Cramming Crackdown Hooks Carriers for Millions in Refunds

Jul 03, 2014 3:23 pm ET

(Updates with T-Mobile CEO comments in 13th paragraph.)

July 3 (Bloomberg) -- The crackdown on unauthorized mobile- phone charges that led to a federal complaint against T-Mobile US Inc. this week poses a threat to other U.S. carriers that fail to stamp out the practice and offer refunds.

The Federal Trade Commission filed a suit this week accusing T-Mobile US Inc. of placing “bogus charges onto customers’ bills” for items such as flirting tips, horoscopes and celebrity gossip. Vermont Attorney General William Sorrell said in an interview he may seek to get reimbursements from all the top wireless providers for fees from the practice known as cramming -- and other states may follow.

Governments are going after wireless providers even though cramming is on the wane. The practice has declined dramatically since last year, when the largest U.S. carriers voluntarily decided to stop offering premium text messages, a service most commonly associated with fraudulent charges, said Roger Entner, an analyst at Recon Analytics LLC. T-Mobile, for instance, stopped offering premium SMS in December, a little more than a year after Chief Executive Officer John Legere took office.

“It turned into an uncontrollable problem for the customer -- it created more bad than good,” Entner said. “It’s largely shut down in the U.S. by now, simply because it was too much fraud.”

Still, federal and state authorities argue the carriers have to pay back the unauthorized charges from which they profited earlier. The fees add up to as much as $887 million a year, according to advocacy group Consumer Federation of America.

“We think consumers are entitled to recovery of money they lost,” Sorrell said in an interview. “I don’t think there’s any question that this is not limited to just T-Mobile.”

Unwitting Customers

Cramming typically involves a phone company placing unauthorized charges on a consumer’s bill for services offered by a third party. A consumer may accidentally respond to an unsolicited text message, or click on a link -- and unwittingly sign up for the service.

The practice takes advantage of the fact that wireless bills are often several pages long and filled with line items that consumers struggle to understand. The FTC action could bring more attention to all kinds of charges on customers’ bills, said Richard Crone, CEO of payment researcher Crone Consulting LLC. Last year, he signed up to use his mobile phone in Costa Rica and El Salvador through his U.S. wireless service provider, and then couldn’t figure out how to cancel it.

“I receive bills as long as 50 pages,” Crone said. “If they send me a text or an e-mail or a call offering a service, and you respond positively, it’s very difficult to find where that service had been billed.”

First Target

Carriers can often spot third parties that rack up unauthorized charges by looking at the percentage of consumers who drop a service they supposedly signed up for; for cramming services, the refund rate can reach 50 percent, Crone said.

The FTC is seeking for T-Mobile -- the first carrier it’s targeted -- to refund its customers money lost in cramming charges. The agency unveiled the suit just three weeks after T- Mobile announced a refund program, saying it will “proactively reach out to customers who were billed for these third-party services to give them the opportunity to request a refund for any unauthorized charges.”

T-Mobile called the FTC suit unfounded. Even before the company shut off premium SMS completely in December, it had been vetting its content providers and let customers block the services. It also required users to confirm purchases twice before they went through, the company said.

Taking Action

“T-Mobile is NOT participating in any form of cramming, stuffing charges for un-purchased services, or trying to be anything less than totally transparent with each of our customers. PERIOD!” Legere said in a blog post today.

“We cannot comment on the scope of the issue within the industry, but I can say that this was an issue that impacted the entire industry, and T-Mobile believes that the third-party content providers should be held responsible for their actions,” T-Mobile spokeswoman Tolena Thorburn said in an e- mail. “We are the first to take action for the consumer with a comprehensive refund program and we are calling for the entire industry to do the same.”

Other mobile-phone companies said they work to screen out unauthorized charges. Verizon Communications Inc. has a “generous policy of providing refunds,” and it shut down premium messaging services late last year, said a spokeswoman, Adria Tomaszewski. Mark Siegel, an AT&T Inc. spokesman, didn’t immediately return a request for comment.

Landline Precedent

“Sprint has always employed a liberal refund policy for disputed third-party charges,” spokeswoman Stephanie Vinge said in an e-mail. “We have consistently provided monetary refunds in instances of confirmed unauthorized charges.”

Providing consumer refunds can add up quickly. Assuming 30 percent of T-Mobile customers request a refund of third-party services, that could add up to $73 million in revenue for last year, Crone estimated. Handling each customer request could require another $10 per user, he said. T-Mobile declined to confirm whether those estimates are accurate. The company reported $24.4 billion in total sales last year.

Government authorities are turning their attention to mobile-phone cramming after dealing with the practice on landline bills for years. Only last year, Sorrell’s office settled two lawsuits that netted 12,500 Vermont residents and local businesses more than $900,000 in refunds for landline cramming. The FTC has brought 30 cramming cases involving landlines over the years, Jane Ricci, staff attorney at the agency’s Bureau of Consumer Protection, said in an interview.

State Lawsuits

Now mobile cramming is drawing more scrutiny. According to a survey Vermont commissioned in early 2013, 60 percent of third-party charges on the state’s mobile-phone bills were unauthorized, and many were for monthly amounts such as $9.99.

Attorneys general from states like Texas have filed suit against content providers and their bill aggregators -- the companies that serve as middlemen to mobile-phone carriers. The FTC has brought five actions related to wireless cramming so far, three of them last year, Ricci said.

While she acknowledged that carriers have changed their practices to make premium SMS largely a thing of the past, the FTC believes that other services could be defrauding consumers as well, she said.

“Wireless carriers have stopped premium SMS billing, but there are other types of third-party billing out there,” Ricci said. “We are always on the lookout for unauthorized billing.”