FTC Lawsuit Unlikely to Derail T-Mobile, Sprint Merger

The FTC's fraudulent billing lawsuit may create greater vigilance on consumer protection.

A Deutsche Telekom T-Mobile logo hangs under pink umbrellas at the stand of the German telecommunications giant at the 2014 CeBIT computer technology trade fair on March 10, 2014, in Hanover, Germany.

T-Mobile CEO John Legere would serve as CEO of the combined company after a proposed merger with Sprint.  

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T-Mobile may have a harder time campaigning as a consumer-friendly alternative to AT&T while it confronts a lawsuit from the Federal Trade Commission accusing it of overbilling customers hundreds of millions of dollars for premium texting services that users never ordered. The investigation may lead to greater awareness of such fraudulent billing, but the lawsuit would likely not damage chances for T-Mobile and Sprint to negotiate with regulators on a merger of their companies.

Sprint is reported to be finalizing a deal to purchase T-Mobile that would leave current T-Mobile CEO John Legere as the head of the combined company in order to compete with their larger rivals AT&T and Verizon Wireless. The FTC lawsuit may lead to more scrutiny from regulators but not enough to damage chances of approval by the government, says Harold Feld, senior vice president at Public Knowledge, a consumer advocacy group.

“Complaints like this traditionally are not a serious obstacle to a merger, rather when you have a merger pending before the commission there is tremendous pressure to settle things before the merger goes through,” Feld says. “If there are arguments that there is a systemic problem [at T-Mobile] it may lead to some kind of merger condition.”

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Both the Justice Department and the Federal Communications Commission would review a proposal for Sprint to purchase T-Mobile. The DOJ would look at antitrust concerns while the FCC would be concerned with public interest concerns, including whether a merger would improve efficiency and prices for consumers enough to be worth a potential negative impact on market competition.

The government may see a possible merger between T-Mobile and Sprint as damaging to competition since it would reduce the number of major wireless companies from four to three, says Glenn Manishin, a partner at Troutman Sanders law firm who specializes in telecom antitrust law. However, T-Mobile may be able argue its competitive value by pointing to its efforts to shake up pricing in the business by offering to help people break contracts with their rivals, Manishin adds.

“There is a good case to be made that they each lack scale on their own to compete with Verizon and AT&T,” Manishin says.

That argument on needing to consolidate to compete did not work out for T-Mobile in 2011 during its bid for a merger with AT&T when pressure from regulators led the companies to abandon the proposed deal. Verizon Wireless and AT&T would remain the two largest wireless providers in the U.S. even if Sprint made a successful bid for T-Mobile, so that could be a factor in the government’s decision.

The FTC lawsuit announced Tuesday accuses T-Mobile of collecting inaccurate bills even after complaints from subscribers in 2012 about companies fraudulently billing for services they had not ordered, a practice known as “cramming.”

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“It’s wrong for a company like T-Mobile to profit from scams against its customers when there were clear warning signs the charges it was imposing were fraudulent,” said FTC Chairwoman Edith Ramirez in a release. “The FTC’s goal is to ensure that T-Mobile repays all its customers for these crammed charges.”

Calling the complaint by the FTC “unfounded and without merit,” Legere said in a blog post the company stopped billing for those texting services in 2013 and launched a program to provide full refunds.

“This is about doing what is right for consumers and we put in place procedures to protect our customers from unauthorized charges,” Legere said. “Unfortunately, not all of these third party providers acted responsibly – an issue the entire industry faced.”

Victims of cramming may have a better chance of getting refunds from companies after this lawsuit. The FCC has investigated other companies for cramming but the FTC’s lawsuit is significant because it has more investigative resources, meaning there may be more uncovered and more penalties against those responsible than in past efforts, says Manishin. Telecommunications billing can get complicated so it’s unclear if the fraudulent billing was a glitch, he says.

“It’s an unfortunate PR debacle for T-Mobile,” Manishin says. “I believe even the largest companies have been charged with cramming at one time or another.”