AT&T's cell phone subsidiary has agreed to pay more than $100 million to settle claims that it profited from charges placed on customers' phone bills without their permission. The Federal Trade Commission says the scam, which ran at least from 2011 to 2013, netted AT&T millions of dollars in transaction fees, and the cell phone company didn't do enough to combat the problem.
Affected customers will be eligible for refunds (click here to get yours), and AT&T will retrain its customer service representatives to make it easier for customers to dispute fraudulent charges.
AT&T customers were getting charged for third-party "services" they didn't ask for
In a scam known as "cramming," fly-by-night companies obtained AT&T customers' cell phone numbers and then signed them up for services that cost a few dollars per month. The FTC says these services can include "ringtones, wallpapers, and text message subscriptions for horoscopes, flirting tips, and celebrity gossip." The charges are added to customers' phone bills, which in many cases occurred without customers' knowledge or consent.
For example, the FTC said one scammer created a Facebook application that claimed to let people know who was looking at their Facebook profile. Ads for the service labeled it as free, but consumers were asked to take a short "survey" that asked for the customers' phone numbers. The FTC says the company began adding a monthly charge to customers' phone bill. Oh, and the app didn't actually tell customers who was looking at their Facebook page.
The FTC says this is just one of many examples of unauthorized charges placed on peoples' phone bills.
AT&T was making millions of dollars from these scams, according to the FTC
These third-party charges — not all of which are fraudulent — were big business for AT&T. According to the FTC, AT&T typically takes more than a third of the the revenue from these third-party subscription fees. In 2012, AT&T earned $108 million from these fees, and the figure went up to $161 million in 2013.
And while there's no evidence AT&T actively encouraged these scams, the FTC alleges that AT&T established lax rules for third-party charges that allowed the scam to thrive — and AT&T to take a big cut.
In the credit card industry, the average "chargeback" rate — the fraction of charges that get disputed by consumers — is around 0.2 percent. The FTC says merchants with chargeback rates above 1 percent tend to get flagged by credit card networks for fraud investigations.
AT&T's threshold for suspending third-party providers was much higher. At various points in time it ranged between 15 and 22 percent. According to the FTC, AT&T didn't cut off a company called Wise Media even after some of its "services" had refund rates above 40 percent — that is, almost half of their "customers" had complained about unauthorized charges.
The FTC says AT&T failed to adequately notify customers or respond to customer complaints
One reason these scams lasted for as long as they did, according to the FTC, is that AT&T did a poor job of distinguishing optional third-party services from charges levied by AT&T itself. Here's how third-party charges appeared on the summary page from one AT&T bill:
While the bill does later list the "subscriptions" individually, it again labels them as "AT&T Monthly Subscriptions." The FTC argues this made it difficult for consumers to figure out that these were charges levied by (possibly unauthorized) third parties, rather than charges for the AT&T phone service itself.
The FTC says AT&T received 1.3 million customer calls relating to third-party subscription charges, and it says AT&T customer service reps weren't always helpful. Prior to October 2011, AT&T would only offer customers a 3-month refund for an unauthorized subscription charge, even if the subscription had been on the customer's bill for longer than that. After October 2011, this was reduced to 2 months. And the FTC says that if a customer called to complain about a second unauthorized subscription request, they would be denied a refund if they had gotten one the first time.
Meanwhile, the FTC says AT&T went easy on companies with a history of disputed charges. Providers that racked up high refund rates three months in a row would be "suspended," but that just meant that they couldn't sign up new customers — they were free to continue charging existing customers. At the end of the suspension, the FTC said, they'd again be allowed to sign up new customers. The FTC says that after a suspension, providers were given a 90-day "grace period" during which high fraud rates wouldn't lead to another suspension.
AT&T won't admit it did anything wrong, but it's paying $105 million to settle the charges
In a 40-page settlement agreement, which a Georgia judge approved on Wednesday, AT&T doesn't admit it did anything wrong. That's a fairly common feature of settlement agreements with federal agencies, which are often more interested in resolving the issue than assigning blame.
But AT&T will provide cash to compensate victims. $80 million will go to a fund to be administered by the FTC. It will be used to compensate fraud victims and to cover the costs of administering the money. Another $20 million will go to state attorneys general and a final $5 million will go to the Federal Communications Commission.
AT&T will notify current customers that they may be eligible for refunds. The FTC will look for ways to notify former AT&T customers.
AT&T has also agreed to make significant changes to the way it handles third-party subscriptions. The company will set up a system that makes sure customers are not billed unless they have explicitly consented to the services. And AT&T will train customer service representatives to make it easier for customers to get unauthorized charges removed.
I think I might have gotten hit by this scam! What should I do?
You should visit the FTC's page about this issue, click "apply for a refund," and follow the instructions.