Sprint hit with government lawsuit over third-party charges, as FCC's $105M fine looms

Sprint (NYSE: S) is facing a lawsuit by the Consumer Financial Protection Bureau that alleges the carrier illegally billed wireless consumers for tens of millions of dollars in unauthorized third-party charges.

The lawsuit from the government's consumer watchdog agency contends that Sprint operated a billing system that allowed third parties to bill for unwanted services, a process known as "cramming." The CFPB is seeking refunds for affected consumers and penalties to deter the practice in the future.

"Today we are suing Sprint for allowing illegal charges to be crammed onto consumers' wireless bills," CFPB Director Richard Cordray said in a statement. "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."

In November 2013, AT&T Mobility (NYSE: T), Sprint and T-Mobile US (NYSE:TMUS) entered into an agreement with 45 states to stop billing customers for premium SMS messages they receive. Verizon Wireless (NYSE: VZ) was not part of the settlement but said that it would also discontinue the practice.

Up until then, the CPFB contends Sprint outsourced payment processing for digital purchases such as apps, games, books, movies, and music to vendors called "billing aggregators" without properly monitoring them. The lack of oversight, the lawsuit alleges, gave aggregators "near unfettered access to consumers' wireless accounts," according to a CPFB statement.

"Sprint's system attracted and enabled unscrupulous merchants who, in some cases, only needed consumers' phone numbers to cram illegitimate charges onto wireless bills," the CPFB said. "The charges ranged from one-time fees of about $0.99 to $4.99 to monthly subscriptions that cost about $9.99 a month. Sprint received a 30-40 percent cut of the gross revenue from these charges."

"Although Sprint and other wireless carriers ended premium message transactions in 2013, third-party billing on mobile accounts continues through different platforms, like mobile wallets," Cordray told the New York Times. "Companies must have strong safeguards in place and they must take vigorous and proactive steps to protect consumers against fraud and abuse."

"We are disappointed that the CFPB has decided to target Sprint on this issue, and we strongly disagree with its characterization of our business practices," Sprint said in a statement. "Sprint took considerable steps to protect wireless customers from unauthorized third-party billing and is an industry leader in proactively preventing unauthorized charges."

The company said it recognizes "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 CFPB said worked in close coordination with FCC and its Enforcement Bureau on the lawsuit. Reports have indicated that the FCC is preparing to fine Sprint $105 million over the practice. However, it's unclear if the FCC will issue a fine or come to some kind of settlement with Sprint.

"Protecting consumers from unauthorized fees on their phone bills is a team effort," an FCC spokesman told CNET. "The commission has a great working relationship with CFPB and state law enforcement partners. Together, we are pursuing joint enforcement actions to protect consumers from unauthorized fees on their wireless bills. Our agencies have agreed to continue our close cooperation on this and other cases on behalf of wireless customers nationwide."

The FCC and other government agencies and lawmakers have been cracking down on cramming. In October AT&T agreed to distribute $80 million to current and former customers who were billed for third-party services they did not authorize. Additionally, the carrier agreed to pay $20 million to state governments participating in the settlement and make a $5 million penalty payment to the U.S. Treasury.

Additionally, in July the Federal Trade Commission alleged in a lawsuit that T-Mobile made "hundreds of millions of dollars" by knowingly charging customers for purported "premium" SMS subscriptions that, in many cases, were "bogus charges" customers never authorized. T-Mobile initially said the complaint was "unfounded and without merit" but in October indicated it was looking to settle the case.

For more:
- see this CPFB statement
- see this CPFB lawsuit (PDF)
- see this CNET article
- see this Re/code article
- see this NYT article
- see this Reuters article

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