Wait, aren't Early Termination Fees illegal in California?

Reader Jeremy (and several others), in response to yesterday's post about Verizon doubling Early Termination Fees on certain devices, asked the following: After reading today about ETFs now even higher with Verizon, I can't help but be confused. I thought a court ruling in California last year made ETFs illegal. Could you shed some light on this for me?

Indeed, I'd almost forgotten about the landmark lawsuit from last year in which Sprint Nextel was ordered to pay millions in restitution to consumers who had been charged an Early Termination Fee. In case you've also forgotten: Last July, Sprint was ordered to repay some $18.2 million to customers who'd been assessed an ETF and were ordered to stop trying to collect ETFs from thousands of additional customers.

Many (myself included) got a little excited: A judge had declared ETFs to be illegal... right? Soon we would all be free of the burden of paying extra money when we cancel our cell phone contracts, no?

Well, not so fast, folks. A couple of issues quickly turned up to complicate things.

For starters, remember that the Sprint Nextel ruling is a California case only, with relatively limited reach. Even if that court had struck down ETFs altogether, it would only apply in the court's jurisdiction unless the feds got involved (which they didn't).

Second, it's important to note that the court didn't make all ETFs illegal, it simply said that what Sprint Nextel was doing was against the law and ordered the company to reimburse its customers. Technically the court did not make all ETFs illegal, just the ones that Sprint Nextel was levying.

And that brings us to the third point: In order to smooth things over, Sprint settled the lawsuit with its customers this January (I totally missed this news when it happened -- customers got up to $90 each), and agreed to change the way it levies ETFs. Now, Sprint Nextel follows the practice of most of the rest of the industry by slowly reducing the amount of the ETF over the lifetime of the customer's contract. The FCC seems fine with this, so it's doubtful the courts will continue to make a fuss over it.

So, yeah -- ETFs, as Sprint had been using them, are vaguely "illegal" -- but since no one's doing them that way any more, the court case is largely irrelevant. In other words, Verizon is probably free to charge you a whopping $350 ETF if it wants to, as long as it keeps offering that $10/month discount as time wears on. Sorry, folks!