressional intent. [Citation.] [¶] Congress's intent to preempt must be 'clear and manifest' to preempt state law in a field traditionally occupied by the states, such as the exercise of a state's police powers." (Spielholz, supra, 86 Cal.App.4th at pp. 1371-1372; see also Smith v. Wells Fargo Bank, N.A. (2005) 135 Cal.App.4th 1463, 1475 (Smith).)

1. Standard of Review

The trial court considered and rejected the preemption claim. Finding the ETF to function primarily as a liquidated damage clause subject to California consumer protection statutes, the court applied a presumption against preemption. It found that Sprint had failed to meet its burden of demonstrating preemption, and that "[a] contractual agreement to replace a calculation of actual damages with liquidated damages does not transmute the calculation of contract damages (a traditional state function) into a wireless carrier's 'rate' (a federal concern)."

In its opening brief, Sprint suggested that the preemption issue is entirely one of law, subject to de novo review. Plaintiffs assert that the court's ruling was based primarily on findings of fact from the evidence presented at trial, and that our review is limited to examining the record for substantial evidence to support the court's findings. In fact, they contend that Sprint has waived review of this issue by failing to address the evidence considered by the court, presenting only the evidence favorable to Sprint, and by failing to fully and fairly discuss the conflicting evidence. (See Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 409.) In its reply brief, Sprint acknowledges that the court's ruling involved mixed questions of fact and law, but asserts that Sprint is challenging the legal standards employed by the trial court and the application of those standards to the trial court's factual findings--not the findings themselves--and that such rulings are reviewable de novo.

Neither party is entirely correct. "The party claiming federal preemption bears the burden of establishing it. [Citation.]" (Pacific Bell Wireless, LLC v. Public Utilities Com. (2006) 140 Cal.App.4th 718, 730 (Pacific Bell Wireless).) "When the issues regarding federal preemption involve undisputed facts, it is a question of law whether a federal statute or regulation preempts a state law claim and, on appeal, we independently review a trial court's determination on that issue of preemption. [Citations.]" (Smith, supra, 135 Cal.App.4th at p. 1476.) And insofar as the court resolved disputed issues of fact, its findings are reviewed under the substantial evidence standard, i.e., they will be sustained unless shown to lack substantial evidentiary support. (People ex rel. Gallo v. Acuna (1997) 14 Cal.4th 1090, 1136-1137; Howard S. Wright Construction Co. v. Superior Court (2003) 106 Cal.App.4th 314, 320.)

2. Application of the FCA

The FCA "grants the Federal Communications Commission (FCC) broad authority over interstate and foreign communication by wire or radio, to secure and protect the public interest and to insure uniformity of regulation." (Annot., Construction and Application of the Communications Act of 1934 and Telecommunications Act of 1996--United States Supreme Court Cases (2008) 32 A.L.R.Fed.2d 125). In 1993 Congress amended the FCA (47 U.S.C. § 151 et seq., as amended by the Omnibus Budget Reconciliation Act of 1993, Pub.L. No. 103-66, § 6002 (Aug. 10, 1993) 107 Stat. 312, 387-397) to provide in relevant part that "no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service, except that this paragraph shall not prohibit a State from regulating the other terms and conditions of commercial mobile services. . . ." (§ 332(c)(3)(A), italics added.)*fn13

"By enacting section 332(c)(3)(A) in 1993, Congress 'dramatically revise[d] the regulation of the wireless telecommunications industry, of which cellular telephone service is a part.' [Citations.] 'To foster the growth and development of mobile services [i.e., cellular and related mobile wireless communications] that, by their nature, operate without regard to state lines as an integral part of the national telecommunications infrastructure, new section 332(c)(3)(A) . . . preempt[s] state rate and entry regulation of all commercial mobile services,' but permits state regulation of 'other terms and conditions.' (H.R.Rep. No. 103-111, 1st Sess., at p. 260, reprinted in 1993 U.S. Code Cong. & Admin. News, pp. 378, 587; 47 U.S.C. ยง 332.)" (Ball v. GTE Mobilnet of California (2000) 81 Cal.App.4th 529, 534.) While only briefly discussing the meaning of "rate regulation," the report of the House Budget Committee elaborated that " '[b]y "terms and conditions," the Committee intends to include such matters as customer billing information and practices and billing disputes and other consumer protection matters; facilities siting issues (e.g., zoning); transfers of control; the bundling of services and equipment; and the requirement that carriers make capacity available on a wholesale basis or such other matters as ...

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