The watchdog is seeking $10 million each from Bell (TSX:BCE), Rogers (TSX:RCI.B) and Telus (TSX:T) and $1 million from the Canadian Wireless Telecommunications Association.
The industry, for its part, says the bureau is going after the wrong target and that its suit could have a chilling effect on e-commerce.
The so-called short-codes enable users to do anything from make charitable donations, to pay for parking or to vote for contestants on "So You Think You Can Dance" from their phones. There are some 700 such codes in use in Canada.
The bureau says premium services — it cites trivia questions and ringtones as examples — can cost up to $10 per transaction and up to $40 for a monthly subscription over and above standard texting plans.
"Our investigation revealed that consumers were under the false impression that certain texts and apps were free," said bureau commissioner Melanie Aitken.
"Unfortunately, in far too many cases, consumers only became aware of unexpected and unauthorized charges on their mobile phone bills."
In addition to the financial penalties, the Competition Bureau also wants full refunds for customers, a stop to advertisements that don't clearly disclose the price of the premium-rate digital content and a "corrective notice" informing the public about any order issued against them.
The suit, which follows a five-month investigation, is before the Ontario Superior Court of Justice. The allegations have yet to be proven in court.
While the case currently names the three companies and the CWTA, bureau spokesman Bryan Parker said the investigation is ongoing. He said the companies named in the suit get a slice of the revenues from the services.
The CWTA said the wireless carriers don't make or control the text messaging services in question, but manage the billing on behalf of third-party creators and operators.
"It's as if any newspaper in Canada could be now sued for misrepresentation of ads that were placed in their newspapers," said Bernard Lord, CEO of the industry association.
While most developers of third-party services are above-board, the industry acknowledges some have behaved badly. The industry approached the Competition Bureau a year ago for guidance on how to crack down on the bad apples and protect consumers.
"We were willing to offer our help and instead they came around and came after the carriers and ourselves, which is a bit ironic," said Lord.
Third-party providers apply to the CWTA for a short-code, and then it's up to the individual companies to decide whether to allow them to use their network, he said.
Parker said there was a great deal of communication between the bureau and the three companies and CWTA leading up to the announcement Friday.
"It's just that we couldn't come to an acceptable agreement that adequately addressed that ongoing consumer harm," he said.
Telus Corp. (TSX:T) at one time considered scrapping short-code services from its network altogether, but in the end decided the benefits outweighed the negatives, company spokesman Shawn Hall said.
He said the Vancouver-based company has a number of safeguards in place, including a "double opt-in" system that forces customers to click twice when signing up for a service. It also sends out a notice after a customer racks up more than $100 in premium-text charges and forgives charges the first time someone complains about being unfairly charged for text services.
Hall said the Competition Bureau's action doesn't get to the root of the problem, which is that some third-party developers are tricking customers.
"Unfortunately the effect of this action might well be that we have no choice but to stop allowing premium text message services on our network at all," he said.
"These are valuable services that millions of Canadians enjoy."
Rogers spokeswoman Patricia Trott said the company is "disappointed" the Competition Bureau has decided to take legal action.
"We want to do the right thing for customers," she said in an emailed statement. "In 2011, we recognized that some customers might be confused about premium text services and the industry worked proactively to make changes to improve industry-wide standard."
Rogers gives customers the choice to block new premium text programs and offers an itemized list of charges on invoices, she said.
"We don't approve any new third party premium SMS program that has a contest or prizing element. If there are problems with a specific short code, we block that program, and if a third party doesn't abide by the rules, we terminate the relationship."
A Bell spokeswoman directed questions to the CWTA.
Carmi Levy, an independent media analyst in London, Ont., said consumers shoulder some of the responsibility.
"Most consumers click feverishly through a sequence of steps so that they can just get it over with and get on with their day," he said.
"We're in such a rush to sign up for something that we don't bother to understand what the implications are. We don't read the fine print."
He said the bureau is going after the three biggest players in order to send a message.
"Essentially what they're saying is that the carriers are responsible for the behaviour, or as the case may be the misbehaviour, of those third-party providers that make use of their infrastructure to deliver services," he said.
NDP consumer protection critic Glenn Thibeault welcomed the bureau's action.
"What I really hope comes out of this is this decision will discourage some of Canada's big telecom companies from taking advantage of consumers in the future."
The CEO of Wind Mobile, a relatively new wireless player in Canada, applauded the Competition Bureau.
“It sends a clear message that Canadians no longer have to tolerate misleading advertising or hidden fees from the Big Three. We believe that Canadians deserve the benefit of an open and competitive marketplace, fair and transparent pricing and a clear focus on consumers," said Anthony Lacavera in a statement.
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