The Canadian government is being sued by two backers of Mobilicity, on the grounds that it failed to fulfil pledges to help the mobile operator compete against the country’s big three players.

Investment firms Quadrangle Group and Data & Audio-Visual Enterprises are suing government body Industry Canada to the tune of CAD1.2 billion ($1.1 billion), according to a filing with the Ontario Superior Court of Justice.

According to Reuters, the filing claims negligence, misrepresentation, breach of contract and abuse of public office.

The companies said they had put hundreds of millions of dollars into Mobilicity with assurances from Industry Canada that the operator would benefit from favourable terms that were breached.

These terms included the prevention of unfair competition from established operators and to create market conditions that would allow new players to compete effectively.

The filing also claimed that Industry Canada assured Mobilicity founder John Bitove that the company could transfer any spectrum licences it acquired to an established player five years after they were issued.

A potential acquisition of Mobilicity by Telus was rejected last year on the grounds that the spectrum was reserved for newcomers for a set period of five years.

Industry Canada subsequently said improvements to the policy on spectrum licence transfers would be released, indicating that even after the expiry of the restrictions on the new entrant licences issued in 2008, deals involving incumbents may not be straightforward.

The Canadian government has expressed the desire for other operators to compete more effectively with the ‘big three’ operators of Rogers Wireless, Telus and Bell Mobility, but smaller players have struggled to make an impact.

Mobilicity filed for creditor protection in October last year after the deal with Telus fell through, with the larger company instead buying Public Mobile in the same month.

In addition, Wind Mobile, the largest of the country’s new operators, withdrew from Canada’s auction for spectrum in the 700MHz band at the beginning of the year, after principal backer VimpelCom decided to not fund a bid.

In July, the government said the spectrum auction scheduled for early next year will see a large block reserved for new entrants, as part of efforts to boost competition.

Operators with less than 10 per cent of subscribers nationally or less than 20 per cent in provincial markets will be eligible to bid on the reserved spectrum in regions where they already operate.

The big three operators held 88 per cent of the Canadian market in terms of connections at the end of the second quarter of 2014, according to GSMA Intelligence figures.

In the spectrum auction earlier this year, market leader Rogers made bumper bids that represented more than 60 per cent of the $4.78 billion total. Fellow big three operators Telus and Bell Mobility also secured licences.