New York State's Attorney General Eric Schneiderman has opened an investigation against T-Mobile (NASDAQ:TMUS) in response to an activist group's claims that its ads saying people can leave contracts behind are misleading.
The AG's office is responding to a letter from a number of consumer groups led by Change to Win (CTW), an activist organization that focuses on labor and consumer issues. It charges that T-Mobile's device installment plans amount to de facto contracts, according to USA TODAY. The letter, which was also signed by numerous civil rights and consumer advocacy groups, was sent to the Consumer Financial Protection Bureau, which is responsible for consumer financial products, according to the newspaper.
Schneiderman has not made a public comment on his office's intentions, but he has been aggressive in going after high-profile targets in the past.
What does the letter charge?
The investigation focuses on two things, which CTW describes in its letter. Basically, the consumer activist group is saying that T-Mobile advertises that it offers service without requiring a contract, but that, CTW charges, is not really the case.
The letter explains that roughly 90% of T-Mobile customers take advantage of two-year financing agreements on phones, This, CTW wrote, equates to "contracts with financial penalties for early termination."
In addition, the consumer advocate group accuses T-Mobile of "a pattern of abusive debt collection practices, including providing third party debt collectors with inaccurate information and customers with little or no notice of the alleged debt." As part of that claim, CTW also takes issue with the carriers use of an arbitration clause in its wireless contracts, writing that it "exacerbates these problems by erecting significant barriers against injured customers seeking compensation."
The New York State Attorney General is not obligated to investigate these claims, but Schneiderman tends to go where there might be potential news coverage for him.
A bit about New York's AG
The No. 3 wireless carrier is not the only high-profile company or personality to be the subject of the attention-seeking AG's office. Schneiderman has, in recent months, told daily fantasy websites FanDuel and DraftKings to stop operating in New York, and he has opened an investigation into speculative Bruce Springsteen ticket sales on eBay. He has also been outspoken in his opposition to tech pioneers Uber and Airbnb and has long pursued a case again former AIG CEO Hank Greenberg.
That does not mean Schneiderman's investigation into T-Mobile is invalid, but it's worth noting that the elected official seems to like media attention. He may have a point, that T-Mobile's claims are not quite what they seem to be, but it's hard to see how it's illegal to advertise not requiring a contract when, on a technical level, T-Mobile does not require customers to have a contract.
How has T-Mobile responded?
The company has not released an official statement, but CEO John Legere made his thoughts very clear in a Tweet that responded to a USA TODAY story on the investigation.
@usatodaytech We stand by our ads! Contrary to the click-bait headline, we haven't been accused of false advertising by any regulatory body.— John Legere (@JohnLegere) December 8, 2015
Realistically, how else would Legere respond? The only surprise perhaps is that he limited his response and did not explode in the flurry of posts he often responds with when his company is challenged.
What is a contract?
The major point of the claim being investigated is the charge that T-Mobile is using false advertising when it says it does not require a contract. That claim seems a little weak, because T-Mobile clearly has a different method of operating than what has been the norm in the industry, which has generally been to offer device subsidies in exchange for a two-year contract commitment.
That practice has actually faded across the industry, with the other three major carriers, AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint (NYSE:S), pushing people toward financing deals or leasing. In fact, only AT&T still offers the traditional device subsidy model. Sprint and Verizon have both dropped it, though they both still have customers on legacy subsidized plans.
Unlike Sprint and Verizon, which only recently made the change, Legere's company has been contract-free for about two years. Customers can sign up on a month-to-month basis with no early termination fee for leaving.
T-Mobile does (as do its three rivals) offer consumers two-year financing on a device, and that deal could effectively tie people to keeping T-Mobile as their provider. The problem with that argument is that consumers also have the option of bringing their own device. And, while T-Mobile makes departing customers pay off any financed handsets, the consumer could in theory then sell that phone to pay off much off the bill.
Wireless contracts used to be ironclad, making it expensive for people to switch between T-Mobile, Sprint, AT&T, and Verizon. That's simply not the case with what T-Mobile is doing, because the financed phone people would have to pay off could either be used on a new carrier or sold. Yes, the consumer will likely end up losing a bit of money on any sale, but the penalty does not approach the old ETFs when people broke a contract.
This complaint may lead to T-Mobile getting admonished or asked to clear up wording, but it's hard to see any actual wrongdoing, here. It's impossible to predict how the various investigating groups, especially Schneiderman's office, will react, but it's somewhat implausible they back up the false advertising claims.
Daniel Kline has no position in any stocks mentioned. He is a T-Mobile customer using a leased phone. The Motley Fool owns shares of and recommends eBay. The Motley Fool recommends Verizon Communications. 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.