When she moved to Baltimore to work at the Johns Hopkins University, Ivy Greene discovered a problem: She couldn't get cell phone reception in her Mount Vernon apartment.
But when she tried to switch carriers, it cost her $150 - the price of freedom from a contract that came with a hefty early termination fee.
"It's just ridiculous," said Greene, 31.
Cancellation penalties have long been a frustrating and confusing "gotcha" for cell phone subscribers. The chorus of complaints is likely to swell again today as Apple's long-awaited iPhone 3G goes on sale and thousands of potential customers learn how much it will cost them to switch from their carriers to AT&T;, the only company that services the popular Apple handset.
But there are signs that the outlook is improving for customers. This week, Verizon Wireless agreed to pay $21 million to settle a lawsuit by California subscribers angry about the carrier's termination fees.
Although the settlement does not affect similar California suits filed against carriers, or actions filed in other states, lawyers in the case said the settlement shows that the company was worried that it would lose at trial.
Consumers have long hated early termination fees, but no one knows exactly what to do about them.
Even critics of the fees say that industry-backed efforts to regulate them at the federal level may make a bad situation worse.
Cell phone service providers say the fees help them recoup their subsidies of cell phone handsets and service plans.
All four major carriers have announced plans to gradually pro-rate these fees, if they haven't begun already, so the cancellation penalties will decline over time. But none disappears entirely.
AT&T; and Verizon have plans in place to reduce penalties by $5 every month for the life of the contract. Sprint says it will develop a plan by the end of the year. T-Mobile recently announced that its $175 fee would decrease - but only in the last six months of the contract.
Consumer groups say the fees still discourage consumers from walking away from bad service.
"It's exponentially, by far, the biggest complaint we get," said Bob Williams, director of hearusnow.org, the Consumers Union telecommunications site. Worse yet, critics say, providers of other electronic services, such as broadband Internet and cable TV, are starting to adopt the practice.
"The marketplace really isn't able to function very well if they're locked into contracts by this big financial penalty," Williams said. "You shouldn't have to pay to vote with your feet, and that's what this is all about."
But consumers seem to be willing to pay, however grudgingly. Wireless carriers generated $138.9 billion in revenue in 2007, according to industry statistics.
More than 255 million people subscribed to wireless service as of December, according to CTIA, a wireless industry organization. Only 45 million people choose pre-paid service, which requires neither a contract nor a cancellation fee.
Still, the fees have generated class-action lawsuits around the country, and the Federal Communications Commission recently held a hearing on the issue.
Chairman Kevin J. Martin suggested five ways the penalties could be changed to benefit consumers - including pro-rating services, correlating the cost of a fee with the cost of the handset and tying contract extensions to the purchase of new hardware.
The commission would prefer federal oversight. "Now we're hoping we're able to move forward on this issue and create more flexibility and choices for consumers," FCC spokesman Robert Kenny said.
Joseph Farren of CTIA said early termination fees guarantee consumers a competitive marketplace from which to choose a variety of handsets and mobile plans - including pre-paid services without minimum-term contracts.
"When a consumer voluntarily signs a two-year agreement, they get a discounted or in some cases a free phone, and they get an affordable, predictable monthly rate," Farren said.
"And what the carriers get in return is an understanding they'll get the money back that they've put into the deal."
Federal regulations would create uniform rules for the companies to abide by in every state, rather than a patchwork of conflicting strictures.
"We think it would be harmful to consumers and generally harmful to wireless service in America if the industry was regulated on a state-by-state basis much like phone service used to be regulated 20 or 30 years ago," Farren said.
But Williams said consumer groups fear that federal regulation will actually harm customers. The reason: Although the FCC regulates the rates consumers pay, individual states regulate the terms and conditions of the contracts.
Some states have stronger protections in place for their residents than the federal government is proposing, and those rules would be pre-empted by FCC action.
"In many cases the state regulators are closer to the problems," Williams said. "They have better expertise of what's going on with consumers in their area."
Steve Hannan, the executive director of the Maryland Consumer Rights Coalition, agrees that the marketplace has changed.
At one time, when the industry was making major investments in infrastructure, these types of contracts might have had some justification, he said, but not now.
Hannan compared the cell phone cancellation penalties to telephone rental charges in the age of landline monopolies, when consumers had to lease handsets from the phone company instead of owning them.
"It is a dinosaur, an anachronism that's left over from an earlier marketplace," he said.
He said that if it has to be regulated, the industry would rather have federal rules that eliminate the opportunity for regulatory or legal action in state courts.
"Federal regulation is going to take it out of the hands of two groups of people: one is the state regulators that are often more active than federal regulators, and the second group are the class-action attorneys," Hannan said.
Ben Popken of Consumerist.com, a popular consumer advocacy Web site, noted that the call for federal legislation coincides with a spate of class-action lawsuits challenging the fees.
"Now that states are actually exercising the right to sue these companies, they [the industry] want to get federal regulations to pre-empt them, to avoid potentially billions of dollars in class-action lawsuits," he said.
Critics say that in the end, the industry figures it will salvage more money by dealing with federal regulators.
"It's about 'what tiny compromise and concession we can give so that possibly we can blunt the efforts to do away with this profit center entirely,' " Popken said.
Sen. Amy Klobuchar, a Minnesota Democrat who introduced federal legislation on cancellation fees last year, testified at the FCC hearing that "the states have proven to be better industry watchdogs, and we shouldn't handcuff these cops on the beat."
"For years, wireless companies have gamed consumers out of millions of dollars through unfair practices and excessive fees," Klobuchar said in a prepared statement.
"Rewarding these companies for making the practical and reasonable change of prorating their early termination fees is unacceptable," she said.
But industry spokesmen say consumers know what they're getting into with the fees. "There are several points in time in the sales process where we disclose to you that it's a two-year agreement and it's a $200 fee if you walk away early," said John Taylor, a Sprint spokesman. And 85 percent of Americans chose that option.
He said Sprint also gives consumers a mock-up of what their first month's bill will look like - assuming no overages.
Car phones used to be an executive perk, Taylor noted, arguing that they're affordable today only because regulation of the industry has been limited.
But Patrick Donnelly, 27, a Hopkins graduate student, says the current system is a closed loop that limits consumer options. He wonders why he can't buy a phone and select the services he wants to use on that phone.
"Your cable company doesn't sell you a TV," he said. "It just appears to be kind of a closed market."
Donnelly said he believes the contract system prompts people to spend more than they intend.
"If they weren't so darn convenient, I wouldn't have one," he said.
liz.kay@baltsun.com
Early termination fees
AT&T;
The $175 fee decreases by $5 every month for the life of one- or two-year contracts initiated or renewed after May 25.
Sprint PCS
Expects to begin pro-rating early termination fees by the end of 2008.
For customers who start or renew after June 28, 2008: The cancellation fee starts at $200. After 18 to 21 months have elapsed, or with three to six months left in the contract, members will pay $100. After 21 months, the fee decreases to $50. Anyone with less than one month will pay $50 or the monthly charge, whichever is less.
Verizon
For customers who started or renewed contracts after Nov. 16, 2006, the $175 fee declines by $5 monthly for the life of the contract.
How to escape your early termination fee
If your cell phone provider changes your contract, you may be able to escape without paying an early termination fee.
Under standard contract law if one party tries to impose a "materially adverse" change to a contract, he has basically broken the contract, said Ben Popken of Consumerist, a popular consumer advocacy Web site. The other party may have a right to leave the contract without being bound by the terms it contains, including any penalties. Some carriers put this language in their terms and conditions, but not all.
Strategies that have worked for Consumerist readers involve telling the company they have received a notice about a rate increase, a materially adverse change that entitles the customer to cancel.
The representative may offer to waive the changed fee or offer freebies, but if you want to cancel, you should insist on ending the contract, according to Popken. The service rep may also ask f this is your only reason for canceling.
"You have to keep sticking to your guns," Popken said. He suggests writing down a phrase that to repeat, such as, "This is a materially adverse change of contract, and I can't stand it, and that's why I want to cancel."
Retention specialists spend their workdays trying to convince people to stick with their contracts, so it can become a psychological test of wills. "It's victory to the tenacious, basically," Popken said.
Still, it could be worth the time and effort in a contract with an early termination fee of $175 or more.
One suggestion: Popken says his readers have had the most success after a notification of increased charges for text messages if they don't already have a text message plan.
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