T-Mobile (NASDAQ:TMUS) has become a fast-rising player in the mobile phone market largely because the company has distanced itself from the billing practices that are common in its industry. Led by brash CEO John Legere, T-Mobile has dubbed itself the "uncarrier" and has openly mocked the way AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint (NYSE:S) conduct business.
Much of the uncarrier strategy has focused on billing and the industry practice of offering one base price then piling on the overages and extra charges. By pledging price transparency and generally promising to be more honest than its competitors, the company has been adding customers by the millions.
That could all come crumbling down.
The Federal Trade Commission has accused T-Mobile of issuing "bogus charges" to mobile phone customers amounting to hundreds of millions of dollars. In a complaint filed Tuesday, the FTC alleges that T-Mobile received anywhere from 35% to 40% of the total amount charged to consumers for subscriptions for content such as flirting tips, horoscope information, or celebrity gossip that typically cost $9.99 per month. In some cases, the agency charges, T-Mobile continued to bill its customers for these services offered by scammers years after becoming aware of signs that the charges were fraudulent.
"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. "The FTC's goal is to ensure that T-Mobile repays all its customers for these crammed charges."
Legere called the FTC's complaint "unfounded and without merit," USA Today reported. "In fact, T-Mobile stopped billing for these Premium SMS services last year and launched a proactive program to provide full refunds for any customer that feels that they were charged for something they did not want."
If the charges prove true, T-Mobile has more than dollars at stake. If it's proven the company knew it was billing customers fraudulently, its entire strategy could fall apart.
The public has come to accept random line item charges on their mobile phone bills. As long as the fees aren't egregious, we just pay up. But T-Mobile has proclaimed itself a company we could trust. If that's not so, the impact will be worse than it would be for any of the three big carriers.
If you tell everyone you're a hero but turn out to be a villain, you've not only cheated people, you've also let them down.
What exactly is the FTC saying happened?
The charges against T-Mobile involve a practice known as third-party billing where the phone company places charges on a consumer's bill for services offered by another company, receiving a percentage of the amount charged. When the charges are placed on the bill without authorization it is known as "cramming."
The FTC made numerous charges in its press release announcing the action against T-Mobile, including:
T-Mobile was charging consumers for services that had refund rates of up to 40% in a single month. The FTC has alleged that because such a large number of people were seeking refunds, it was an obvious sign to T-Mobile that the charges were never authorized by its customers. As the complaint notes, the refund rate likely significantly understates the percentage of consumers who were crammed. The complaint also states that internal company documents show that T-Mobile had received a high number of consumer complaints at least as early as 2012.
The company's billing practices made it difficult for consumers to detect that they were being charged, much less by whom. When consumers viewed a summary of their T-Mobile bill online, it did not show consumers that they were being charged by a third party or that the charge was part of a recurring subscription. The heading under which the charges would be listed, "Premium Services," could only be seen after clicking on a separate heading called "Use Charges." Even after clicking, though, consumers still could not see the individual charges.
T-Mobile's full phone bills, which can be longer than 50 pages, made it nearly impossible for consumers to find and understand third-party subscription charges. After looking past a "Summary" section as well as an "Account Service Detail" section, both of which described "Usage Charges" but did not itemize those charges, a consumer might then reach the section labeled "Premium Services," where the crammed items would be listed.
Basically the FTC is saying the T-Mobile had every reason to know something shady was going on and it either ignored the signs or willfully continued the practice. The agency also charges T-Mobile with making it difficult for customers to get refunds when they noticed the extra charges.
The FTC's case against T-Mobile is likely to be the largest cramming case ever brought by federal authorities. It is also the first time a mobile carrier has been charged with the practice.
What is T-Mobile risking?
T-Mobile is supposed to be the company that doesn't pull these kind of stunts, and we know that because Legere has told us time and time again that's the case.
It's one thing if the cramming was somehow happening in a way that T-Mobile could plausibly claim ignorance. That does not seem to be what happened. If the allegations prove true the carrier may well lose the one thing it had over other mobile phone providers -- the public's trust.
How bad will it be?
Since adopting the uncarrier strategy T-Mobile has been gaining customers. In the first quarter of 2014 the company added 2.4 million new users, marking the first quarter ever with 2 million net additions. It was also the fourth consecutive quarter with over a million total net additions, making T-Mobile the fastest-growing wireless company.
That growth has put the industry on notice and forced the other players to, in some part, adopt the pricing transparency T-Mobile claims to offer. It has also made the company an acquisition target with a megadeal/merger with Sprint -- which would have Legere as CEO -- appearing the most likely possibility.
The allegations alone likely will undermine the company's efforts to market itself as above the standard industry practices. If they are proven true, T-Mobile will likely lose the trust of its customers, which would be a severe blow for a brand that has staked its reputation on being the trustworthy alternative.
Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.