Early-termination fees: Taking the bite out of consumers' bark

At first blush, promises of a sleeker phone, robust features and generous talk-time packages are enough to woo many consumers. But fickle customers beware: Trying to leave the once-happy union can be a surprisingly sour experience. The difficult process of severing ties has left many exasperated consumers resigned to remain with their current provider, if only because of the early-termination fees.

Taking one's business elsewhere has been an age-old consumer tactic when faced with poor customer service or steep prices. While the power of choice unquestionably has its limitations, it was never underestimated.

But in Canada, where three-year contracts with cellphone providers are regarded as standard, consumers have considerably less freedom and power, as was highlighted by a recent decision by Bell and Telus to begin charging customers for incoming text messages.

While Quebec consumers Eric Cormier and Natalie Martin separately filed class-action suits against the companies, the remainder were left to make the somewhat deflated threat that they most certainly planned to switch carriers — in due time, once their contracts expire.

'[It's] not about service,' says consumer group

Michael Janigan, executive director of the Ottawa-based Public Interest Advocacy Centre, says the early-termination fees are effectively used to lock consumers into a host of obligations that bind them to their current provider.

'Everything in terms of sales is geared towards getting the customer. Servicing the customer or keeping the customer happy is definitely a secondary priority.' —Michael Janigan, Public Interest Advocacy Centre

"Bell and Telus embark upon a public relations fiasco associated with text messages with impunity," he said. "Why do they do that? Well, because they get people locked into all of these contracts and things.

"Effectively, telecommunications is really about sales, it's not about service," he said. "Everything in terms of sales is geared towards getting the customer. Servicing the customer or keeping the customer happy is definitely a secondary priority."

Janigan says competition would be improved if cellphone providers were limited to one-year contracts, noting long-distance telephone competition has been successful because consumers can change providers in a frictionless swap.

Rogers and Bell both charge consumers the greater of $100 or $20 for each month left in the contract, capped at $400, to get out of their contracts. Telus charges customers $20 per month to abandon their contracts though there is no maximum. Virgin Mobile penalizes customers with time remaining on their contracts at a rate of $10 per month.

Phone companies say the fees are clearly spelled out in the contracts and are used to recover costs incurred when cellphones are bundled with long-term contracts at discounted rates.

For example, Anne-Julie Gratton, a spokeswoman for Telus, suggests consumers who want to get out of their contract early can transfer their contracts to another consumer for a fee of $25. She also notes consumers have the option to buy a la carte services and products.

"I think that one thing that needs to be clear is that the contracts are optional, you're not in any way obligated to sign a contract with us to get a device or to have a phone plan," she said.

"The bonus when you sign a contract, for example, is discounts on devices and maybe discounts on different plans."

When asked why Telus doesn't cap its early-termination fees along the lines of Bell and Telus, Gratton said the $20 per month rate was firm.

"Like I said for us really it's $20 per month," she said. "That's what we're offering and that's what is spelled out on the contract once you sign with us."

Bell and Rogers did not respond to requests for interviews.

In the U.S., disgruntled consumers forced change through a series of class-action suits.

A California court in a July decision found that the fees, as charged by Sprint Nextel, were used primarily as a means of discouraging customers from leaving rather than recouping the cost of the handset. Sprint Nextel was ordered to refund $18.25 million US to customers who paid the fees. Verizon Wireless agreed in July to pay $21 million US to clients who complained the company's early-termination fees were unfair.

Costly court fees a hurdle for consumers

Canadian consumers can try to fight the fees in court, says lawyer Matthew Baer of Siskinds in London, Ont., though he cautions the court fees may prove to be costly.

"It is always possible to go to small claims court about this issue, but the cost and time make it unpractical," he said.

Baer said if consumers do try to fight the case, they could argue that the contract is unfair, not properly explained. He also notes that contracts such as these are often read against the party who drafted them, meaning since the companies wrote the contracts, any errors or clauses that are vague are interpreted in favour of the consumer.

Baer notes that in other countries, these kinds of fees are regulated.

In France for example, consumers buy mobile phones and pay the entire cost upfront, allowing them the freedom to switch between providers. In Belgium, companies cannot sell phones bundled without contracts. The telephone companies also cannot lock a phone so that it cannot be used on a competitor's network.

Without comparable stringent regulations in Canada, Janigan suggests consumers should pressure Industry Minister Jim Prentice and lodge their complaints with the CCTS, the telecom ombudsman.

Consumers can try to work around the fees and contracts by purchasing a phone without a contract though Bell and Telus allow only phones that will work on their respective Code Division Multiple Access (CDMA) networks. Rogers' GSM network currently allows consumers to use unlocked phones purchased from independent sources.

Kim Osborne, a consumer in Waterloo, Ont., says she shopped around for the cellphone she currently uses.

"I initially decided to shop independently because I was already in a contract so I had no way of getting any of the discounted prices offered by the carriers. This led to my second reason: after some research, I discovered that phone prices are not as high as I originally thought, and the selection is much better from an independent source," said Osborne.

In the end, Osborne spent about $380 on a Motorola smartphone, which she says functions much like the Apple iPhone.

"Bearing that in mind, CBC reported that the total cost of the iPhone over the term of the contract would be $2,360; I paid about $380 for my phone so while I still have to pay for a monthly package allowing me to use it, I'm committing to a lot less money up front," Osborne said.

That flexibility is a small but crucial victory for the consumer, Osborne says.

"I think the most important difference isn't necessarily in the dollar amount, it's in having the flexibility to leave the carrier if I want to and the power that gives me as a consumer."