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April 25, 2013 at 10:51 AM

State AG rips T-Mobile for deceptive “no contract” ads

So much for the home court advantage.

Washington state’s attorney general, Bob Ferguson, has ordered Bellevue-based T-Mobile USA to correct what he called deceptive advertising of its new “No Contract” plans.

The “No Contract” plans are the signature element of T-Mobile’s reorganization and rebranding as the “un-carrier.” Its new chief executive, John Legere, announced the plans in a March 27 event during which he lambasted other carriers for obnoxious billing practices and hidden charges.

But T-Mobile also has a hidden fee in its plans, charging customers for early termination of their T-Mobile contracts, according to Ferguson’s office.

Details of the plans were clearly more complicated than implied – as this FAQ indicates – and terms were disclosed in the fine print. Ferguson’s issue was with how the plans were characterized by T-Mobile’s advertising.

“In our view those advertisements were quite deceptive,” he said in a conference call this morning.

In an unusual twist, T-Mobile was represented in the dispute by Rob McKenna, the previous state attorney general. McKenna is now in private practice, after running for governor last year.

From Ferguson’s press release:

After an investigation of the company’s practices, the Attorney General’s Office learned that the company failed to disclose that customers who purchase a phone using the 24-month payment plan must carry a wireless service agreement with T-Mobile for the entire 24 months— or pay the full balance owed on phone if they cancel earlier.

Consumers who cancel their wireless service face an unanticipated balloon payment for the phone equipment – in most cases higher than termination fees for other wireless carriers depending on how early they cancel. Instead of a “two-year sentence” for wireless service, consumers face a different two-year “sentence” to avoid a lump-sum balloon payment for the phone.

The issue involves T-Mobile’s switch to an unsubsidized approach to phone hardware. It’s the first major carrier to separate hardware and service costs, selling phones at full price instead of folding their cost into service plans. Customers pay the full price of the phone upfront or through payment plans. For phone service, they pay month to month, without a two-year obligation.

Legere’s pitch is that this approach is more transparent. Customers will also pay less for wireless after the hardware is paid off, rather than perpetually paying a monthly rate with hardware costs folded in. But they’re not really “No Contract” plans if you end up locked into a hardware payment plan.

Asked for comment on the state action, T-Mobile provided the following statement:

As America’s Un-carrier, our goal is to increase transparency with our customers, unleashing them from restrictive long-term service contracts  – this kind of simple, straight forward approach  is core to the new company we are building.  While we believe our advertising was truthful and appropriate, we voluntarily agreed to this arrangement with the Washington AG in this spirit.

Under an “assurance of discontinuance” settlement filed in King County Superior Court, T-Mobile promises to “clearly communicate the limitations of its new ‘no-contract’ wireless service plans,” Ferguson’s office said in its release.

The company did not admit to breaking the law but agreed to stop what Ferguson’s office characterized as misrepresentations that customers can get wireless service and hardware without restrictions. It also agreed to clearly disclose that customers must pay the balance due on hardware if they cancel before paying off their phones. The agreement applies nationally.

Customers who were “duped by the deceptive ads” will also be able to exit their contract with no penalty.

“As Attorney General, my job is to defend consumers, ensure truth in advertising, and make sure all businesses are playing by the rules,” Ferguson said in the release. “My office identified that T-Mobile was failing to disclose a critical component of their new plan to consumers, and we acted quickly to stop this practice and protect consumers across the country from harm.”

T-Mobile customers who entered contracts between March 26 and April 25 may now obtain a full refund for equipment and cancel plans without being required to pay the remaining balance on the hardware. T-Mobile will notify eligible customers and give them 30 days to respond, said Paula Selis, an attorney in Ferguson’s office.

T-Mobile cooperated with Ferguson’s office and will pay $26,046.40 toward its legal fees.

No consumers had yet complained about the advertising, which caught the eye of the attorney general’s office. Selis said the office tries to proactively protect consumers, who might not have realized there were potentially additional charges.

“The way we learned about this was seeing the advertising and thinking, gee, there has to be a hitch here, this is too good to be true,” she said.

Additional details referred to in footnotes weren’t adequate.

“There were disclosures that were not easily understood in the so-called fine print,” she said. “You had to dig very deeply to understand what the terms of the program were and put two and two together.”

Asked by a Seattle technology columnist whether the AG’s office will be similarly proactive about ads promising 4G LTE wireless service in areas where the service is not yet available, Selis said “that’s not something that’s in front of us as an issue right now.”

Comments | Topics: No Contract, Phones, Public policy


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