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A provision in a consumer contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage. Civ. Code, § 1671, subds. (c)(1), (d). Because liquidated damage clauses in consumer contracts are presumed void, the burden is on the proponent of the clause to rebut that presumption. 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. Absent either of these elements, a liquidated damages provision is void. A liquidated damages provision need not, however, be expressly negotiated by both parties to a form contract in order to be valid. 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.
In 2003, a consumer class action was filed against wireless telephone carrier Sprint Spectrum, L.P. (Sprint), alleging that the early termination fees (ETF's) charged by Sprint to customers terminating service prior to expiration of defined contract periods violated California consumer protection laws and constituted unauthorized penalties under Civil Code section 1671, subdivision (d). Among other things, plaintiffs alleged that Sprint’s ETFs violated section 1671, subdivision (d) because they were “penalties,” which were intended to prevent consumers from readily changing wireless telephone carriers. The trial court found the ETFs to be unlawful, enjoined their enforcement, and granted restitution/damages to the plaintiff class in the amount of ETF's collected by Sprint during the class period. Sprint appealed the decision.
Did the trial court err in holding that the ETFs collected by Sprint were unlawful?
The court affirmed the judgment, holding that the evidence failed to establish any endeavor, reasonable or otherwise, to even approximate the carrier's actual damages flowing from breach of the term contracts by consumers, and instead reflected a marketing decision made with an entirely deterrent purpose and focus. The court rejected the carrier's claim that the ETFs provided an option of alternative performance by permitting subscribers to terminate contracts before the end of the agreement by paying a fee. The carrier had 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.