This afternoon, the Federal Communications Commission released a settlement with Verizon Wireless in the so-called “mystery fee” investigation, and as a result Verizon will be paying a total of at least $77 million in refunds and to the federal treasury. While the settlement is focused on Verizon’s fees for casual use of wireless data service, it may provide some guidance on truth in billing issues, and also suggests how the FCC may address consumer issues under the National Broadband Plan. The press release is available on the FCC’s web site at http://www.fcc.gov/Daily_Releases/Daily_Business/2010/db1028/DOC-302489A1.pdf, the consent decree describing the terms of the settlement is at http://www.fcc.gov/Daily_Releases/Daily_Business/2010/db1028/DA-10-2068A2.pdf and the order adopting the settlement is available at http://www.fcc.gov/Daily_Releases/Daily_Business/2010/db1028/DA-10-2068A1.pdf

OVERVIEW

The “mystery fee” investigation concerned fees for access to data services that showed up on Verizon customer bills without warning. These fees were imposed on “pay-as-you-go” customers (that is, customers who had not signed up for data plans), and approximately 15 million customers were affected. The charges were imposed for a variety of reasons, including data access via games that were built into the customers’ phones; unsuccessful attempts to access the data network when there wasn’t good enough coverage; and accessing web links that had been designated as free of charge, including Verizon’s own mobile homepage.

While Verizon did not admit to any wrongdoing, it did agree to refund at least $52.8 million to customers who were subjected to the fees and to pay $25 million to the U.S. Treasury. The payment to the Treasury is a record in an FCC consent decree. Verizon also may be required to make additional refunds if more customers complain. By entering into a consent decree, Verizon Wireless avoided having the FCC impose a fine for its behavior, and the FCC avoided questions about its ability to regulate Verizon’s wireless data services.  

THE FEES

The fees that Verizon imposed on its customers were for casual access to data services, that is, access by customers who had not purchased data plans. As a result, this settlement does not address questions about overage charges or any other charges that result when a customer has purchased data service on a monthly basis.

Most of the actual charges appear to have occurred when customers used software built into their phones that, without the customers’ knowledge, made use of the Verizon data network. In these cases the customers often did not know about the data access until they received their bills. Customers also were charged for services that were advertised as free, including access to the Verizon Wireless mobile web site, and for access that was supposed to be blocked by filtering services.

In addition, some charges were imposed when customers attempted to get access to the data network, but were unsuccessful because there was insufficient signal strength. In these cases, it appears that the customers succeeded in getting just enough access to be charged for it, without getting the information or services they were trying to reach.  

After a months-long investigation, Verizon estimated that the total charges in these cases were $52.8 million. Approximately 15 million customers were affected over a three year period.

THE SETTLEMENT

The settlement has four major elements – financial penalties, steps to prevent future unauthorized charges, customer education and ongoing compliance requirements. The headline for most purposes will be the amount of the refunds and the payment to the Treasury. However, the settlement also requires Verizon to modify its practices in significant ways, and those requirements potentially could be applied in other contexts going forward.

Financial Penalties

Verizon agreed to make two types of payments. First, it will make a voluntary payment of $25 million to the U.S. Treasury. This payment is in lieu of a fine. While this is by far the largest voluntary payment ever made in an FCC consent decree, it is about $1.60 for each affected customer, and less than half of the overcharges that Verizon agreed had occurred. In comparison to fines imposed by the FCC for repeated violations of some of its rules, such as in the context of slamming, this is a small payment on a per-violation basis.

Verizon also agreed to pay at least $52.8 million in refunds to the customers affected by the improper charges. These payments will go to any affected customer who has not already received a refund, and for current customers will appear on their October or November bills. (Former customers will get checks.) Verizon has committed to make additional refunds if it discovers “additional categories” of customers who were mistakenly charged.

In addition, customers who believe they are entitled to refunds but do not receive them may ask for credits. Because Verizon likely already has refunded some charges during the course of the investigation and because it is likely that customers will emerge who are not already receiving refunds, it is reasonable to expect that Verizon’s final refund total will be substantially higher than $52 million.  

Preventing Future Unauthorized Charges

Two parts of the settlement address elimination of future unauthorized charges. First, the settlement requires Verizon to give many of its pay-as-you-go customers a limited allowance of data service – 50 kilobytes – at no additional charge. Presumably the purpose of this allowance is to eliminate charges when customers do not succeed in connecting to the data network or otherwise make minimal or unintended use of the network.  

The next basic element concerns Verizon’s customer service representatives. They are, among other things, required to be trained to understand how data charges work; to be monitored for their responses to data-related issues; and required to offer data blocking to customers who ask how to avoid or reduce data charges.  

Interestingly, the settlement does not address software that uses data service without telling customers or the imposition of charges for “free” services. While the press release implies that these charges were unreasonable, the absence of any specific discussion of them in the consent decree leaves the permissibility of these charges open for debate.  

Customer Education

The settlement also includes a substantial customer education element. First, Verizon is required to post information on “how PayGo customers can manage their data usage, including the availability of data blocks” in “an easily-accessible location on its website.”  

Verizon also will be required to provide customers with “a plain-language description” of how data charges are imposed; where more information is available; and how they can track their usage. This information must be included in bill inserts for existing customers and in the welcome letter for all new pay-as-you-go customers.  

Finally, Verizon will be required to create an online “bill tutorial,” which will explain how different types of charges are reflected on customer bills and how customers can obtain additional information on those charges. Like the information on managing data usage, he tutorial must be placed “in an easily-identifiable location” on the Verizon web site.  

Ongoing Compliance

As is the case in most consent decrees, this one includes provisions to ensure that Verizon continues to comply with its obligations going forward. First, it includes what is essentially a standard provision requiring periodic reports to the FCC over a two-year period. The reports must describe Verizon’s efforts to comply with the settlement and any failure to do so.  

Second, the settlement takes the more unusual step of creating a Data Charge Task Force. The task force will for review refund requests that have been denied; review complaints about data charges; and ensure that customer service staff is aware “of any widespread or systemic billing errors relating to per MB data usage charges.”  

The task force also will review and respond to every complaint about per-use data charges filed with the FCC, a state commission, a state attorney general or the Better Business Bureau; and will file periodic reports on those complaints and its responses with the FCC. One consequence of this reporting requirement will be that the FCC will be made aware of any pattern of customer complaints relatively quickly, which will increase the FCC’s ability to respond or seek additional information from Verizon.  

IMPLICATIONS

An FCC consent decree binds only the party that enters into the agreement. Still, consent decrees can shed light on what issues the FCC considers important. There can be little doubt that the FCC intended for this settlement to send a message to the wireless industry and, most likely, the telecommunications industry as a whole.  

That message is that the FCC is concerned about surprising and concealed charges on customer bills. While the order and consent decree do not address the question of whether the specific charges were permitted by the FCC’s rules (or even by Verizon’s customer agreement), it is apparent that the FCC believed that the charges were unjustified and, perhaps more important, imposed on customers who had no good way of knowing that they would be charged.  

The FCC’s reaction to Verizon’s practices is reminiscent of its response to cramming, the practice of adding charges for services customers did not order to their telephone bills. This reaction raises the question of whether the FCC will insist on more transparency in its existing proceeding on truth in billing and when it takes up consumer protection issues as part of its implementation of the National Broadband Plan.  

The results of this investigation also could make the FCC more suspicious about carrier practices that have become increasingly common, including the addition of regulatory fees and other fees that are not disclosed explicitly in price advertising and customer agreements. The FCC has been asked to address these fees in the past, and as they become more common the pressure to react may become greater.

Finally, the FCC’s aggressive stance in this case further demonstrates its determination to maintain authority over data services. Wireless providers have argued that their data services are not subject to the same rules as their voice services and that data services should be treated as information services. The FCC never has adopted this position. The investigation and the negotiation of the consent decree are further evidence that the FCC does not intend to walk away from regulation of wireless data services and, by implication, wireless broadband. Indeed, Verizon’s willingness to make such a large voluntary payment suggests that it may have been concerned that the FCC would use this case to assert broad authority over wireless data services.