Economics and Technology, Inc. -- Views and News, April 2011

April 2011

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Supreme Court wipes out last vestige of consumer protection in the wireless market

The April 27 US Supreme Court decision in AT&T Mobility LLC v. Concepcion broadly eliminates the consumer protection of being permitted to sue collectively as a class when arbitration clauses and class action waivers are included in adhesion contracts. Separate and apart from its economywide implications, Concepcion literally stems from and directly affects the wireless telephone and data industry. Had the decision been handed down in 1985, the effect on wireless consumers might have gone largely unnoticed. Back then, wireless telephone service was quite expensive and was generally viewed as a luxury – only some 340,000 people had wireless phones nationwide. Wireless services were also pervasively regulated by state public utility commissions, with wireless carriers required to file tariffs subject to regulatory review and scrutiny. The presence of filed tariffs superseded any bilateral agreement between the customer and carrier and, for the most part, what we now know as "customer service agreements" ("CSAs") were still many years off in the future.

Like many products and services provided to consumers and other individual purchasers, wireless CSAs fall into the category of so-called "adhesion contracts." An adhesion contract is one in which the seller provides the buyer with a non-negotiable form agreement that the buyer must either accept as presented and in its entirety or forgo the product or service being offered – in effect, a "take it or leave it" offer. Prior to the elimination of most wireless services regulation, the terms of service were set forth in filed tariffs, and consumers could bring disputes before the appropriate state or federal regulatory agency. Proponents of deregulation argued that the wireless industry had become sufficiently competitive that consumers could rely on the competitive marketplace to protect them from provider abuse, and could always "vote with their feet" in the event that the service or their relationship with the service provider became unsatisfactory. Whatever the state of competition had been at the time that such deregulation initiatives were being pursued, today's wireless market is anything but competitive, and is becoming even less so by the minute (see below).

Wireless services are no longer a luxury. There are now more than 302-million wireless phones in the US out of a total population of 311-million (i.e., a 97% penetration rate), and more than 26% of all US households have "cut the cord" and now rely on wireless as their only connection to the public telephone network. Whereas wireless started out as a luxury, it must now be viewed as an essential service, especially for the 80+ million Americans that are "wireless only." Yet this essential service remains unregulated, with the extent of consumer rights confined to the four walls of the substantively identical adhesion contracts being used by all major US wireless carriers.

Up until this latest Supreme Court ruling, the principal surviving consumer protection mechanism was the class action lawsuit. Most individual consumer disputes with wireless carriers involve relatively small dollar amounts, usually well below $200, and certainly far too small to justify the expense of individual litigation. The specific dispute with AT&T Mobility at issue in the Concepcion case amounted to roughly $30. Although most wireless service agreements had routinely contained provisions requiring customers to resolve disputes through arbitration and expressly prohibiting class action lawsuits, up to now those provisions have typically been rejected by courts as unconscionable and hence unenforceable. California went so far as to enact legislation expressly prohibiting the inclusion of such arbitration/anti-class action provisions in consumer agreements. But by a 5-4 decision, the US Supreme Court has now upheld these contract provisions, shutting down most future – and some ongoing – wireless class action litigation.

The Concepcion decision in today's wireless marketplace

Whether by design or accident, the major wireless carriers have engaged in practices that have been sufficiently widespread in their impact as to prompt a great deal of class action litigation. The challenged conduct has included the imposition of flat rate early termination penalties, locking of handsets to block their use on a different carrier's network, the method of timing calls and billing for unanswered calls, among others. Were wireless rates, terms and conditions subject to active regulation, such issues would have been addressed and resolved by regulatory bodies. In the wake of the Concepcion case, however, consumers are now effectively being denied access to the one remaining legal remedy – to economically litigate claims as a class where a company has set out "to deliberately cheat large numbers of consumers out of individually small amounts of money." In his dissent, Justice Breyer put it simply: "What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?" But the majority in Concepcion confirms that federal law allows AT&T, Verizon, and other wireless service providers to circumvent class actions by virtue of their being able to require consumers to agree to adhesion contracts with onerous terms that limit a consumer's legal options. Consumers are not permitted to negotiate these contracts, nor can they "vote with their feet" because all of the major carriers include similar arbitration clauses and class action waivers in their terms and conditions. Even carriers like MetroPCS that have "broken rank" with industry practice by not requiring term contracts to obtain service, still force subscribers to agree to contract provisions requiring arbitration and waiving class action rights. Marketplace forces have clearly not worked to compel any wireless carrier to offer more consumer-friendly agreements.

Is it finally time to reregulate wireless?

A more precise characterization of the regulatory status of wireless services is that they are unregulated, not deregulated. This is an important, albeit perhaps subtle, distinction. The FCC, pursuant to Title III of the Communications Act as amended (by, among other things, the 1993 Omnibus Budget Reconciliation Act that transferred jurisdiction over wireless rates from the states to the FCC, and by the Telecommunications Act of 1996), maintains full regulatory jurisdiction with respect to wireless rates. State commissions have jurisdiction with respect to wireless terms and conditions and other consumer protection issues. The FCC and most state commissions have chosen to forbear from exercising their regulatory authority in this sector, but such forbearance can be – and certainly should be – revisited in light of the "perfect storm" of the essential nature of wireless communication, the escalating concentration in the wireless market that is about to be increased as a result of the pending AT&T/T-Mobile merger, and now the Concepcion ruling by the Supreme Court.

While a generic review of current forbearance policy is certainly warranted, the pending merger affords an even more immediate opportunity for regulators to step in where the market has failed to provide a check on wireless carrier market power. AT&T has acknowledged that it will likely have to make concessions in order for regulators to approve the transaction. An obvious merger condition will be the divestiture of overlapping wireless properties in markets where AT&T and/or T-Mobile already have market power. Another condition that regulators should consider would be a voluntary agreement from AT&T and T-Mobile that the post-merger company will forgo class action waivers in its standard form consumer contracts. And, in view of the "highly concentrated" nature of the US wireless market that will exist post-merger, a more general reinstatement of regulatory oversight with respect to rates, terms and conditions is also warranted.

The FCC will also be releasing additional spectrum for use by CMRS carriers – including, potentially, existing TV channels that are under consideration for redeployment to wireless. Spectrum auctions can be used both to limit market concentration (by restricting the amount of spectrum in any market that can be owned by any one carrier) as well as by linking the availability of spectrum to carrier acceptance of other conditions, such as (in this instance) a commitment not to include class action waivers in their CSAs.

The wireless industry has been extraordinarily successful in promoting its self-interests through the regulatory and political processes. In the beginning, many of the concessions it received were rationalized under a nascent industry theory. More recently, policies such as regulatory forbearance and de facto deregulation have been rationalized on the notion that the wireless market is intensely competitive. Facts and realities have proven both of these claims to be inapposite and incorrect. As a start, the AT&T/T-Mobile merger should not be permitted to go forward. But whether or not it is allowed – and especially if it is – policymakers need to recognize that deregulation and nonregulation simply don't apply here, and need to implement effective measures to constrain the market power of the few incumbents that remain.

For more information, contact Colin B. Weir at cweir@econtech.com

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About ETI. Founded in 1972, Economics and Technology, Inc. is a leading research and consulting firm specializing in telecommunications regulation and policy, litigation support, taxation, service procurement, and negotiation. ETI serves a wide range of telecom industry stakeholders in the US and abroad, including telecommunications carriers, attorneys and their clients, consumer advocates, state and local governments, regulatory agencies, and large corporate, institutional and government purchasers of telecom services.