By: Linda Goodman
On December 17, 2014, the Consumer Financial Protection Bureau (“CFPB”) filed a lawsuit slamming Sprint Corporation for illegally billing wireless consumers tens of millions of dollars in unauthorized third-party charges and ignoring consumer complaints about the practice.
The Bureau’s complaint alleges that Sprint operated a billing system that allowed third parties to “cram” charges on customers’ mobile-phone accounts and then ignored complaints about the charges. The CFPB seeks refunds for affected consumers and penalties to deter cramming in the future.
“Today we are suing Sprint for allowing illegal charges to be crammed onto consumers’ wireless bills,” said CFPB Director Richard Cordray. “Consumers ended up paying tens of millions of dollars in unauthorized charges, even though many of them had no idea that third parties could even place charges on their bills. As the use of mobile payments grows, we will continue to hold wireless carriers accountable for illegal third-party billing.”
The CFPB is holding the wireless carriers responsible and therefore liable as it is the carriers who collect and process payments and control the networks connecting the cramming merchants with customers. From 2004 through 2013, Sprint acted as a third-party service for products identified as “premium text messages” or “premium short messaging services” (“PSMS”) – all of which were commercial offers. Sprint outsourced payment processing for these digital purchases to vendors called “billing aggregators” without properly monitoring them.
The lack of oversight gave aggregators unfettered access to consumers’ wireless accounts. Sprint’s system attracted and enabled unscrupulous merchants who, in some cases, only needed consumers’ phone numbers to cram unauthorized charges onto wireless bills. The charges ranged from one-time fees of $0.99 – $4.99 to monthly subscriptions at $9.99 a month. Notably the charges were low enough that many avoided detection by consumers. More importantly, Sprint received a 30-40 percent cut of the gross revenue from these charges.
The complaint further states that consumers were targeted online. Through click ads that brought them to websites asking them to enter their cellphone numbers often without notifying the consumer a charge would be assessed to their mobile bill. Some merchants tricked consumers into providing their cellphone numbers to receive “free” digital content but were subsequently charged for the same content. Many others simply placed fabricated charges on bills without delivering any goods or communicating with consumers.
The CFPB alleges that Sprint, as a payment processor for third parties, violated the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on unfair practices by:
- Allowing third-parties to illegally charge consumers: Sprint’s billing system made it easy for third-party scammers to attach charges to consumers’ bills. Sprint then profited from these unauthorized charges thereby victimizing millions of consumers.
- Automatically billing consumers for charges without their consent: Sprint did not provide for any type of customer opt in for third-party billing. Instead, the company automatically enrolled customers without their consent. This policy helped perpetuate the third-party wrongdoing because many customers did not understand or know of the third-party charges.
- Disregarding red flags about third-parties: Sprint further put its proverbial head in the sand by disregarding red flag warnings that should have notified Sprint that its system was onboarding unauthorized charges. Instead, Sprint continued to outsource to billing aggregators, despite multiple lawsuits claiming cramming against the very same aggregators that Sprint used. In addition, the CFPB alleged that Sprint should have known that cramming was a major problem as the company had already been subject to a law enforcement action related to the issue.
- Ignoring consumer complaints about unauthorized charges: It was further alleged that Sprint failed to track customer complaints about the unauthorized charges, and as a result, lacked the “most basic” alert mechanism that could have revealed flaws in its systems. Sprint also failed to provide full and prompt remediation to consumers subjected to these charges. In some instances, Sprint refused to provide refunds but offered only instructions on how to block future third-party charges. Other times, Sprint refused to provide refunds and referred customers to the merchants.
As a result, Sprint’s wireless customers – many of whom did not know that third parties could place charges on their bills – incurred millions of dollars in authorized charges – from which Sprint took 40%. The complaint alleged that Sprint profited handsomely from its system, collecting hundreds of millions of dollars in revenue. It is noted that Sprint terminated the services billing in December 2013.
______________________________________________________________________
This article is a publication of The Goodman Law Firm and is intended to provide information on recent legal developments. This article does not create an attorney-client relationship, nor should it be construed as legal advice or an opinion on specific situations. This may constitute “Attorney Advertising” under the Rules of Professional Conduct and under the law of other jurisdictions.
© 2014 TGLF, A.P.C.