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.
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 crossappeal, 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.
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
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.'"
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."
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 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.
Testimony concerning Sprint's initial decision to adopt a $150 ETF was presented by Plaintiffs through the video deposition of Bruce Pryor, Sprint's
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.
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. 13603, ¶ 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; 47 U.S.C. § 151 et. seq.), as amended in 47 United States Code section 332(c)(3)(A) (hereafter, section 332(c)(3)(A)).
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.
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 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 nonpretextual 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 [44 Cal.Rptr.2d 890] (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, subd. (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.
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.
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.
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. A124077). 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. A124095). On February 17, 2009, Plaintiffs' filed a timely notice of appeal from the December 24, 2008 judgment (appeal No. A125311), including the portion of the jury's verdict finding that the class had breached its contracts with Sprint.
"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. [Citation.] 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 [38 Cal.Rptr.3d 653] (Smith).)
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 [58 Cal.Rptr.3d 527].) 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.
"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.'
Sprint contends that ETF's are an integral part of its rate structure and that Plaintiffs' claims are consequently expressly preempted by 47 United States Code section 332(c)(3)(A). Plaintiffs argue that Sprint failed to meet its evidentiary burden of establishing that ETF's are an element of its rates, and that ETF's fall within the "other terms and conditions" provision of section 332(c)(3)(A), leaving them subject to state jurisdiction.
In Spielholz, cellular service provider AT&T contended that 47 United States Code section 332(c)(3)(A) preempted state law claims of false advertising as to AT&T's service coverage. (Spielholz, supra, 86 Cal.App.4th at p. 1369.) The class action plaintiffs in Spielholz sought injunctive and monetary relief, including damages and restitution. AT&T argued that for the court to award damages or restitution based on false advertising it must determine the value of the services provided and the reasonableness of the rates charged, and that such a determination would be expressly preempted as rate regulation within the meaning of 47 United States Code section 332(c)(3)(A). (Spielholz, at pp. 1369-1370.)
The Court of Appeal first stayed resolution of appellate proceedings to allow the FCC (Federal Communications Commission) to consider a petition filed by Wireless Consumers Alliance, Inc., regarding the preemptive scope of 47 United States Code section 332(c)(3)(A).
Following the FCC's decision, the Spielholz court vacated the stay and rejected the preemption claim. It observed that only rate regulation was
The FCC has not yet ruled upon the question of whether ETF's constitute "rates charged" under 47 United States Code section 332(c)(3)(A), such that state law claims are preempted.
Nor have we found reported appellate authority from any other jurisdiction on this point. Contrary to Plaintiffs' assertion, there is no "overwhelming weight of authority" that state law challenges to ETF's are not preempted rate regulation. Trial courts considering the question have reached conflicting conclusions.
As we have discussed, Sprint's position is that this court should review the trial court's rejection of the preemption defense de novo.
We first observe that while the FCC has still to address the ETF question, it has suggested that the issue of rate preemption under 47 United States Code section 332(c)(3)(A) is, at least to some degree, fact intensive. (Wireless Consumers, supra, 15 F.C.C.R. at ¶ 39.) While concluding that there is "no inherent conflict between state common law or statutory remedies and the [FCA]," the FCC nevertheless cautioned that the question of whether a specific damage award or a specific grant of injunctive relief based on state contract or consumer protection laws constitutes rate regulation prohibited by section 332(c)(3)(A) would depend on all facts and circumstances of the case. (Wireless Consumers, at ¶¶ 37, 39.)
The trial court took this approach. By order of January 20, 2004, the original coordination judge overruled a demurrer to the ETF claims based on an argument of federal preemption by section 332(c)(3)(A), finding that the factual allegations of the pleadings were "unsettled," and that evaluation of whether ETF's were rates "will require a decision based on consistent pleadings or an evidentiary record on summary judgment or at trial. [Citation.]" In its March 17, 2008 pretrial order, the trial judge denied Plaintiffs'
Sprint contends that undisputed evidence at trial showed that its ETF's are an element of the prices it charged, and that the ETF's are an "integral part of Sprint's rate structure." Sprint points to testimony of one of its experts (Taylor) that ETF's are "potentially one of the prices you pay" under Sprint's cell phone plans. According to Taylor, cell phone service is a package with separate prices for its individual components, and just as customers are charged under some contracts if they decide to "roam" outside a geographic area, "if you decide to leave early, there may be an early termination price." Sprint contends that Plaintiffs' expert, Dr. Selwyn, agreed, conceding on cross-examination that ETF's "are a form of payment for the handsets and cellular service that Sprint provides with its long-term contracts," with customers paying for the handset "in three ways: up-front charges for the contract, recurring monthly service charges, and what Selwyn characterized as the `liquidated damages payment in the event of breach of the installment contract.'" Sprint says that the evidence shows that ETF's are an integral part of its rate structure because they are included in one-year and two-year term contracts, which offer heavily subsidized handsets and relatively low monthly charges, but not in its month-to-month service plans. Therefore, ETF's are, they claim, part of the "quid pro quo for the rate reductions included in long-term plans." (In re Ryder Communications, Inc. v. AT&T Corp., supra, 18 F.C.C.R. at ¶ 33.)
As Plaintiffs correctly observe, however, Sprint ignores the evidence considered by the trial court, and set forth in its statement of decision, as to the "factual nature of the ETF." The trial judge discussed the evidence concerning the "true nature" of Sprint's ETF, "which the Court discerns by looking at its objective effect on commerce generally and its effect on the majority of Sprint's customers specifically," and found that "Sprint's ETF operated primarily as a liquidated damage clause." The court cited the testimony of Bruce Pryor, who testified that Sprint's goal in adopting the ETF was to control churn and was implemented, as Nextel's similar charge, "primarily as a means to prevent customers from leaving." It noted that Sprint "did no analysis that considered the lost revenue from contracts, the avoidable costs, and Sprint's expected lost profits from contract terminations." The ETF's were set "from a competitive standpoint," and "Sprint's early evaluations of the ETF assumed that Sprint would not collect any money from the
Sprint argues that the presumption against preemption is not triggered when the state regulates in an area, like communications law, where there has been a history of significant federal presence. This again is an "implied preemption" argument not applicable here. In Spielholz, the court rejected a claim of implied preemption, finding that the FCA does not evidence an intent to "occupy the field" by precluding other remedies than petition to the FCC to address a service provider's classifications, practices and regulations, and that a potential federal remedy is not necessarily inconsistent with state remedies, as acknowledged by the saving clause within the statute. (Spielholz, supra, 86 Cal.App.4th at p. 1376.) "Moreover, the availability of state law remedies is consistent with the 1993 amendments' objective to achieve maximum benefits for consumers and providers through reliance on the competitive marketplace, in which state law duties and remedies ordinarily are enforceable. [Citation.]" (Id. at pp. 1376-1377, citing Wireless Consumers, supra, 15 F.C.C.R. at ¶¶ 22, 24.) Furthermore, even without a presumption
The trial court found that Sprint failed to meet its burden of establishing preemption. We agree.
But the ETF's were not prorated, so that the customer would pay the same amount whether the termination occurred during the first month or the last
It is certainly possible that elimination of ETF's may indirectly affect Sprint's rates to the extent that Sprint incurs costs in pursuing alternative remedies for contractual breach or that it would reserve for losses attributable to a potentially higher level of customer defaults. Sprint would presumably factor actual or projected lost revenue into its rate structure. We agree with the Spielholz court, however, that "[r]ate regulation, or to `regulate . . . the rates charged' in the words of section 332(c)(3)(A), refers . . . to an action whose principal purpose and direct effect are to control prices. . . . [¶] . . . [¶] A judicial act constitutes rate regulation only if its principal purpose and direct effect are to control rates." (Spielholz, supra, 86 Cal.App.4th at pp. 1373-1374.) In Ball v. GTE Mobilnet of California, the court, while finding federal preemption of state law claims contesting "rounding up" of per minute charges for wireless calls, distinguished cases involving "billing practices" having "only a tangential relationship to the actual rates for service paid by cellular customers" (including Esquivel v. Southwestern Bell Mobile Systems, Inc., supra, 920 F.Supp. 713 [finding a charge for early termination of cellular service to be a "term and condition" of service, not a rate, and therefore subject to state regulation]). (Ball v. GTE Mobilnet of California, supra, 81 Cal.App.4th at pp. 539, 541.)
Although not directly on point, we also find the reasoning in Pacific Bell Wireless, in a closely related context, persuasive. Upholding imposition of penalties and a restitution order issued by the PUC against Cingular for,
Invalidation of the ETF's under California's consumer protection laws will have only an indirect and incidental effect on Sprint's rates and, therefore, is not preempted by 47 United States Code section 332(c)(3)(A).
The trial court found that an ETF operated primarily as a liquidated damage clause. Because Sprint failed to prove that, in adopting ETF's, it made any effort "to determine what losses it would sustain from breach by the early termination of its contracts" or "to estimate a fair average compensation for such losses," it failed to satisfy the reasonable endeavor test and the ETF's were consequently unlawful penalties under section 1671, subdivision (d).
Decisions interpreting this statute have created a two-part test for determining whether a liquidated damages provision is valid: (1) fixing the amount of actual damages must be impracticable or extremely difficult, and (2) the amount selected must represent a reasonable endeavor to estimate fair compensation for the loss sustained. (Utility Consumers' Action Network, Inc. v. AT&T Broadband of Southern Cal., Inc. (2006) 135 Cal.App.4th 1023, 1029 [37 Cal.Rptr.3d 827] (Utility Consumers).) "Absent either of these elements, a liquidated damages provision is void . . . ." (Hitz, supra, 38 Cal.App.4th at p. 288, italics added.) A liquidated damages provision need not, however, be expressly negotiated by both parties to a form contract in order to be valid. (Utility Consumers, at p. 1035.)
Impracticability may be established by showing "that the measure of actual damages would be a comparatively small amount and that it would be economically impracticable in each instance of a default to require a [seller] to prove to the satisfaction of the [consumer] the actual damages by accounting procedures." (Garrett, supra, 9 Cal.3d at p. 742.) The trial court found that, although Sprint could readily calculate its lost monthly revenue per customer in the event of a default, it would have been impracticable to determine Sprint's avoidable costs, and therefore impracticable to determine actual damages at the inception of the contracts. Plaintiffs do not challenge this finding.
"Determining whether a reasonable endeavor was made depends upon both (1) the motivation and purpose in imposing the charges, and (2) their effect." (Utility Consumers, supra, 135 Cal.App.4th at p. 1029.) "[T]he focus is not . . . on whether liquidated damages are disproportionate to the loss from breach, but on whether they were intended to exceed loss substantially—a result of which is to generate a profit." (Hitz, supra, 38 Cal.App.4th at p. 289.) A liquidated damages provision that "bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach" is an unlawful penalty that compels a forfeiture upon a breach of contract. (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977 [73 Cal.Rptr.2d 378, 953 P.2d 484].) Such penalties are "`ineffective, and the wronged party can collect only the actual damages sustained.' [Citations.]" (Id. at p. 977.)
In order to establish the reasonable endeavor required, evidence must exist that the party seeking to impose liquidated damages "`actually engaged in
As discussed above, the court's findings are supported by substantial evidence. The testimony of Bruce Pryor, Sprint's vice-president of consumer marketing, was that Sprint began to study the concept of term contracts with ETF's in 1999 as a means to reduce its churn rates. The decision to implement ETF's was made by members of Sprint's marketing team. Contemporaneous Sprint internal documents referred to the ETF as a "$150 contract penalty fee," and as a "Penalty or Contract Cancellation Fee." Sprint's postmerger $200 ETF was based on Nextel's premerger ETF. The trial court found "no evidence at trial that Nextel did any analysis that considered the lost revenue from contracts, the avoidable costs, or Nextel's expected lost profits from contract terminations."
Sprint counters that "undisputed evidence" at trial showed that the ETF's were not intended to exceed losses, and that Sprint officials were "aware that their ETFs would recover only a fraction of the revenue lost as a result of early terminations." Sprint asserts that any charge that "does not overstate actual damages cannot be a penalty." Sprint cites testimony that early terminations occurred on average with 13.25 months left on a contract, depriving Sprint of average revenues of $49.16 per month in monthly recurring charges per customer and that it lost over $650 in revenue for each early termination. Sprint points out that the ETF's do not even cover their costs of adding new customers, which averaged $388 dollars during the class period. It contends that the evidence showed that it "well understood that due to competitive forces, the ETF could not be set anywhere near a level that would compensate it for a customer's breach through early termination."
Sprint asserts that the trial court erroneously failed to consider the effect of Sprint's ETF's and in requiring a "formal study of estimated damages" to satisfy the motive-and-purpose prong of the reasonable endeavor test. Sprint argues that because the ETF's were not "intended to exceed loss substantially," they do not and cannot violate the motive-and-purpose aspect of the reasonable endeavor test. (Hitz, supra, 38 Cal.App.4th at p. 289.)
We note first that, as to Sprint's motive and purpose, whatever information as to costs and revenues Sprint may have been "aware" of, it cites to no evidence in the trial record that any of this information was part of the calculus in deciding to impose ETF's, or in determining the amount of an ETF. Further, we do not second-guess the trial court's factual determinations as to Sprint's motivation and purpose. (Hitz, supra, 38 Cal.App.4th at p. 290.)
While Sprint contends that it satisfied both prongs of the reasonable endeavor test in adopting ETF's, the real focus of its argument is on the effect of the ETF's. The thrust of that argument is that so long as the ETF amount is shown in practice to be less than Sprint's actual damages, the effect is not to generate a profit, whatever Sprint's motive and purpose, and nothing more is required to meet the test.
Sprint likewise places undue reliance on our Supreme Court's decision in Better Food Mkts. v. Amer. Dist. Teleg. Co. (1953) 40 Cal.2d 179 [253 P.2d 10] (Better Food), contending that Better Food imposes an entirely objective effect test. The plaintiff in Better Food was a grocery company that contracted with the defendant to install a burglar alarm system, then monitor that system, and notify the police if the alarm were triggered. It sued for damages when the defendant failed to do so and the store suffered a large loss. (Id. at p. 182.) The Supreme Court reversed a directed verdict for the defendant, but also held that any recovery for the plaintiff would be limited to $50, the amount set forth in the form contract's liquidated damages provision. (Id. at p. 188.) The court reiterated the rule that the amount of liquidated damages "must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained." (Id. at p. 187.) It also held that even though the liquidated damages provision was found in a form contract, and even though the defendant did not investigate the plaintiff's manner of doing business or the character and value of its stock, "the parties agreed to the liquidation provisions, and there is no evidence that they were not fully aware of circumstances making it desirable that liquidated damages be provided for." (Ibid.) The court in Better Food, however, dealt with a commercial contract and focused on the impracticability of fixing actual damages and the parties' agreement to the liquidated amount at the time of contracting. (Id. at p. 187.) It also did not articulate any rationale or underlying policy behind its rulings. (Utility Consumers, supra, 135 Cal.App.4th at p. 1038.)
The Utility Consumers case lends some support to Sprint's position. That court, in rejecting a claim that actual mutual negotiation was required to validate liquidated damages in a consumer contract (in that instance, late fees), made a detailed analysis of the cases underpinning and articulating the reasonable endeavor test. (Utility Consumers, supra, 135 Cal.App.4th at
In Hitz, the plaintiff class challenged late and overlimit fees on credit card balances. (Hitz, supra, 38 Cal.App.4th at pp. 277-278.) There was trial evidence that the defendant bank was looking for new sources of revenue, and the bank's witnesses admitted when the bank made the decision to impose the fees, it had conducted no study or analysis of the costs resulting from late and overlimit activity. (Id. at p. 289.) The bank nevertheless relied upon testimony from the responsible bank officer that he "`had a good understanding of our costs from the information that I got on a regular basis,' and on his assertion that he never `saw a situation' where [the bank] made a profit from late and overlimit fees." (Id. at p. 290.) The court observed that the "pivotal factor" was the bank's motivation and purpose, not whether an officer personally had a "`good understanding' of costs." (Ibid.) In rejecting an argument similar to that Sprint makes here, the Hitz court found the bank's
We see no necessary conflict between Hitz and Utility Consumers. We think that Utility Consumers correctly acknowledged that "whether a reasonable endeavor was made depends upon both (1) the motivation and purpose in imposing the charges, and (2) their effect." (Utility Consumers, supra, 135 Cal.App.4th at p. 1029, italics added.) Failure to meet its burden of proof on either element is fatal to Sprint's position.
Sprint again insists that the evidence shows that the ETF's benefit consumers by allowing Sprint to offer reduced monthly fees and subsidized handsets, as well as generally imposing charges less than, or at least equal to, Sprint's actual damages. Sprint contends that applying the reasonable endeavor test in these circumstances will expose consumers to liability for higher actual damages and would be inconsistent with the underlying rationale of the rule. But focusing solely on hindsight justifications would render the reasonable endeavor requirement meaningless if no effort at foresight were required, and arbitrarily selected charges could be routinely imposed in consumer contracts, subject only to the ability of a company to muster a credible defense if challenged in litigation. If no attempt to make a reasonable assessment of potential loss is required at the outset, and to make the amount of the liquidated damages consonant with that assessment, one of the important functions that liquidated damages serve, removing the uncertainty factor from determining damages from a breach of contract and reducing litigation, would be lost. (See Utility Consumers, supra, 135 Cal.App.4th at p. 1038.)
Sprint was required to show that it actually engaged in some form of analysis to determine what losses it would sustain from breach,
In evaluating the legality of a provision, a court must first determine its true function and operation. (Garrett, supra, 9 Cal.3d at p. 735; Morris, supra, 128 Cal.App.4th at p. 1315.) "[W]hen it is manifest that a contract expressed to be performed in the alternative is in fact a contract contemplating but a single, definite performance with an additional charge contingent on the breach of that performance, the provision cannot escape examination in light of pertinent rules relative to the liquidation of damages. [Citations.]" (Garrett, at p. 738.) To hold otherwise "would be to condone a result which, although directly prohibited by the Legislature, may nevertheless be indirectly accomplished through the imagination of inventive minds." (Id. at p. 737.)
As Plaintiffs note, Sprint itself, in several different versions of Sprint's form subscriber agreements referred to the ETF as a "liquidated damages" provision. The trial court "categorize[d] and analyze[d] the ETF by looking at its true nature, which the Court discern[ed] by looking at its objective effect on commerce generally and its effect on the majority of Sprint's customers specifically. [Citations.]" The court found that the ETF provisions "did not give customers a rational choice of paying the ETF or completing the contract," because the language of the ETF provision permitted Sprint to impose the fee on customers involuntarily. The court noted that "[o]f those customers who were charged an ETF, 80% were terminated by Sprint and experienced the ETF as the imposition of liquidated damages . . . ." As the
Sprint argues that the trial court erred in judging the economic function of the ETF and choice it provided customers after the contract had either been performed or breached, and that it should instead have judged the choice the ETF provided customers at the outset of the contract. (Blank v. Borden (1974) 11 Cal.3d 963, 971 [115 Cal.Rptr. 31, 524 P.2d 127] [arrangement viewed from the time of making the contract].) But, as Plaintiffs respond, the service agreements provided from the inception of the contract that an ETF could be triggered involuntarily by Sprint, confirming that at the time of contracting the provision was not understood or intended as providing only for a "rational choice" of the customer.
Sprint cites a trial level decision of the U.S. District Court in Hutchison v. AT&T Internet Services, Inc. (C.D.Cal. May 5, 2009, No. CV07-3674 SVW (JCx)) 2009 U.S.Dist. Lexis 53937 (Hutchison). There the trial judge granted summary judgment to an Internet service provider on a claim that its ETF violated section 1671. The court found that the fee there provided a realistic and rational choice of alternative performance to the subscriber. (2009 U.S.Dist. Lexis 53937 at pp. *12-*14.) While the federal trial court determination is not binding on this court in any event, it is self-evident that in contrast we deal here with contrary factual findings made after trial on a full evidentiary record.
The court found that "Sprint has not met its burden of establishing that the predominant effect of the ETF provisions was to provide consumers with an alternate means of performing their contracts." Substantial evidence supports the findings.
D.,E.
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The judgment of the trial court is affirmed. The matter is remanded for retrial on the issue of Sprint's damages, and the calculation of any offset to which Sprint may be entitled. Neither party shall recover costs on this appeal.
Simons, Acting P. J., and Needham, J., concurred.
We grant Plaintiffs' December 14, 2010 request for judicial notice of a June 12, 2009 letter in which the cellular industry group, CTIA, withdrew its petition for expedited declaratory ruling (FCC Docket No. WT05-194). We also take judicial notice of the fact that the FCC has sent inquiries to cellular service providers asking for information on use of ETF's and is examining that information in preparation for a "Notice of Proposed Rulemaking" dealing with a number of consumer issues, including ETF's. (U.S. Government Accountability Office, Enhanced Data Collection Could Help FCC Better Monitor Competition in the Wireless Industry, GAO-10-779 (July 2010) p. 35; Evid. Code, § 459.) It appears safe to say that any action by the FCC on this issue is not imminent.
The issue here is one of express preemption. (See also Pacific Bell Wireless, supra, 140 Cal.App.4th at p. 735 [discussing the preemptive effect of 47 U.S.C. § 332(c)(3)(A) and concluding "the doctrine of implied preemption is inapplicable in this case"].)
The 1993 amendments to the FCA authorized the FCC to exempt wireless telephone service from the tariff filing requirement, and it did so in 1994. The FCC has a different regime for cellular telephone service, in which the provider-customer relationship is not governed by terms set out by carriers in regulatory tariff filings, but by the mechanisms of a competitive marketplace. Since cellular telephone providers are not required to file rates with the FCC, they are not subject to the filed rate doctrine. (Wireless Consumers, supra, 15 F.C.C.R. at ¶¶ 15-22; Spielholz, supra, 86 Cal.App.4th at pp. 1372, 1377-1378.)