Phillip Dampier

Now that the initial shock of an aggressive — some say “audacious” — move by the Justice Department to block a merger AT&T confidently called “a done deal” is past, analysts of all kinds are attempting to discern the inside reasons for the merger’s rejection, where the deal can go from here, and what signals this will send the rest of America’s telecom industry.

In short — was this one merger proposal too far over the line?

The Justice Department reviewed reams of data, document-dumped by AT&T, on the company’s rationale for wanting to absorb T-Mobile and its implications for employees, consumers, and the dwindling number of wireless competitors.

They quickly discovered they did not like what they were seeing:  an all-new AT&T with a combined 132 million wireless customers, completely dwarfing all of their competitors and signaling a full-scale retreat from the company’s historic landline network.  An unregulated, increasingly concentrated wireless marketplace, represents the Wild West of fat profits, ripe for the picking by those large enough to control the market.  Increasingly, that means two former Baby Bells — AT&T and Verizon.

The Wall Street Journal charted more than two decades of mergers and acquisitions, which reduced nearly two dozen players down to five supersized telecom companies.

The Politics

Decisions at Justice are hardly made in a vacuum.  Politics always plays a role, and it’s a safe bet Obama Administration officials well-above rank-and-file lawyers in the Antitrust Division sent clear signals to the Department about how it wanted the review handled.  After all, this same team of lawyers had almost no trouble approving a mega-merger between NBC-Universal and Comcast Corporation, not finding anything ‘antitrust’ about that deal.  But Justice officials hurried out their own lawsuit with a wide-ranging, harsh condemnation of the deal at yesterday’s press conference.  As most Americans already know, competition in the cable industry is hardly robust, but market concentrating mergers and acquisitions are approved regularly in that industry.  So why did the Justice Department have such a problem with AT&T?

America's Wireless Market: Beyond well-behind, third-place Sprint, no other carrier comes close to AT&T or Verizon Wireless.

Many analysts seem to blame the company’s “arrogance” in telling reporters the merger was a breeze to be approved, others point to spectrum issues, as well as complaints about AT&T’s poor service potentially ensnaring T-Mobile customers.  But above all, Justice lawyers believe that America’s wireless marketplace needs at least four national wireless carriers, particularly scrappy T-Mobile, which has a long history of being a disruptive player in the market, loathe to offer the kind of “identical twin”-pricing common at AT&T and Verizon Wireless.  Losing T-Mobile’s aggressive performance in the market would mean declaring open season for price increases and abusive business practices.  After all, where would wireless consumers go?

That “four national carrier”-test could be a big problem for T-Mobile, as it could mean Justice lawyers would also reject an presumed alternative — combining Sprint and T-Mobile,  rumored before AT&T moved in and stole the show.  A new entrant willing to buy-out Deutsche Telekom’s U.S. wireless interests may be the only palatable solution acceptable to Justice lawyers because it would keep T-Mobile intact and running, independent of other wireless carriers.

Justice also completely discounted the relevance of regional carriers like MetroPCS, Cricket, U.S. Cellular, and other smaller providers.  The reason is simple: roaming.  All of these smaller providers are completely dependent on the four large national carriers to deliver essential roaming services for their customers who travel outside of the regions where these smaller companies deliver service themselves.  All national carriers would have to do to control an overly-competitive “problem” carrier is withdraw roaming agreements or raise prices for them.

Sprint, among others, is obviously the most relieved by yesterday’s events.  Their long term viability as a national carrier dwarfed by AT&T and Verizon Wireless would have raised numerous questions about whether that company could survive in the long term.  Sprint would have also felt pressure to beef up its own operations, likely through acquisitions of several regional carriers, particularly MetroPCS and Cricket, which share its CDMA network standard.

Wall Street is livid, of course.

The great gnashing of teeth has begun on Wall Street, evident as stock analysts begin raising questions about President Obama’s “anti-business” policies.  While executives at both AT&T and T-Mobile are at risk of losing substantial bonuses for pulling the deal off (and providing special retention packages to keep key talent from leaving), there is also a lot of money to be lost in New York and Washington should the deal collapse.  Take the “little people” that will be out tens of millions in deal fees and proceeds from extending credit, implementing the merger itself, and structuring the legal mechanics.  They include:

Arnold & Porter: The now infamous law firm that accidentally posted an un-redacted document on the Federal Communications Commission website that exposed, in AT&T’s own words, what consumer groups already strongly suspected: AT&T preferred the long term benefits of knocking pesky T-Mobile out of the marketplace, even though the $39 billion dollar price tag dwarfed the $4 billion estimated cost of building AT&T’s own 4G LTE network.  That’s the 4G network executives deemed “too expensive” earlier this year.  With a deal collapse, the firm can say goodbye to lucrative legal fees and perhaps more importantly, their reputation of properly managing their clients’ business affairs.

Greenhill & Co.: Greenhill is one of several all-star, platinum-priced advisory firms hired by companies acquiring other companies to structure and implement their mergers.  With Greenhill hoping for a substantial piece of at least $150 million set aside by AT&T to cover these specific costs, a merger-interrupted could cost key people some nice year-end bonuses.

JPMorgan (Chase): The House of J.P. Morgan handed over a check for AT&T worth up to $20 billion to help finance the deal.  JPMorgan doesn’t do that for free.  In addition to any interest proceeds, JPMorgan also charges a range of underwriting and administrative fees that could easily total $85 million dollars.  AT&T might have to send the check back.

Cable Business News & Business Media: One of the most ironic developments watching the Justice Dept. decision unfold was the unintentional amount of AT&T advertising promoting the merger that preceded video reports and appeared adjacent to AT&T-related stories.  Those ads may soon end, costing cable news and the business press substantial ad revenue.

Cable business news networks offered up scathing analyses. Among anchors and analysts upset with the news of the merger’s potential derailment, it didn’t take long for “couched questions” to begin, pondering whether President Obama was against big companies, jobs, or the concept of the private sector in general.  Completely missing: coverage of the benefits for consumers who potentially don’t have to endure a further concentration in the wireless marketplace.

Craig Moffett from Sanford Bernstein, who usually celebrates all-things-cable, today told the Wall Street Journal the actions at Justice will harm business at every U.S. wireless carrier.

“Put simply, the industry will be structurally less attractive than it would otherwise have been,” he said. “Pricing is likely to be less stable, and profound technological risks, including free texting and bandwidth arbitrage, that would be manageable in the context of a significantly consolidated industry now become much more threatening.”

Judge Ellen

In other words, a hegemony of AT&T and Verizon Wireless could play rough with third party developers trying to undercut text message pricing and deliver data plan workarounds. With more competitors, consumers could simply abandon abusive providers.  Without those competitors, consumers have to pay AT&T’s asking price or go without service.

The Law

AT&T may be hoping it scored one potential success in its anticipated legal challenge against the Justice Department’s antitrust case.

The judge assigned to hear arguments is Ellen Segal Huvelle, who has a track record of slapping down government overreach.  Huvelle previously rejected Justice Department objections to the merger of SunGard and Comdisco — two disaster-recovery businesses.  The government argued the merger would leave just two major players in that business.  Judge Huvelle dismissed that, claiming the government too-narrowly defined what a disaster-recovery business entailed.  If she finds AT&T’s arguments of robust competition from regional carriers, landlines, and Voice Over IP credible, Justice lawyers may have a problem.  So could consumers.

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PBS Newshour explores where the AT&T/T-Mobile merger goes next, now that the Justice Dept. sued to stop it on antitrust grounds.  (7 minutes)

Any consumer who has ever paid an early termination contract cancellation fee to a wireless carrier might feel a little satisfaction today knowing AT&T’s languishing deal to acquire T-Mobile comes with its own $3 billion dollar penalty payable to Deutsche Telekom if the merger fails to come to fruition.

Sachin Shah, merger arbitrage strategist with Tullett Prebon Americas Corp., suggests that $3 billion dollar fee (and the spectrum giveaway that goes with it) delivers a real incentive for AT&T executives to find a way to force the deal through, and their next venue will likely be federal court in the District of Columbia to keep the government from getting a preliminary injunction against the merger deal.

For AT&T, any legal action will certainly cost far less than $3 billion dollars, so the company has little to lose rolling the dice trying to find a remedy in a district court that has become increasingly business-friendly.

Shah believes yesterday’s announcement by the Justice Department also provides additional paths for AT&T to consider:

• Renegotiate the deal: AT&T could go back to the bargaining table with T-Mobile and return to the DOJ with an amended proposal it hopes will be more acceptable to the government’s antitrust lawyers;
• Reboot the lobbying campaign: AT&T could claim scuttling the deal will cost American jobs — a particularly sensitive topic with unemployment around 9 percent;
• Re-engage AT&T Employee Unions: The Communications Workers of America are true believers in the AT&T/T-Mobile deal, if only because it is likely to broaden union membership to include T-Mobile workers.  Shah thinks the unions might speak to a more receptive audience among certain union-friendly lawmakers who have also been concerned AT&T will use the merger to clear-cut T-Mobile’s employees.

Shah thinks the Justice Department has not entirely slammed the door shut on AT&T’s proposed merger, and there have been precedents of DOJ lawyers changing their minds.

Meanwhile, the Federal Communications Commission, quieter than a church mouse ever since the deal was announced, apparently found cover from the DOJ decision, and FCC Chairman Julius Genachowski delivered his own “me too” statement hours after the Justice Department announced their lawsuit:

“By filing suit today, the Department of Justice has concluded that AT&T’s acquisition of T-Mobile would substantially lessen competition in violation of the antitrust laws,” Genachowski said. “Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition. Vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile. Competition fosters consumer benefits, including more choices, better service and lower prices.”

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Sachin Shah says the U.S. Justice Department’s lawsuit to block AT&T Inc.’s proposed $39 billion takeover of T-Mobile USA Inc. does not mean the deal is dead.  He speaks with Lisa Murphy on Bloomberg Television’s “Fast Forward.”  (5 minutes)

News Release

Justice Department Files Antitrust Lawsuit to Block AT&T’s Acquisition of T-Mobile

Transaction Would Reduce Competition in Mobile Wireless Telecommunications Services, Resulting in Higher Prices, Poorer Quality Services, Fewer Choices and Fewer Innovative Products for Millions of American Consumers

WASHINGTON – The Department of Justice today filed a civil antitrust lawsuit to block AT&T Inc.’s proposed acquisition of T-Mobile USA Inc.   The department said that the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.

The department’s lawsuit, filed in U.S. District Court for the District of Columbia, seeks to prevent AT&T from acquiring T-Mobile from Deutsche Telekom AG.

“The combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services,” said Deputy Attorney General James M. Cole.   “Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation’s wireless carriers, particularly the four remaining national carriers.   This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition.”

“T-Mobile has been an important source of competition among the national carriers, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice’s Antitrust Division.   “Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer.”

Mobile wireless telecommunications services play a critical role in the way Americans live and work, with more than 300 million feature phones, smart phones, data cards, tablets and other mobile wireless devices in service today.   Four nationwide providers of these services – AT&T, T-Mobile, Sprint and Verizon – account for more than 90 percent of mobile wireless connections.   The proposed acquisition would combine two of those four, eliminating from the market T-Mobile, a firm that historically has been a value provider, offering particularly aggressive pricing.

According to the complaint, AT&T and T-Mobile compete head to head nationwide, including in 97 of the nation’s largest 100 cellular marketing areas.   They also compete nationwide to attract business and government customers.  AT&T’s acquisition of T-Mobile would eliminate a company that has been a disruptive force through low pricing and innovation by competing aggressively in the mobile wireless telecommunications services marketplace.

The complaint cites a T-Mobile document in which T-Mobile explains that it has been responsible for a number of significant “firsts” in the U.S. mobile wireless industry, including the first handset using the Android operating system, Blackberry wireless email, the Sidekick, national Wi-Fi “hotspot” access, and a variety of unlimited service plans.   T-Mobile was also the first company to roll out a nationwide high-speed data network based on advanced HSPA+ (High-Speed Packet Access) technology.  The complaint states that by January 2011, an AT&T employee was observing that “[T-Mobile] was first to have HSPA+ devices in their portfolio…we added them in reaction to potential loss of speed claims.”

The complaint details other ways that AT&T felt competitive pressure from T-Mobile.   The complaint quotes T-Mobile documents describing the company’s important role in the market:

• T-Mobile sees itself as “the No. 1 value challenger of the established big guys in the market and as well positioned in a consolidated 4-player national market”; and
• T-Mobile’s strategy is to “attack incumbents and find innovative ways to overcome scale disadvantages.   [T-Mobile] will be faster, more agile, and scrappy, with diligence on decisions and costs both big and small.   Our approach to market will not be conventional, and we will push to the boundaries where possible. . . . [T-Mobile] will champion the customer and break down industry barriers with innovations. . . .”

The complaint also states that regional providers face significant competitive limitations, largely stemming from their lack of national networks, and are therefore limited in their ability to compete with the four national carriers.   And, the department said that any potential entry from a new mobile wireless telecommunications services provider would be unable to offset the transaction’s anticompetitive effects because it would be difficult, time-consuming and expensive, requiring spectrum licenses and the construction of a network.

The department said that it gave serious consideration to the efficiencies that the merging parties claim would result from the transaction.   The department concluded AT&T had not demonstrated that the proposed transaction promised any efficiencies that would be sufficient to outweigh the transaction’s substantial adverse impact on competition and consumers.   Moreover, the department said that AT&T could obtain substantially the same network enhancements that it claims will come from the transaction if it simply invested in its own network without eliminating a close competitor.

AT&T is a Delaware corporation headquartered in Dallas.   AT&T is one of the world’s largest providers of communications services, and is the second largest mobile wireless telecommunications services provider in the United States as measured by subscribers.   It serves approximately 98.6 million connections to wireless devices.   In 2010, AT&T earned mobile wireless telecommunications services revenues of $53.5 billion, and its total revenues were in excess of $124 billion.

T-Mobile, is a Delaware corporation headquartered in Bellevue, Wash.   T-Mobile is the fourth-largest mobile wireless telecommunications services provider in the United States as measured by subscribers, and serves approximately 33.6 million wireless connections to wireless devices.   In 2010, T-Mobile earned mobile wireless telecommunications services revenues of $18.7 billion.   T-Mobile is a wholly-owned subsidiary of Deutsche Telekom AG.

Deutsche Telekom AG is a German corporation headquartered in Bonn, Germany.   It is the largest telecommunications operator in Europe with wireline and wireless interests in numerous countries and total annual revenues in 2010 of €62.4 billion.

Download a copy of the Complaint (PDF)

 

Deputy Attorney General James M. Cole Speaks at the AT&T/T-Mobile Press Conference

Washington, D.C. ~ Wednesday, August 31, 2011

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Good morning.   Millions of Americans rely on mobile wireless telecommunications services in their everyday lives.   Whether you are a parent using a cell phone to check up on your teenager or a working professional using a laptop or smart phone to conduct business or surf the web, mobile wireless communications plays a vital – and increasing – role in our daily lives.

We all reap the benefits of this incredible technology because there has been fierce competition in this industry, which has brought all of us innovative and affordable products and services.

Cole

In order to ensure that competition remains and that everyone – including consumers, businesses and the government – continues to receive high quality, competitively priced mobile wireless products and services, the Department of Justice today filed an antitrust lawsuit in U.S. District Court in Washington, D.C. to block AT&T’s acquisition of T-Mobile.

The Department filed its lawsuit because we believe the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for their mobile wireless services.

Consumers across the country, including those in rural areas and those with lower incomes, have benefitted from competition among the nation’s wireless carriers, particularly the four remaining national carriers.   This lawsuit seeks to ensure that everyone can continue to reap the benefits of that competition.

Right now, four nationwide providers account for more than 90 percent of the mobile wireless connections in America, and preserving competition among them is crucial.   For instance, AT&T and T-Mobile currently compete head-to-head in 97 of the nation’s largest 100 cellular marketing areas.   They also compete nationwide to attract business and government customers.   Were the merger to proceed, there would only be three providers with 90 percent of the market, and competition among the remaining competitors on all dimensions—including price, quality, and innovation—would be diminished.

As can be seen in the Department’s complaint, AT&T felt competitive pressure from T-Mobile.   One example cites an AT&T employee observing that “[T-Mobile] was first to have HSPA+ devices in their portfolio…we added them in reaction to potential loss of speed claims.”

So as you can see, a merged AT&T and T-Mobile would combine two of the four largest competitors in the marketplace, and would eliminate T-Mobile, an aggressive competitor, from the market.

Although there has been a leadership change in the Antitrust Division, one thing has not changed – the Division will remain steadfast in its mission to vigorously enforce the antitrust laws.

And that’s what the Department has done today.   The leadership transition has been seamless and the right decision was reached in this case.

We are seeking to block this deal in order to maintain a vibrant and competitive marketplace that allows everyone to benefit from lower prices and better quality and innovative products.

I want to express my own deep gratitude for the efforts of so many members of the Antitrust Division staff who have tremendous expertise in this important industry.   And Sharis, I want to thank you for your leadership in this effort.   You and your team have done the right thing for consumers.

And now, Acting Assistant Attorney General Sharis Pozen will say a few words.

 

Acting Assistant Attorney General Sharis A. Pozen Speaks at the AT&T/T-Mobile Press Conference

Washington, D.C. ~ Wednesday, August 31, 2011

Thank you, Jim.   And thank you for your leadership and support on this case.

As the Deputy Attorney General mentioned, this is an extremely vital industry with more than 300 million feature phones, smart phones, data cards, tablets, and other mobile wireless devices in service today.   As you are well aware, the Department of Justice has significant experience in this industry going as far back as the original breakup of AT&T.   We know this industry well—inside and out.

Here, the Antitrust Division conducted an exhaustive investigation.   We conducted dozens of interviews of customers and competitors, and we reviewed more than 1 million AT&T and T-Mobile documents.   The conclusion we reached was clear.   Any way you look at this transaction, it is anticompetitive.   Our action today seeks to ensure that our nation enjoys the competitive wireless industry it deserves.

Sharis (Courtesy: Main Justice)

T-Mobile has been an important source of competition among the national carriers through innovation and quality enhancements.   For example, T-Mobile rolled-out the first nationwide high-speed data network using advanced HSPA+ technology and the first handset using the Android operating system.   It has also been an important source of price competition in the industry.   Unless this merger is blocked, competition and innovation in the mobile wireless market, in the form of low prices and innovative wireless handsets, operating systems, and calling plans, will be diminished—and consumers will suffer.

T-Mobile competes with the other three national providers to attract individual consumers, businesses, and government customers for mobile wireless telecommunications services. They compete on price, plan structure, network coverage, quality, speed, devices, and operating systems.   A combination of AT&T and T-Mobile would eliminate this price competition and innovation.   It would reduce the number of nationwide competitors in the marketplace from four to three.   Eliminating this aggressive competitor, which offers low pricing and innovative products, would hurt consumers, businesses, and government customers that rely on a competitive marketplace to provide them with the best products at the best possible price.

It is important to move expeditiously to preserve the lower prices and innovation resulting from T-Mobile’s competitive presence in this market.   That’s why we filed a lawsuit to block this transaction—our goal is to preserve price competition and innovation in this important industry.

I want to thank the Division’s Deputies for their expertise and counsel.   And I want to especially recognize the Telecommunications staff led by Chief Laury Bobbish and the many others in the Division for their tireless work on this important matter.   Consumers and businesses around the country owe you a great deal of thanks.   We also want to thank our partners in law enforcement, including the Federal Communications Commission and the state Attorneys General who have assisted and partnered with us in our investigation.

The U.S. government has filed a lawsuit to block a $39 billion dollar merger deal between AT&T and T-Mobile USA, citing substantially reduced competition for American cell phone customers.

“AT&T’s elimination of T-Mobile as an independent, low-priced rival would remove a significant competitive force from the market,” the Justice Dept. said in its filing.

“We are seeking to block this deal in order to maintain a vibrant and competitive marketplace that allows everyone to benefit from lower prices and better quality and innovative products,” said James M. Cole, deputy attorney general.

News that the merger could be ultimately blocked by the Justice Department caused AT&T and T-Mobile shares to lose as much as seven percent of their value.  But shares of competitor Sprint, considered the most vulnerable remaining competitor to AT&T and Verizon Wireless are soaring this morning by more than seven percent.

Cole’s statement was harsh in its condemnation of the merger’s benefits touted by AT&T:

The Department filed its lawsuit because we believe the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for their mobile wireless services.

Consumers across the country, including those in rural areas and those with lower incomes, have benefitted from competition among the nation’s wireless carriers, particularly the four remaining national carriers.   This lawsuit seeks to ensure that everyone can continue to reap the benefits of that competition.

Right now, four nationwide providers account for more than 90 percent of the mobile wireless connections in America, and preserving competition among them is crucial.   For instance, AT&T and T-Mobile currently compete head-to-head in 97 of the nation’s largest 100 cellular marketing areas.   They also compete nationwide to attract business and government customers.   Were the merger to proceed, there would only be three providers with 90 percent of the market, and competition among the remaining competitors on all dimensions—including price, quality, and innovation—would be diminished.

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Bloomberg News delivered the breaking news that the Department of Justice would oppose the merger of AT&T and T-Mobile on antitrust grounds.  (2 minutes)

The deal falling through would cost AT&T a $3 billion dollar failed deal breakup fee, and a parting gift of wireless spectrum to T-Mobile USA, a unit of Deutsche Telekom AG.

Observers suggest part of the reason for the rejection may have been an attempt by the Obama Administration to draw a line in the sand for the size of large mergers and acquisitions it will tolerate.  The antitrust division of the Dept. of Justice has recently become more aggressive in reviewing large corporate merger transactions, and had the Administration approved the deal between AT&T and T-Mobile, the acceptance of permitting two companies to control the majority of wireless customers would have arguably meant virtually any merger deal would have passed muster, regardless of the implications of concentrated market share.

Traditionally, opposition from the Dept. of Justice spells doom for most merger proposals.  But AT&T is no ordinary corporate entity.  In addition to being confident enough to agree to a $3 billion breakup fee and giving away valuable spectrum should the deal fail, AT&T’s lobbying efforts and legal budget are unparalleled, and the company may decide to fight to preserve the deal using political and legal channels.  The terms of the merger could also be renegotiated, agreeing to spin off more customers to reduce market share, or compromising on consumer protections or other givebacks.

But for most companies, opposition from the government’s antitrust division is a high hurdle to overcome, and many won’t even try.

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CNBC delivered the stunned reaction among its own anchors and telecommunications industry analysts about the Justice Department’s strong objections to the proposed merger.  Many on Wall Street predicted this was a ‘done deal.’  (12 minutes)

Should AT&T and T-Mobile abort the deal, that doesn’t necessarily guarantee Americans will still have four major carriers to choose from.  Deutsche Telekom maintains a strong interest in selling off T-Mobile USA, and has reduced investment in the company.  That could renew rumors of a merger deal between T-Mobile and Sprint.

AT&T executives as late as this morning seemed to have no advance warning of the Justice Department’s decision.  CEO Randall Stephenson spent much of his morning suggesting AT&T would hire thousands of call center workers as a result of the merger.

After learning of the impending lawsuit, AT&T released a statement: “We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated,” the statement said. “The DOJ has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court.”

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CNBC reporters and analysts react to the impact the Justice Department’s objections are having on the entire telecommunications business sector.  The question now being pondered at AT&T: Will it fight for the deal or will it fold?  (5 minutes)

Thanks to a divided 5-4 decision by the U.S. Supreme Court, customers trying to seek relief from unilateral fees and surcharges suddenly showing up on their Verizon cell phone bills will have to pursue individual arbitration claims with the cell phone company instead of joining forces in a class arbitration claim.

That Supreme Court case, AT&T Mobility v. Concepcion, is turning out to benefit Verizon Wireless as much as AT&T, because the Supreme Court found merit in contracts obligating customers to seek individual arbitration to settle differences while forbidding customers from pursuing organized legal action.

Now the 3rd U.S. Circuit Court of Appeals in Philadelphia has reversed an earlier ruling, reinstating a 2008 decision by U.S. District Judge Freda Wolfson that delivered victory to Verizon Wireless.

At issue was Verizon’s decision in October 2005 to unilaterally impose an “administrative fee” of $0.40 and/or $0.70, as part of the monthly charges for each Verizon cell phone line.  Customers upset with the new fees felt they violated the principle that, as part of their two year contracts, Verizon would deliver a fixed-price service.  The cell phone company has since implemented a variety of fees and surcharges on customers that are pocketed by Verizon, regardless of the contract price.

All Verizon Wireless customers are obligated by contract to challenge any terms and conditions they disagree with through an arbitrator of Verizon’s choosing, at a place also chosen by the company.  That means Verizon could place an arbitrator on retention in a city potentially thousands of miles away, and demand the customer make their case there, to an arbitrator whose livelihood ultimately depends on retainer fees paid by the company.  Few consumers would make such a journey to protest a fee that amounts to less than $10 a year per line.

Lawyers Keith Litman and Robert Wachtel, representing Verizon customers, decided to try a different approach — a class action arbitration.  The two attorneys would represent potentially millions of impacted customers themselves, making any travel cost concerns incidental, and providing a seasoned challenge before arbitrators, who would also hear counter-arguments from Verizon’s own legal team.

Verizon’s attorneys argued such class action arbitration was specifically forbidden in the company’s contract with customers.  Normally, a judge might decide at that point a customer agreeing to those terms and conditions was effectively up the creek.  But a series of legal challenges in circuit courts opened the door to invalidating those terms.

Litman and Wachtel argued that because the New Jersey Supreme Court, in Muhammad v. County Bank of Rehoboth Beach, Del. (2006), has held that an arbitration provision in a consumer contract that precludes class arbitration of low-value claims is unconscionable under New Jersey law, similarly, the arbitration provision in Verizon’s contract is also unenforceable.

Unfortunately for the two attorneys representing consumers, the decision by the U.S. Supreme Court effectively overrode that case, leaving Verizon on top with Judge Wolfson’s 2008 decision.

Wolfson

Wolfson’s written ruling on the case seemed unimpressed with claims that Verizon’s fees were unconscionable:

In this case, Plaintiffs are customers who chose Verizon as their wireless provider at least four years ago and continue to use Verizon today. They signed the customer Agreement with the arbitration clause and agreed to subsequent terms of service as added by Verizon. Plaintiffs do not allege that they did not understand the Agreement that they voluntarily entered into nor do they allege fraud or misrepresentation. The parties agreed “to settle [their] disputes . . . only by arbitration,” and the “agreement doesn’t permit class arbitration.” Therefore, [federal law] requires this Court to uphold the arbitration provision within Plaintiffs’ service Agreement.

But Judge Wolfson did recognize the effective impact of her decision:

“The Court recognizes the many hardships visited upon plaintiffs, such as in this case, based upon this ruling. First, it creates the opportunity for a different result depending on whether the case is brought in federal or state court. Second, it is also clear that compelling individual arbitration in this case will be tantamount to ending the Plaintiffs’ pursuit of their claims, as there is very little possibility that these Plaintiffs or any other plaintiff will pursue individual arbitration for claims that amount only to several dollars in damages. While this outcome is harsh, this Court is bound by Third Circuit precedent.”

Lately, Verizon Wireless customers have been seeking other forms of relief when Verizon unilaterally changes or implements new fees or surcharges.  Many are invoking the “materially adverse” clause found in Verizon’s terms and conditions, which theoretically allows customers to exit their contracts penalty-free if they do not agree to the changes Verizon is imposing on customers.  Verizon Wireless appears to be increasingly aggressive in fighting these claims, too, refusing to allow customers to leave without stiff early termination fees.  That may become the subject of another lawsuit at some point in the future.