BEFORE THE by sofiaie


									                                   BEFORE THE


                            WASHINGTON, D.C. 20554

In the Matter of                            )
Cellular Telecommunications &               )     WT Docket No. 05-194
Internet Association’s Petition for         )
Declaratory Ruling Regarding Early          )
Termination Fees in Wireless Service        )
Contracts                                   )

                            INITIAL COMMENTS OF

                               CONSUMERS UNION


I. Introduction

On July 6, 2005, the Federal Communications Commission (“Commission”) published in

the Federal Register a request for comments on the petition for expedited declaratory

rulemaking filed by the Cellular Telecommunicates & Internet Association (“CTIA” and

“CTIA Petition”) regarding early termination fees (“ETFs”) in wireless carriers’ service

contracts.1 These Initial Comments are filed jointly by Consumers Union, National

Association of State PIRGs, and the National Consumer Law Center, on behalf of our

low-income clients (collectively the “Consumer Groups”).

A. Interest of the Commenting Parties

        Consumers Union is a nonprofit membership organization chartered in 1936

under the laws of the state of New York to Provide consumers with information,

education and counsel about goods, services, health and personal finance, and to initiate

and cooperate with individual and group efforts to maintain and enhance the quality of

life for consumers. Consumers Union's income is solely derived from the sale of

Consumer Reports, its other publications and from noncommercial contributions, grants

and fees. In addition to reports on Consumers Union's own product testing, Consumer

Reports with more than 4 million paid circulations, regularly, carries articles on health,

product safety, marketplace economics and legislative, judicial and regulatory actions

which affect consumer welfare. Consumers Union's publications carry no advertising

and receive no commercial support.

 Petition of the Cellular Telecommunications & Internet Association for an Expedited Declaratory Ruling,
WT Docket No. 05-194 (filed March 15, 2005).

       National Association of State PIRGs is a network of state-based, nonprofit,

nonpartisan public interest advocacy organizations working on consumer, environmental

and good government issues, with over half a million citizen members across the country.

The State PIRGs have documented consumer problems with the cell phone industry in a

recent report, Can you Hear Us Now?, available at

       National Consumer Law Center is a non-profit corporation organized under the

laws of the Commonwealth of Massachusetts in 1971. Its purposes include representing

the interest of low-income people and enhancing the rights of consumers. Throughout its

history, NCLC has worked to make utility services (telephone, gas, electricity, and water)

more affordable and accessible to low-income households.

B. Summary

       The Commission should reject CTIA’s petition seeking a declaration that the

early termination fees (“ETFs”) are “rates” under 47 U.S.C. § 332(c)(3)(A). The

requested expansion of the definition of rates to include early termination fees

impermissibly encroaches on the states’ jurisdiction over traditional areas of contract and

consumer protections. The Commission decisions and the case law regarding the

definition of section 332 “rates” as well as the characteristics of the early termination fees

do not support such an expansion of “rates”. The Consumer Groups strongly oppose

CTIA’s petition on legal and public policy grounds.

II. CTIA’s Petition Fails to Apply the Appropriate Legal Analysis

          CTIA’s petition asks the Commission to declare that ETFs in wireless service

contracts are “rates charged” for CMRS under Section 332(c)(3)(A) of the

Communications Act so that any application of state law by a court or other tribunal to

invalidate, modify, or condition the use or enforcement of ETFs constitutes prohibited

rate regulation and is therefore preempted by Section 332(c)(3)(A).2 CTIA’s request

reflects an amazing disregard for the principles of federalism, a plain reading of 47

U.S.C. 332(c)(3)(A), and its legislative history and judicial precedent.

      A. The Commission is Limited In Its Ability to Preempt States Traditional
      Police Powers Absent Express a Clear and Manifest Purpose of Congress

          The Supreme Court has recognized the Congressional intent for a “dual federal-

state regulatory system.” La. Pub. Serv. Comm. v. F.C.C.,3 Our federal system is based on

the concept of dual sovereignty of federal and state governments (this is the core concept

of federalism). The statutory language and the Congressional history of 47 U.S.C.

332(c)(3)(A) demonstrate Congress’ intent to preserve the dual federal and state

jurisdiction over interstate and intrastate wireless services and Congress’

acknowledgement and expectation that the States will use their traditional police powers

to protect wireless consumers in the marketplace.

          The language of 47 U.S.C. § 332(c)(3)(A) expressly provides that States are

preempted from the regulation of “the entry of or the rates charged by any commercial

mobile service . . .” 47 U.S.C. § 332(c)(3)(A). However, the second half of the same

sentence expressly provides that “. . . this paragraph shall not prohibit a State from

    CTIA Petition at Executive Summary.
    476 U.S. 355, 368-70 (1986).

regulating the other terms and conditions of commercial mobile service.” Thus the

statutory language itself indicates Congress’ intent to have states regulate the wireless

industry in areas other than “the entry of or the rates charged.”

        In addition, the legislative history for §332(c)(3)(A) clearly states Congress’

intent that states retain jurisdiction over the traditional areas of state regulation. Section

332(c)(3)(A) was enacted as part of the Budget Act of 1993. In the House Report

discussing Section 332(c)(3)(A), the Committee provided an illustrative list of matters

intended to be covered by “terms and conditions.”

        By ‘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 fall within a state’s lawful authority. This list is intended to be illustrative
        only and not meant to preclude other matters generally understood to fall
        under “terms and conditions.’4

This Committee report language makes clear that Congress intended for “terms and

conditions to be broadly applied by including a wide range of subject matter

including the catch-all “other matters generally understood to fall under “terms and

conditions.” Early termination fees, as is discussed below, are essentially contract

penalties that are covered by “other consumer protection matters” and “the bundling

of services and equipment.”

B. Presumption Against Preemption

        The U.S. Supreme Court has held that when looking at the initial question of

whether preemption exists or the scope of preemption, the analysis “start[s] with the

 H.R. Rep. No. 103-111, 103rd Cong., 1st Sess. at 261 (1993), reprinted in 1993 U.S.C.C.A.N. 378,
588 (emphasis added).

assumption that the historic police powers of the States were not to be superseded by the

Federal Act unless that was the clear and manifest purpose of Congress.”5 The U.S.

Supreme Court has also held that “[t]he regulation of utilities is one of the most important

functions traditionally associated with the police power of the States.”6 In

Communications Telesystems International v. Cal. P.U.C., a case upholding the state

utility commission’s sanctions on a long-distance company for slamming, the 9th Circuit,

in citing the Arkansas Electric holding, states: “Among the important state interests at

issue here are the protection of consumers from unfair business practices, the

compensation of those consumers for harm, and the need to ensure fair competition

between, and the fitness to operate of, licensed carriers.”7 The ability of States to protect

consumers from unfair and deceptive practices and to interpret and enforce contracts falls

squarely within their historic police powers. Thus the Commission must prove that there

is a clear and manifest intent to preempt the States on this matter.

        In the Budget Act of 1993, Congress explicitly carved out roles for the federal and

state governments in the regulation of wireless service. While section 332(c)(3)(A)

prohibits states from regulating entry or rates, it also preserves their traditional authority

over the “other terms and conditions” of wireless service. This explicit preservation of

state authority runs counter to the arguments that states are preempted from interpreting

and enforcing their contract and consumer protection laws regarding early termination

fees. The Supreme Court has held that “[a]ny indulgence in [statutory] construction

  Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947), quoted in City of Columbus v. Ours Garage
and Wrecker Service, Inc., 536 U.S. 424, 432-33 (2002); Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996).
  Arkansas Electric Cooperative Corp. v. Arkansas Public Serv. Comm’n, 461 U.S. 375, 377 (1983).
  196 F.3d 1011, 1017 (1999).

should be in favor of the States, because Congress can speak with drastic clarity

whenever it chooses to assure full federal authority, completely displacing states.”8

         Pursuant to the states’ police powers to protect their citizens’ health, safety and

well-being, states have a long history of regulating against unfair business practices,

interpreting and enforcing contracts and protecting consumers in the marketplace.9 As

discussed below, early termination fees are section 332(c)(3)(A) “terms and conditions”

that fall within the states’ authority to regulate. Thus, CTIA’s request to avoid state

contract and consumer protection laws must be denied.

III. CTIA Seeks a Declaration That is Not Substantiated by the Law

A.       ETFs Are Not “Rates” Under § 332

         The Commission’s decisions and case law regarding the definition of “rates” and

the nature of how the wireless early termination fees operate do not support CTIA’s

petition to declare that early termination fees are “rates.” In the Memorandum Opinion

and Order In the Matter of Southwestern Bell Mobile Systems, Inc.,10 the Commission, in

interpreting “rates charged” under Section 332(c)(3)(A), noted:

         In interpreting this language, it should be recognized that a “rate” has no
         significance without the element of service for which it applies. . . .the
         term ‘rate’ is defined in the dictionary as an ‘amount of payment or charge
         based on some other amount.’

The Commission also cited the Supreme Court on this matter in, American

Telephone and Telegraph Co. v. Central Office Telephone, Inc.,: “Rates,

  Bethlehem Steel Co, v. N.Y. State Labor Relations Board, 330 U.S. 767, 780 (1947).
  Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 146 (1963); California v. ARC Am. Corp,
490 U.S. 93, 101 (1989). See also, Medtronic, Inc. v. Lohr, 518 U.S. 470, 475 (1966)(“States traditionally
have had great latitude under their police powers to legislate as to the protection of the lives, limbs, health,
comfort and quiet of all persons”), quoting Metro.Life Ins. Co. v. Massachusetts, 471 U.S. 724, 756
(1985)); Cedar Rapids Cellular Telephone v. Miller, 280 F.3d 874, 880 (8th Cir. 2002)(the State of Iowa
has an important interest in enforcing its consumer protection statutes).
   14 FCC Rcd 19898 at ¶ 19 (1990).

however, do not exist in isolation. They have meaning only when one knows the

services to which they are attached.”11

        Courts that have looked at ETFs have found that they are not preempted by the

federal authority over rates under Section 332(c)(3)(A). In a recent case, Phillips v.

AT&T Wireless,12 the district court held that “the early termination fee is not a rate.” The

Court, in finding that ETFs are “other terms and conditions” under Section 332(c)(3)(A),

also found that, “Congress demonstrated a specific intent to exclude “other terms and

conditions” from preemption under section 332.”13 The Court rejected AT&T’s attempt

at an interpretation of rate that was so expansive as to encompass ETFs and stated:

        This Court agrees that “rate” must be narrowly defined or there is no
        ability to draw a line between economic elements of the rate structure and
        normal costs of operating a telecommunications business that have no
        greater significance than as factors to be considered in determining what
        will ultimately be required of rates to provide a reasonable return on the
        business investment.14

An earlier decision in the Northern District of Iowa also declined to read section

332 “rates” so broadly as to preclude state challenges to ETFs based on state laws

regarding consumer protection and fraudulent and deceptive business practices.

The Court stated:

        And, like the Southern District, this Court declines to read “rates” in
        section 332 so broadly as to necessarily preclude a state’s judicial
        challenge based on a statute designed to protect consumers against
        fraudulent or deceptive business practices. Under such a reading, any
        challenge to Plaintiffs’ conduct could be couched in terms of its effect on
        rates, and, as the Court has already concluded, the language of the statute
        makes it apparent that Congress did not intend such a result.15

   524 U.S. 214, 223 (1998).
   2004 WL 1737385, 10 (S.D. Iowa 2004).
   Id. See also, Iowa v. U.S. Cellular Corp., 2000 WL 33915909 (S.D. Iowa 2000)(court declined a broad
interpretation of “rates” to include ETFs).
   Cedar Rapids Cellular Telephone v. Miller, 2000 WL 34030836, 7 (N.D. Iowa 2000)

Similarly, a District Court in Texas found that:

        The congressional history [] indicates that the phrase “terms and
        conditions” was meant to include such matters as customer billing
        information and practices and billing disputes, ‘and other consumer
        protection matters.’ Plaintiffs’ suit is invoking the common law of Texas
        designed to protect consumers from excessive liquidated damages
        provisions that are tantamount to penalties.16

In addition, the Commission, in Wireless Consumers Alliance, Inc., made the

determination that damages awards against wireless carriers under state tort or

contract claims were not preempted by Section 332 as equivalent to rate

regulation.17 As noted by the 7th Circuit, the Commission, in Wireless Consumers

Alliance, “rejected the argument that any determination of monetary liability is

equivalent to a finding that the service was inadequate for the charge, and

therefore necessarily a finding that the rates charged were unreasonable.”18

B. CTIA Relies On Cases That Do Not Support The Assertion that ETFs are

        CTIA cites federal cases in support of its assertion that ETFs are rates that are

based on Bastien v. AT&T Wireless Services, Inc.,19 a case focusing on the ability of

states to regulate market entry.20 Furthermore, Bastien has been limited by a subsequent

case, Fedor v. Cingular Wireless Corp.21 In Fedor, the 7th Circuit distinguishes Bastien

as a case requiring the courts to determine the infrastructure appropriate to market entry,

   Esquivel v. Southwestern Bell Mobile Systems, Inc., 920 F.Supp. 713,716 (S.D. Tex. 1996)(footnotes
   Memorandum and Order, In the Matter of Wireless Consumers Alliance, Inc., 15 F.C.C.R. 17021, 17035
¶ 25 (Aug. 2000).
   255 F.3d 1069, 1073 (2004).
   205 F.3d 983, 989 (7th Cir. 2000)(court characterized consumers case as challenging wireless carrier’s
build out of its network as insufficient).
   CTIA petition at 13
   355 F.3d 1069 (7th Cir. 2004).

an area expressly preempted by Section 332.22 The 7th Circuit, in Fedor, gives deference

to the Commission’s analysis that “distinguished between claims that would enmesh the

courts in a determination of the reasonableness of a rate charged and those that would

require examination of rates in the context of assessing damages, but would not involve

the court in such a reasonableness inquiry.”23 In Fedor, the 7th Circuit found that the

consumer was not challenging the reasonableness of the rates, but rather arguing that the

wireless carrier breached its contract by billing charges from one month in another

month. The Court found that “these claims address not the rates themselves, but the

conduct of Cingular in failing to adhere to those rates. This is precisely the type of state

law contract and tort claims that are preserved for the states under § 332 as the ‘terms and

conditions’ of commercial mobile services.”24

C.       The Characteristics of ETFs Suggest They Are Penalties and Not a
         CTIA attempts to portray ETFs as rates for service and equipment, but the

association cannot identify the service the “rate” is associated with.25 CTIA attempts to

recast ETFs as part of the overall price of a wireless phone service contract. However,

ETFs are not associated directly or indirectly with a service, but apply only when the

customer seeks early termination of the wireless contract. Consumers understand ETFs

as penalties for the cancellation of service prior to the expiration of the contract term, or

for nonpayment under the contract.26

   355 F.3d 1073.
   355 F.3d 1073.
   355 F.3d 1074.
   CTIA Petition, Footnote 41.
   Phillips v. AT&T Wireless, 2004 WL 1737385, 9 (S.D. Iowa 2004)( the early termination fee is a penalty
billed by AT&T for what it considers breach of its contract and is not a rate for service). See also Esquivel
v. Southwestern Bell Mobile Systems, Inc., 920 F.Supp. 713 (S.D. Tex. 1996)(class action challenging
wireless contracts’ liquidated damages as punitive and invalid under state common law).

         In contrast, a “rate” is a price paid for usage of service. A customer who fulfils the

contract term and pays in a timely manner is never assessed an ETF, regardless of how

much service used. Clearly, the purpose of an ETF is to give the consumer a strong

incentive to remain a customer throughout the contract term.

         CTIA attempts to classify ETFs as identical to pay per use charges, such as

charges for downloading ringtones, overages, or roaming.27 However, the difference

between ETFs and these types of charges are obvious—ringtones, overages and the like

are associated with usage by the customer—in other words, with service.

         That ETFs are not tied to service as a rate is further reinforced by the fact that the

ETF does not vary over the course of the contract. CTIA characterizes ETFs as “part of

the total consideration the customer agrees to provide in exchange for the service.”28 Yet,

a customer can receive service without ever paying an ETF. However, any customer who

cancels the contract before the end of its term receives the same penalty, regardless of

how much service they have used. The customer who terminates on the 23rd month of a

two-year contract is treated the same as the one who walks away after a month of service.

If early termination fees were part of cell phone companies’ rate structures, as CTIA

claims, and not simply penalties, then they would have to be prorated to reflect the

amount of time that customers have been paying monthly service charges.29

         ETFs are also often imposed by agents and resellers, who are not providing

CMRS service. In the market, consumers may enter contracts for CMRS via agents and

   CTIA Petition, pp. 12-13.
   CTIA Petition, pp. 12-13.
   Only one of the major cell phone service companies prorates any of its early termination fees. Cingular
prorates fees in ten states and in portions of two additional states. Throughout the rest of the country,
customers face a $150 fixed, non-prorated fee. In at least ten states, however, Cingular’s base early
termination fee is $240. As a result of the $240 baseline for the prorated fee, the revenues from prorated fee
may well approximate revenues from the non-prorated fee.

resellers who also impose ETFs in addition to those that are part of the contract for the

underlying service.30 Clearly, agents and resellers are not providing CMRS service and

are not charging rates for service. The ETFs charged by agents serve the same function

as the ETFs charged by carriers—to keep the consumer from canceling the contract to

guarantee the agent receives his or her commission from the carrier.

        Unlike monthly service plans and pay per use charges, ETFs are not associated

with an element of service and are not designed to recover the cost of service.

Consumers understand ETFs as penalties and they are used as such. ETFs are a

disincentive for customers to terminate service before the expiration of the contract to

switch to a better or less expensive plan.

IV. Conclusion

        CTIA’s Petition seeks an impermissibly, overbroad interpretation of “rates” so as

to preempt state consumer protection law. As consumer groups have raised in the Truth-

in-Billing proceeding, wireless contracts remain one of the top areas of consumer

complaints regarding cell phone service.31 ETFs serve to tie consumers to contracts for

less than satisfactory service and run counter to CTIA’s claims of a competitive market.

   See e.g., Opinion Ordering Penalties and Reparation, Cal. PUC Decision 04-09-062 (Sep. 23,
2004)(Wireless agents charged customers additional ETFs as much as $400).
   See Consumer Groups Comments at 2-4, Consumer Groups Reply at 3-5, In the Matter of Truth-in-
Billing Format, CC Docket No. 98-170, CG Docket No. 04-208.

       For the reasons presented above, the Consumer Groups urge the Commission to

reject CTIA’s petition.

Respectfully Submitted,

Janee Briesemeister
Senior Policy Analyst
Consumers Union
1300 Guadalupe, Suite 100
Austin, TX 78701
(512) 477-4431
(512) 477-8934 (fax)

Ed Mierzwinski
Consumer Program Director
U.S. PIRG, National Association of State PIRGs
218 D St SE
Washington, DC 20003
(202) 546-9707x314
(202) 546-2461 (fax)

Olivia Wein
Staff Attorney
National Consumer Law Center
1001 Connecticut Avenue, Suite 510
Washington, DC 20036
(202) 452—6252 Ext. 103
(202) 463-9462 (fax)

August 5, 2005


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