WASHINGTON — The Consumer Financial Protection Bureau's lawsuit against Sprint Corp. is likely to be a test case for whether it has the power to oversee telecommunications firms.
The agency filed suit Wednesday against the telecommunications giant, arguing that Sprint allowed third parties to charge fees for wireless products that were not authorized by the customer and that the firm ignored complaints about such charges.
It was the CFPB's first attempted action against a cell phone company. Agency officials said they have jurisdiction because the Dodd-Frank Act gave them power over payment processing and mobile deliveries.
Industry experts say the Sprint case was a bold demonstration of how far the CFPB can take its jurisdiction.
The case against Sprint is "another example of the CFPB taking a very broad and expansive view of its jurisdiction," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. "It seems if they see a practice that they think is harming consumers, they are going to stretch as far as they can to make sure that they can get jurisdiction."
Whether the CFPB plans to go beyond telecommunications firms is unclear. Reporters sharply questioned Jeff Ehrlich, the agency's deputy enforcement director, on a conference call Wednesday whether the CFPB could extend its jurisdiction to other industries that process payments, like cable companies. But Ehrlich declined to get into details.
"I can't talk about industries" specifically, he said. "What I will say is that if a company is processing payments over a mobile network, that is something the bureau clearly has jurisdiction over. And the bureau will take action over any financial product in the marketplace where we find unlawful conduct."
Dodd-Frank does give the CFPB wide latitude, but it also sets some limits. For example, the law says the agency can't pursue certain retailers or merchants selling non-financial products.
But in the case with Sprint, the agency cited a few caveats of Dodd-Frank that would deem Sprint a "covered person" under the CFPB's jurisdiction since it was processing payments through a mobile telecommunications network.
"The complaint alleges that Sprint engaged in unlawful practices by acting as a payment processor over its mobile network so the conduct at issue in our complaint is squarely within the bureau's jurisdiction," Ehrlich said.
The Federal Communications Commission, the primary agency with responsibility over Sprint, helped the CFPB in its investigation and has its own separate pending action with Sprint. The FCC has already gone after other telecommunication companies for allowing so-called "cramming" of third-party charges on cell phone bills. Most recently, the FCC reached a $105 million settlement in October with AT&T Mobility on similar charges.
"Protecting consumers from unauthorized fees on their phone bills is a team effort. The Commission has a great working relationship with CFPB and state law enforcement partners," said Neil Derek Grace, the FCC's senior communications advisor, in an emailed statement. "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."
Observers said it's possible that the CFPB took the lead on the Sprint case because it could move faster on actions since the agency is run by a single director and not a commission like the FCC where it would need a vote. The CFPB claims that from 2004 to 2013, Sprint outsourced payment processing for digital purchases like games and apps that came through text messages with hidden charges, but failed to monitor the vendors charging those fees while profiting from the charges and ignoring complaints about it.
Most of the harmed consumers would first click on an advertisement online that would direct them to a website asking for their cell phone number in order to get a "free" digital item but would then charge the consumer for it. In other cases, the CFPB said vendors were fabricating the charges without ever sending the product. The agency said the one-time fees ranged from 99 cents to nearly $5 in addition to monthly subscriptions of nearly $10. Meanwhile, Sprint would get 30% to 40% of the gross revenue from the vendor charges.
"In the end, Sprint customers should not have been subjected to unauthorized charges and Sprint needs to be held accountable. The company should have been responsive to consumers, curbed the illegal charges, and ending the damage done by cramming," said CFPB Director Richard Cordray. "Because Sprint did not deliver such common-sense protections, the bureau is filing this lawsuit today to seek appropriate relief for Sprint's misconduct and the harm it has done to consumers."
Sprint denies the allegations. The company stopped allowing charges through text messaging, called premium short messaging services, a year ago.
"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 took considerable steps to protect wireless customers from unauthorized third-party billing and is an industry leader in proactively preventing unauthorized charges," said Roni Singleton, a spokesperson for Sprint. "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 CFPB's Ehrlich said he would not comment back on "what Sprint might have done or may not have done to prevent this."
"Our investigation found that Sprint, over the course of a decade, enrolled consumers into third party billing system without their consent that gave third parties access to customers without adequate compliance controls," he said. "They failed adequately to resolve customer abuse and as a result, millions of consumers were charged hundreds of millions of dollars in unlawful fees for services that they did not want and did not sign up for."
CFPB officials did not give further insight as to what other telecommunication companies it may target. However, it's clear that the first case filed against Sprint was used as a message to the rest of the industry and any company dealing with third-party payment processing.
"If companies hire vendors to manage their billing and payment systems, which they are certainly entitled to do, they must carefully monitor and police their vendors' activities," Cordray said. "As we have said previously about other consumer financial markets, simply contracting with a vendor does not absolve the provider of its legal responsibility to treat consumers fairly."