AT&Tcrammingcase by Rob Wilson / Shutterstock.com
FTC overlooks true villains in AT&T cramming settlement
Earlier this month, the Federal Trade Commission (FTC) announced (0) a $105 million multi-agency settlement with AT&T Mobility LLC. The FTC, along with the Federal Communications Commission (FCC) and various state law enforcement officials, had accused the wireless provider of unlawfully billing customers for third-party charges – a practice known as “cramming.” The settlement is a significant milestone, not only in the government’s ongoing efforts to control cramming but also in the use of intermediary liability to regulate broad telecommunications ecosystems.
The settlement involved premium text-messaging services, wherein customers pay a monthly fee for mobile content such as ringtones, horoscopes, love tips, or fun facts. AT&T acts as a billing agent for the companies selling this content, charging the customer as part of his or her monthly wireless bill and passing that revenue through to the mobile content provider in exchange for a fee. The FTC alleges that numerous customers were billed for premium content without their permission and that AT&T’s billing practices made it difficult for those consumers to seek relief.
The AT&T settlement is part of a larger FTC experiment, which uses intermediary liability to regulate an increasingly global digital environment. The agency has launched seven mobile cramming cases since 2013, including a live investigation against T-Mobile (1) filed in July. Earlier this year, the Commission announced (2) a settlement with Apple requiring the company to reimburse users for in-app purchases made by children through the Apple App Store without parental consent, which will cost the tech company at least $32.5 million. Last month it announced (3) a similar $19 million minimum settlement with Google regarding content purchased through the Play Store. One might even include under this heading the Commission’s myriad efforts to hold companies such as Wyndham Worldwide accountable (4) for data security breaches.
In each case, the conduct at issue was directly perpetrated by a third-party entity other than the defendant. The true villains in cramming cases are unethical content companies that mislead consumers into signing up for services without clearly disclosing the associated charges and conditions. The Apple and Google cases involved app designers who targeted children for easy revenue, and the data security cases involve hackers seeking to steal customer information.
But these bad actors are numerous and hard to find; targeting them directly would be expensive and often impossible, as many lie beyond the Commission’s jurisdiction. Rather than trying to control all lawbreakers in the digital economy, the Commission is instead coercing the Internet’s middlemen to do so. Each settlement is predicated upon the notion that AT&T, Apple, Google, and the like must patrol the use of their facilities by potentially bad actors. Otherwise, they risk liability for providing the facilities through which these bad actors can harm consumers.
The use of intermediary liability is an interesting attempt to leverage the government’s limited resources to deter illegal activity. By deputizing AT&T or Apple – perhaps involuntarily – to fight harmful practices, the Commission can take advantage of their corporate resources in addition to its own annual budget. Furthermore, these “deputies” are sometimes in a better position than the Commission itself to identify, monitor, and sanction those who are misusing their facilities.
But intermediary liability is not without cost. The imposition of liability on a company for misuse of its services increases the cost of the service and can deter potentially beneficial uses as well. This was the issue that the Supreme Court struggled with in the Sony case (5), in which studios sought to hold the manufacturer of the videocassette recorder contributorily liable for providing the technology that allowed users to engage in copyright piracy. The Court recognized that imposing liability might eliminate the product from the marketplace, which would harm those who might rely upon it for legitimate purposes. We see this issue in the cramming case as well; amidst cramming investigations, the major wireless carriers agreed (6) to stop providing premium texting services altogether, rather than risk liability for misuse. This result is unfortunate for those companies engaged in legitimate premium text messaging operations, as well as for customers who enjoyed those services.
In the Internet ecosystem, copyright law has long tried to strike a balance between the benefits and unintended consequences of intermediary liability to control dispersed harmful actions. Section 230 of the Communications Decency Act provides a safe harbor for intermediaries whose facilities are misused for copyright infringement, if they abide by a statutory notice-and-takedown regime to remove allegedly copyrighted material at the copyright owner’s request. In essence, this provision “deputizes” forums such as YouTube to remove infringing material once notified, although it generally does not require them to affirmatively patrol users to root out infringing material. That burden is instead placed upon copyright holders, whose Copyright Alert System (7) is itself an innovative private-law initiative designed to leverage the power of intermediaries in an effort to combat illegal activity online.
It remains to be seen whether the Commission’s attempts to leverage intermediaries will be a net gain or harm to the public. But it should be wary of taking too heavy a hand against those not directly responsible for the harm at issue. Intermediary liability can be a valuable tool to police the nether reaches of cyberspace, but it can also suppress innovation by eliminating socially beneficial practices because of the fear of harm caused by a few bad actors. In its voyages into digital intermediary liability, the Commission would do well to tread carefully.
Footnotes
- http://www.ftc.gov/news-events/press-releases/2014/10/att-pay-80-million-ftc-consumer-refunds-mobile-cramming-case
- http://www.allgov.com/news/where-is-the-money-going/ftc-charges-t-mobile-with-forcing-bogus-charges-on-customers-140703?news=853577
- http://www.ftc.gov/news-events/press-releases/2014/01/apple-inc-will-provide-full-consumer-refunds-least-325-million
- http://www.ftc.gov/news-events/press-releases/2014/09/google-refund-consumers-least-19-million-settle-ftc-complaint-it
- http://www.ftc.gov/news-events/press-releases/2012/06/ftc-files-complaint-against-wyndham-hotels-failure-protect
- http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=464&invol=417
- http://www.fiercewireless.com/story/att-pay-record-105m-settlement-related-unauthorized-premium-sms-billing/2014-10-08
- http://www.techpolicydaily.com/technology/leveraging-vertical-relationships-combat-torrent-based-piracy/
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By A fan who disagrees this time October 22, 2014 - 9:59 am
The FTC “overlooks the true villains”? The same FTC that has brought cases against 5 of the most egregious cramming merchants since spring of 2013 with final judgments totaling $160 million dollars? The AT&T cramming case is *not* about intermediary liability. AT&T allegedly collected 30-40% in fees of the hundreds of millions of dollars in crammed charges, allegedly did not adequately disclose those charges on billing statements, and allegedly didn’t adequately discipline their misbehaving merchant partners, even after having knowledge of cramming, unlike many other carriers. Premium SMS died because the carriers let it become a cesspool of fraud, which is why the liability costs are high now.
By Arthur O.Armstrong October 22, 2014 - 12:07 pm
AEI is the first organization I have seen which appears to be in favor of “cramming” by the once well regarded phone company. It should embarrass, and certainly degrades, AEI to be supporting such corporate crime.
The phone company was hardly an “intermediary”. It provided the critical service which made cramming possible and profitable–hard-to-understand bills which had to be paid, at risk of losing one’s phone service. . It contracted with a bunch of bad guys to collect money for them with obscure, small charges that could easily be overlooked by its millions of customers; it took a healthy “commission” on the amounts it mulcted from its customers, and made it difficult for those of its customers who realized they were being swindled to get a refund.
This has been notoriously going on for years, while the regulators slept on their watch. And when the regulators finally stirred themselves to action, the refunds and penalties were less than the amounts which had been stolen.
If free enterprise is destroyed, it will not be at the hands of the Piketty’s of the world. It will be at the hands of corporate bureaucrats who dishonor their position.
By Bruno Soria October 23, 2014 - 7:08 am
I think that cramming and copyright are completely different issues.
The role of the supplier of the communications platform (be it the network or the device) is totally passive. There are the users who decide to exchange lawful content or otherwise without the carrier or vendor involvement. Furthermore, in many jurisdictions the secret of communications is a constitutional right of users, so that carriers cannot legally monitor what they do with the service. It is hardly understandable that carriers could be held liable for respecting the constitutional rights of their customers.
To the contrary, the role of operators in cramming is an active one, similar to that of a merchant. One would expect a merchant to monitor what is being offered in its shelves, or if it is a mall owner, to somehow control what its tenants do, especially when it is them who are charging the customers. Back in year 2000, when I was in charge of business development of a telecommunications operator in Spain, we decided not to offer this service to our customers because we were not able to find a way to prevent abuses by content providers. We thought that customer satisfaction was more important than some small incremental revenues. I do not think that we lost any end customer for lack of premium content services in our portfolio.