A widespread complaint against the wireless industry landed at Sprint’s doorstep Wednesday when the federal Consumer Financial Protection Bureau took its first action against a telecom giant.
Its federal lawsuit alleged that Overland Park-based Sprint collected tens of millions of dollars in unauthorized charges on customers’ bills, a practice commonly called cramming.
By taking on Sprint, the young federal agency born out of the 2008 financial crisis asserted its power to pursue consumers’ money interests broadly, even at companies far removed from the financial industry.
The suit followed unconfirmed reports Tuesday that Sprint would face a $105 million fine by the Federal Communications Commission over cramming complaints. Those reports had cited sources without identifying them.
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Sprint defended its billing systems against the charges levied Wednesday and said it was disappointed that the consumer bureau chose to sue.
Wireless companies routinely add charges to customers’ bills to collect payments for products and services their customers buy from other companies. These can be games, apps, movies, books and music.
Cramming involves schemes in which other companies push unauthorized charges onto phone bills by deceiving consumers or by simply feeding them into the wireless companies’ billing systems.
Such charges were rampant in the industry from 2004 to 2013 and typically involved “flirting tips, horoscopes and other digital content” delivered through premium text messages to customers’ phones, the lawsuit said. The lawsuit said Sprint retained 40 percent of the as yet untallied revenues it allegedly collected improperly from customers on behalf of cramming companies.
Sprint, AT&T and T-Mobile agreed last year to stop charging customers for premium text messages.
Sprint said in a statement Wednesday that “early on” it had hired an “outside compliance vendor” to help it prevent unauthorized charges through the premium texts and continues to take “considerable steps” to protect its customers from unauthorized billing.
“We recognize this is an important issue for our customers, and we consistently have encouraged any customers who think they may have incurred an unauthorized third-party charge on their phone bill to contact Sprint to resolve the issue,” the statement said.
The consumer bureau’s complaint hits Sprint at the height of the holiday cellphone shopping season and as the company seeks to attract customers with price cuts and promotions. Sprint’s marketing push aims to reverse an exodus that drained 1.8 million of its most valuable customers during the first nine months of this year.
Each of the nation’s largest wireless companies has confronted cramming complaints. Verizon settled a California class action lawsuit over cramming in 2012. AT&T agreed in October to a $105 million cramming settlement with the FCC, the Federal Trade Commission, 49 states and the District of Columbia. T-Mobile is battling an FTC cramming lawsuit against it.
Even Sprint reached a settlement in a 2010 cramming case with Florida’s attorney general, agreeing to provide refunds and credits to customers in that state.
By suing Sprint, the Consumer Financial Protection Bureau thrust itself into the closely regulated wireless industry and raised questions about how broadly its power reaches.
The wireless industry already faces extensive review of mergers, wireless licenses and other key issues from the FCC. And the FTC showed its jurisdiction by pursuing the cramming complaints against AT&T and T-Mobile.
The new bureau’s mandate to give consumers financial protection is commonly thought of as dealing with checking accounts, credit cards and similar products, or broadly with abuses by financial services companies, said Paul Gallant, a telecom policy analyst at Guggenheim Partners in Washington.
If the consumer bureau’s hook in the Sprint complaint “is that money is involved, that would mean there’s literally nothing in the U.S. economy they can’t regulate,” Gallant said.
Bureau officials, in a conference call with reporters, said they were coordinating with the FTC and FCC in the Sprint case, though they declined to offer specifics.
They left unanswered whether their action against Sprint would come on top of any action the other agencies may decide to take, or whether they would pursue other carriers that already face or have settled federal cramming complaints.
Neither Sprint nor the bureau would say whether it had had talks about settling the cramming charges raised in court Wednesday.
“We’ve commenced our enforcement action, and we’ll see how things play out from here,” Jeff Ehrlich, the bureau’s deputy enforcement director, said during the conference call.
In its lawsuit filed in the U.S. District Court in Manhattan, the bureau said it had jurisdiction over Sprint’s actions because the company’s billing practices put it between consumers and the other companies that charged them for the unauthorized premium text messages.
Specifically, Sprint “extends credit to, and processes payments for, consumers in connection with goods and services that Sprint does not directly sell or that consumers did not directly purchase from Sprint,” the lawsuit said.
Sprint spokeswoman Stephanie Vinge Walsh said the lawsuit raised a venue for weighing how much power it had over wireless carriers generally.
“It appears that the CFPB has decided to use this issue as the test case for whether it has legal authority to assert jurisdiction over wireless carriers,” Walsh said.
In its lawsuit against Sprint, the bureau described cramming practices generally. Typically, it said, cramming schemers would attract consumers with online advertisements for free coupons or other giveaways. The consumer would be asked to enter a cellphone number, and the companies would send texts with the flirts and horoscopes the customers didn’t order but which triggered the unauthorized bills.
Some customers were hit for 99 cents, or $4.99, or repeatedly billed under subscriptions at $9.99 a month, the lawsuit said.
At Sprint, the agency’s lawsuit complained, consumers were automatically enrolled in this third-party billing system without their consent or without notifying them. Many customers didn’t detect unauthorized charges, it said, because they didn’t know they needed to watch for them.
The bureau also said Sprint ignored red flags that should have warned the company of the improper billing. It failed to track customer complaints, which the lawsuit called “a basic mechanism that could have helped reveal the flaws and risks in its system.”
Sprint’s billing system also suffered what the bureau called “blind spots” from a lack of oversight by the company.
Sprint, the lawsuit said, relied on other companies it hired to handle the payments processing and compliance with regulations governing it, as well as to aggregate the billings by the cramming perpetrators.
It said Sprint ignored another red flag by continuing to do business with payment processing, compliance and billing aggregators after those companies had “agreed to pay claims pursuant to wireless-cramming settlements in 2008 to 2010.”
Walsh, the Sprint spokeswoman, countered that Sprint was first among the largest wireless companies to add an outside compliance vendor to actively monitor companies with access to add charges to consumers’ Sprint bills.
“Not only did we have robust compliance practices in place that included our own oversight of the aggregator, we also, in addition to that, engaged an outside compliance vendor,” she said.