CommLaw Monitor News and analysis from Kelley Drye’s communications practice group Wed, 12 Jun 2024 02:48:14 -0400 60 hourly 1 FCC Proposes Rare Fine for Failure to File Section 43.61 International Traffic and Revenue Reports Mon, 16 Dec 2013 11:03:07 -0500 On December 6, 2013, the FCC issued a rare Notice of Apparent Liability for Forfeiture, against Start Wireless Group, Inc. d/b/a Page Plus Cellular (“Page Plus”), for failing to file annual section 43.61 international traffic and revenue reports for the past eight years. Fines for this particular violation are very rare. In fact, we believe this is only the second time the FCC has proposed a forfeiture for failing to file the annual international traffic report.

Page Plus also is noteworthy in two additional respects relevant to this blog. First, the FCC applies the base forfeiture of $3,000 for “failure to file a required report” to this violation. This contrasts with other types of forms, such as the Form 499-A and the annual CPNI certification, where the FCC has set an individual (and much higher) forfeiture for failing to file the required form. Here, the FCC applied the $3,000 base forfeiture to eight violations, adding an upward adjustment of $19,200 to the fine due to duration of the violations.

Second, FCC proposed a fine for eight failures to file the annual certification – dating back to 2003. The Commission apparently relied upon its controversial “continuing violation” theory for missed deadlines, in which the Commission considers a violation to continue until it is cured. In this instance, six of the eight alleged violations relate to forms that Page Plus has never filed. Two relate to late-filed forms, which were filed exactly one year prior to the release of the NAL. (A ninth year’s report was filed slightly more than one year prior to the NAL, and is not part of the FCC’s proposed forfeiture). We say that the FCC “apparently” relied upon the continuing violations theory because the NAL does not cite to or discuss the statute of limitations with respect to the eight violations found. In our opinion, the FCC action is vulnerable on statute of limitations grounds.

FCC Prepaid Card Investigations Continue; Bureau Proposes $25,000 Fine for Non-Response Fri, 08 Feb 2013 11:07:28 -0500 After six NALs and an Enforcement Advisory, the FCC is not finished with prepaid calling card marketing practices. On February 7th, the Enforcement Bureau issued a Notice of Apparent Liability against a prepaid card provider for failing to respond to the Bureau's investigation. This action serves both as a reminder to carriers of the importance of responding fully to FCC investigations and as a warning to prepaid card carriers that, despite the previous actions, the FCC's investigations are likely to continue. Any provider that receives or has received an inquiry from the FCC Enforcement Bureau should carefully consider its response.

The entity receiving the NAL is Technical Communication Network (TCN), a small prepaid card provider in Clifton, New Jersey. A few things are particularly noteworthy about the NAL:

  • The Bureau remains active. According to the NAL, the investigation was started in February 2012, which was after the first five prepaid card NALs were issued but before the most recent NAL. Clearly, the Bureau continues to identify potential targets for investigation. Moreover, the fact that the NAL orders the provider to respond substantively to the investigation suggests that the Bureau is actively pursuing additional enforcement of prepaid card marketing practices.
  • $25,000 is not the new base forfeiture. The NAL notes that the base forfeiture for a failure to respond to a Commission communication is $4,000. It applies an upward adjustment because it found the carrier's misconduct "egregious, intentional and continuous." Despite a few recent cases proposing similar $25,000 fines, the base forfeiture has not changed here.
  • The NAL orders a response within an unusually short time period. While the NAL portion of the order grants the TCN the usual 30 days to respond to the proposed fine, the Bureau provides only 10 calendar days to respond to the questions raised in the LOI.

Clearly, the prepaid card marketing issue is not closed. Not only has the FCC not resolved the six pending forfeitures (at $5 million each), but it appears ready to continue issuing NALs for failure to provide adequate disclosures in marketing materials.

FCC Eases CPNI Compliance for Prepaid Calling Card Providers Mon, 14 Jan 2013 15:16:24 -0500

Back in 2007, in response to the pretexting controversy, the FCC strengthened its CPNI rules to require telecommunications carriers to authenticate a subscriber’s identity before providing call detail information. The FCC rules required carriers to authenticate customers with a password or some other information that does not rely upon "readily available biographical information" before providing telephonic, online or in-store access to CPNI, including call detail information.

These rules presented a particular difficulty for prepaid calling card providers, who typically do not have the same type of information available to them about the identity of their customers. In response to a prepaid card provider's petition seeking relief from the authentication rules, the FCC's Wireline Competition Bureau has issued a waiver to all prepaid calling card providers to allow them to authenticate users solely by virtue of the PIN assigned to the card if the prepaid card provider does not have other identifying information on the end user. Under the waiver, the prepaid card provider may provide call detail information to a caller if the caller provides the PIN as authentication.

However, it is important to note that this waiver does not apply if the prepaid card provider has telephone numbers or addresses of record for the customer. Moreover, the FCC ruling concludes, for the first time, that an email constitutes an address of record for this purpose (see fn. 8). Thus, for “no pin” customers, the prepaid card provider should authenticate the customer via the telephone number(s) registered with the account. For cards purchased online, which are then delivered to an email address, the prepaid card provider should authenticate the customer using the email address provided. It is only for prepaid cards sold through traditional retail store distribution channels that a provider will lack any identifying information other than a PIN.

What FCC v. Fox Television Means for Non-Broadcasters Mon, 25 Jun 2012 09:12:34 -0400 In FCC v. Fox Television Stations, Inc., the US Supreme Court reversed FCC indecency fines against two TV broadcast networks. The decision has garnered a lot of attention in the broadcast industry and conventional media (and rightly so). News stories describe the decision as a clear victory for broadcasters. Many commentators also noted the apparently shaky ground of the 1978 Pacifica decision finding George Carlin’s “Filthy Words” monologue indecent. (Including this decidedly non-legal discussion.) These are topics of great interest to the broadcast industry.

For all its significance in the broadcast world, the decision is equally significant for non-broadcasters. In Fox Television, the Supreme Court sets a high bar for FCC enforcement of general obligations under the Communications Act, not just the FCC’s indecency standard. As a result, Fox Television will constrain the FCC’s enforcement abilities in several prominent areas of common carrier regulation as well. Most significantly, we believe that Fox Television limits the FCC's ability to impose fines for violations of Section 201(b)'s prohibition on unjust and unreasonable practices. Unless the FCC has provided fair notice to common carriers of the conduct required under Section 201(b), it may not impose sanctions in the enforcement context.

FCC v. Fox Television. These cases arise from three well-publicized incidents in broadcast television. Two incidents involve Fox’s live broadcasts of awards shows in which Cher and Nicole Richie, respectively, uttered fleeting expletives during unscripted portions of the shows. In the third incident, an ABC broadcast of NYPD Blue included brief female nudity. The history of the FCC’s actions with respect to these incidents is complicated, but in each instance, the FCC found the broadcasts indecent. After the Supreme Court held that the FCC’s so-called “fleeting expletive” rule was not arbitrary and capricious, the 3rd Circuit reviewed the constitutionality of the FCC action. The court reversed the FCC’s action, and the FCC sought review before the Supreme Court.

The Court upheld the 3rd Circuit’s outcome. The Court ruled (8-0) that the FCC failed to give Fox or ABC fair notice prior to the broadcasts in question that fleeting expletives or brief nudity could be the basis for enforcement of the indecency prohibition. The Court found that the FCC enforcement actions therefore violated the Due Process Clause of the Fifth Amendment. Importantly, the Court did not reach the First Amendment implications of the FCC’s enforcement action. The Court also was careful to note that it was not addressing the constitutionality of the FCC’s current indecency policy (i.e., as adopted after the Fox and ABC broadcasts, but before enforcement action was taken against the networks)., nor was it limiting the FCC’s ability to modify that policy in light of the public interest and applicable legal requirements.

Implications for non-broadcast cases. Although the factual context involves television broadcasts and the FCC’s “fleeting expletives” policy, the Court’s decision is much broader in its impact. The Court’s “fair notice” holding is not limited to broadcast indecency. As the Court explained,

A fundamental principle in our legal system is that laws which regulate persons or entities must give fair notice of conduct that is forbidden or required.

The Court held that this principle results from two related due process concerns: (1) regulated parties “should know what is required of them so they may act accordingly,” and (2) the rules must be precise enough “so that those enforcing the law do not act in an arbitrary or discriminatory way.”

These principles will have an impact on a wide range of FCC enforcement activities. In particular, we’ve noted in this blog the recent trend of FCC cases relying upon Section 201(b) to impose fines for cramming, prepaid card marketing and other carrier practices found to violate the requirement that all practices for and in connection with telecommunications service be “just and reasonable.” Fox Television will significantly constrain the FCC’s ability to impose fines in 201(b) cases, at least in the absence of clear FCC rules defining the conduct required or prohibited. This decision will place over $35 million in forfeitures proposed in 2011 in doubt.

Second, Fox Television takes a broad view of what FCC enforcement actions implicate this principle. The Court rejected an FCC claim that it did not impose a sanction where, in one of the incidents, the FCC found the broadcast indecent but declined to impose a fine for the broadcast. The Court found the possibility of increased penalties for future violations to render the FCC’s action sufficiently punitive to implicate the Due Process clause. The FCC has a similar authority in non-broadcast cases to consider a carrier’s “history of compliance” in setting a penalty. As a result, non-broadcast enforcement actions will be impacted, even if they do not impose monetary forfeitures.

Prepaid Card Provider Settles Failure to Disclose Action for $2.3 Million Thu, 02 Feb 2012 09:10:19 -0500 In 2011, the FCC was extremely active in the prepaid calling card area, proposing $25 million in fines and investigating several other prepaid card providers. While the FCC has exclusive jurisdiction over prepaid cards when provided by common carriers, the Federal Trade Commission also has jurisdiction over non-carrier marketers of prepaid calling cards. This case is a reminder of the shared jurisdiction between the agencies.

The FTC case was initiated in May of 2011 against Millennium Telecard, Inc. and related entities. The FTC complaint alleged that Millennium made inaccurate claims about the number of minutes calling cards provided to a wide range of international locations, including Argentina, Brazil, the Dominican Republic, Ecuador, Mexico, Pakistan, Poland, Vietnam, Ghana, Nigeria, and El Salvador. But the FTC alleged that consumers didn't receive the number of minutes advertised. Much of the FTC's case was based on test calls made by the agency, which, it claimed, showed that consumers received only 45% of the advertised minutes.

The FTC asserted that Millennium violated the FTC act by failing to provide the advertised minutes and (in a claim similar to that made by the FCC in its section 201(b) cases) that Millennium failed to adequately disclose the fees applicable to the cards. The FTC complaint did not explain in detail the failure to disclose claim, but its discussion of Millennium posters and cards suggested that the statements of fees were in fonts that were too small and were not prominently placed.

In the settlement agreement, Millennium agrees to two injunctive provisions that require it to clearly and conspicuously disclose all material fees. It also agrees to pay a fine of $2.32 million to resolve the case. However, Millennium pays only a $500,000 installment now, and is obligated to pay the remaining $1.82 million over ten years, in ten annual installments (plus interest). The ten year installment is quite unusual, as is the defendants' grant of a lien on property as collateral for the installment payment.

This case serves as a reminder that prepaid calling card providers and marketers should closely review their marketing practices to ensure that all material terms are clearly and conspicuously disclosed in their marketing materials.

FCC Proposes $25,000 Fine for Failure to Respond to Investigation Mon, 12 Dec 2011 11:10:14 -0500 On Friday, the FCC proposed a $25,000 fine against a carrier that failed to respond to a Commission investigation. In the NAL, the Enforcement Bureau stated that Net One International had failed to respond to a letter of inquiry launching an investigation into its practices. According to the NAL, the Bureau sent the letter of inquiry via certified mail, and the letter was signed for at the company's headquarters. In addition, the Bureau attorney handling the investigation sent an email after the response date had passed, providing a second deadline for the company to respond. Thus, the company was given two chances to respond before the Bureau issued the NAL.

The Bureau proposed a fine of $25,000 for the failure to respond, and ordered the company to respond to the letter of inquiry within 10 days.

The NAL is significant in two respects. First, the proposed fine is $25,000, which is an upward adjustment from the $4,000 standard fine contained in the Forfeiture Guidelines. In addition, the fine is greater than the $20,000 failure to respond fines the Bureau had used a few years ago. The Bureau justified the increase amount as appropriate due to Net One's "apparent disregard for the Commission's authority and investigatory process."

Second, the subject matter of the investigation was described as "[Net One's] billing practices and its offering of prepaid calling card services." This investigation was initiated in July 2011, well after its earlier prepaid card marketing investigations, and roughly at the time that the Bureau was presenting to the full Commission proposed $5 million fines for prepaid card marketing practices. The timing suggests that the Enforcement Bureau is not finished with its examination of prepaid card providers. Presumably, more investigations of prepaid card providers are pending at this time.

FCC Proposes Another $5 Million Prepaid Card Fine Wed, 30 Nov 2011 08:33:07 -0500 Yesterday, the FCC proposed another $5 million fine for insufficient disclosures on prepaid calling cards. This action is best understood as an echo to the FCC's action in September, when it proposed four similar $5 million fines against other prepaid calling card providers. In fact, I believe that this NAL has been circulating at the FCC since shortly before the other four NALs were released.

2011 has been highlighted by an active FCC using Section 201(b) of the Act to engage in consumer-focused enforcement. Although the FCC's authority to use 201(b) in this way is in doubt, the lesson for carriers is clear, especially in the prepaid market. Carriers should clearly and conspicuously disclose all material terms and conditions of their services. Failure to do so risks claims of deceptive marketing or cramming.

The latest Notice of Apparent Liability was issued against Simple Network, Inc. The NAL largely tracks the previous four NALs. Simple Network's disclosure is slightly different than the disclosure in the other four cases, but the FCC reaches the same conclusion that the disclosure is not prominent enough (para. 9) and is too vague (para. 10). The NAL also dismisses Simple Network's listing of a toll-free number to obtain rate information, stating that this information is not available at the point of sale.

In the end, the FCC appears most skeptical of any assertion of a large number of minutes available only on a single call. The five carriers identified so far have all explained how those minutes may be obtained by consumers, but the NALs conclude that the explanations are not sufficient. Prepaid card providers should compare their disclosures with the five disclosures found insufficient so far.

FCC Proposes $5 Million Fines Against Multiple Prepaid Card Providers Fri, 02 Sep 2011 07:02:13 -0400 We noted in April 2010 that the FCC was investigating prepaid calling card provider disclosures. We suspected that action was likely when we saw four notices of apparent liability against unidentified companies appear on the FCC's items on circulation list in late June. Yesterday, it became official: the FCC announced four separate Notices of Apparent Liability against prepaid calling card providers for insufficient disclosures to consumers of its prepaid calling card rates. in each case, the FCC proposes a fine of $5 million for "unjust and unreasonable" practices in violation of Section 201(b) of the Communications Act.

The NALs follow a recent trend of large fines proposed against multiple carriers as a warning to the entire industry. Other prepaid card providers should examine their disclosures carefully to ensure that they clearly and conspicuously disclose all terms and conditions associated with the cards they sell.

As has become its recent practice, the FCC issued several documents relating to the prepaid card investigations. In addition to a press release announcing a total of $20 million in fines, the FCC's Enforcement Bureau released an Enforcement Advisory on prepaid cards and a "Tip Sheet" for consumers of prepaid cards.

In addition, the Commission released the text of its four NALs against Locus Telecommunications, Lyca Tel, LLC, STi Telecom, Inc. (formerly Epana Networks) and Touch-Tel USA, Inc. Each carrier may respond to the proposed fines within 30 days.

Prepaid Card Provider Settles Payphone Compensation NAL Sat, 02 Jul 2011 08:20:16 -0400 For a while, failure to pay per-call compensation to payphone owners was as much of an enforcement focus as is failure to pay the Universal Service Fund today. The FCC resolved one of its legacy cases this week, agreeing to a settlement with prepaid card provider Compass, Inc. d/b/a Compass Global Inc. Notably, the Bureau settled the $466,000 NAL for $20,000 based in part on an inability to pay.

The Compass Global proceeding dates back to 2006, when the FCC released a Notice of Apparent Liability proposing a fine of $466,000. Post NAL, Compass Global hired FCC counsel and presented, in the Bureau's words "significantly more detail about the Company's operations, other unique circumstances and its efforts to comply with the Commission's payphone compensation rules ..."

The Consent Decree settles the NAL for $20,000 (which is paid over six months). This was based in part on "certified financial information" submitted by the company a few months ago to document its inability to pay a large forfeiture.

In addition to the settlement amount, Compass Global agreed to a compliance plan in which, among other things, it must report to the Commission instances of non-compliance with the payphone compensation rules. Further, Compass Global agreed that it is a "completing carrier" for payphone compensation purposes.

FCC Releases Five More CPNI Forfeiture Orders Fri, 10 Jun 2011 12:41:15 -0400 The Commission continues to clear the decks from its 2009 Omnibus CPNI NAL. Apparently having exhausted all of the cases warranting revocation of the NAL and meriting a consent decree, the Enforcement Bureau release five forfeiture orders for failure to file the 2007 Annual CPNI Certification. These orders all involve a prepaid card provider and are virtually identical to the 88 Telecom Forfeiture released earlier this week. All conclude that the $20,000 forfeiture proposed should be imposed. None of the providers were represented by FCC counsel, which may have cost them the opportunity to settle for a few hundred to a few thousand dollars instead of $20,000.

The carriers involved are: VoIP Alliance, Touch-Tel USA, Phone Club Corp., DigitGlobal Communications, and StraightTel Corp.

FCC Imposes $20,000 Fine for Failure to File CPNI Certification Wed, 08 Jun 2011 07:59:54 -0400 Still working its way through the 2009 Omnibus CPNI NAL, the FCC released a forfeiture order against prepaid card provider 88 Telecom. The Commission imposed the full $20,000 penalty proposed in the NAL, rejecting 88 Telecom's arguments that its violation was not willful and that it could not pay the forfeiture. What is most significant about the order, however, is that the provider did not settle the allegation via a consent decree. Most of those who did were able to settle for a few hundred to a few thousand dollars.

AT&T Access Charge Lawsuits Against Prepaid Card Providers Moving Forward Mon, 22 Nov 2010 17:54:27 -0500 Long time readers of the blog will know that we've been following AT&T's attempts to collect access charges for local calls delivered via intermediaries to prepaid card providers. The background is available here: previous Telecom Law Monitor entry. The AT&T litigation is proceeding, albeit slowly.

In June, the U.S. District Court overseeing the first of AT&T's lawsuits allowed the IDT case to proceed forward. IDT counterclaimed against AT&T, and AT&T answered the counterclaims. The pre-trial discovery period is ongoing, but trial is not scheduled to begin until March of 2012.

In addition, AT&T has sued two other small prepaid card providers in the same U.S. District Court in Texas. The defendants are Next-G Communications and Touch-Tel Communications. Next-G has answered the complaint, and it appears it will follow the IDT case's timing.

Meanwhile, the FCC still has not acted on the Arizona Dialtone petition for reconsideration of the Prepaid Card Order that underlies AT&T's case. Arizona Dialtone's 2006 request to reconsider an "ambiguous aspect of the Order [that] sends mixed messages to carriers" remains pending.

Stay tuned.

FCC Clarifies "Carrier" Definition In Prepaid Context Wed, 27 Oct 2010 07:42:13 -0400 In a recent USF appeal, the FCC agreed with a prepaid card "platform provider" that each of its customers, not the platform provider, is the "carrier" for Universal Service purposes. The FCC ruled, however, that the platform provider may owe USF on transport services it provided, unless it properly qualified the customers as resellers under the USF rules. The case, Network Enhanced Telecom LLP, is discussed after the jump.

Prepaid card providers should take note. This decision carries implications for all "carrier" responsibilities, including 214 authorizations, tariffing, CPNI obligations and responsibility for marketing claims, not just for USF contributions.

Wholesale carriers and resellers also should take note. This represents the first time since Global Crossing that the FCC has addressed the obligations of wholesale carriers to qualify their resellers -- a persistent point of contention in USF auditing and reporting.

In Network Enhanced Telecom LLC, the Wireline Competition Bureau considered an appeal of an audit of NetworkIP's USF reporting. In the audit, USAC determined that NetworkIP's platform service was a prepaid card service subject to universal service contribution assessment. USAC also rejected NetworkIP's claim that its customers were "resellers" and thus that NetworkIP could report the revenue as wholesale revenue, rather than end user revenue for USF purposes. USAC determined that NetworkIP had not followed the Form 499-A Instructions in qualifying its customers as resellers.

Prepaid Service. The Bureau described NetworkIP's service as a "web-based software solution that provides the switching and processing capability needed to manage and provision calling cards." However, the Bureau agreed with NetworkIP that NetworkIP "does not create or sell calling cards to end users, retailers or its carrier customers." Instead, it is NetworkIP's customers who perform the activities that constitute the provision of prepaid card service -- principally, establishing PINs and setting the price of cards, the number of minutes available, and the rate at which value is decremented from the card.

Reseller Revenue. In addition to its platform service, NetworkIP provides "ordinary long distance transport" for at least some of its customers. This unquestionably is telecommunications service, so the question becomes whether NetworkIP is providing wholesale or retail service to its customers. This implicates the vexing reseller question that underlies Global Crossing and so many other USF audits and appeals. In this instance, the Bureau remanded the issue to USAC for further analysis. Notably, however, it disagreed with NetworkIP on two of the three issues it raised regarding reseller qualifications.

First, the Bureau affirmed that NetworkIP was required to maintain evidence in addition to the reseller certification that demonstrates a "reasonable expectation" the reseller is contributing to the Fund. The Bureau emphasized that NetworkIP, as the wholesale carrier, has the burden to demonstrate a "reasonable expectation." Its failure to collect Filer IDs (as explicitly addressed in the Instructions) "undermines" NetworkIP's claim of a reasonable expectation. Further, training that NetworkIP conducts with its resellers on their compliance obligations has no bearing on the "reasonable expectation" standard, the Bureau held.

Second, the Bureau dismissed out of hand NetworkIP's claim that the instruction to maintain qualifying information on resellers is optional because the Instructions state that carriers "should" rather than "must" maintain this information. The Bureau again reaffirms that the Instructions are "guidance" (not rules) but asserts that compliance with the Instructions is relevant to determining whether the wholesale carrier met its burden to demonstrate a reasonable expectation.

Where the Bureau agreed with NetworkIP concerned the date of the reseller certifications. In a year when the Instructions did not yet direct carriers to obtain annual certifications, the Bureau agreed that USAC could not reject a certification merely because it was more than a year old. This holding, however, will have little impact on the current environment, since the Instructions now contain a direction to obtain the certification annually.

NetworkIP's case will now return to USAC to determine whether NetworkIP had a reasonable expectation in exempting its customers from USF.

Another Prepaid Card Provider Reduces Its Universal Service Revenue Reporting Mon, 14 Jun 2010 14:27:06 -0400 Following on the heels of AT&T and Verizon's announcements, prepaid card provider Allcom Telink Corporation informed the FCC that it, too, would no longer report for universal service purposes the face value of the prepaid cards that it sells. In a June 11 letter to the FCC, Allcom stated that it "likewise intends to cease contributing on the basis of its non-contributing resellers' revenues (or our best estimate of those revenues) for this year and future years." In other words, Allcom will only report the revenue that it receives when selling the cards for distribution, not their ultimate face value. Given that prepaid cards often are sold to distributors at 35-40% below the face value, these actions could significantly reduce the amount of USF paid for prepaid calling card sales.

Allcom cited to the AT&T and Verizon letters and to USAC's August 2009 request for clarification from the FCC. Allcom then explained:

It is Allcom's preference that the Commission issue an order or guidance resolving this matter. Given the reality of the prepaid calling card market, however, Allcom now has little choice. To avoid an untenable competitive disadvantage in 2010 and future years, absent intervening Commission action, like AT&T and Verizon, we also intend to contribute only on the prepaid calling card revenue Allcom actually receives, not the ultimate retail sale price of those prepaid calling cards that Allcom sells to non-contributing resellers.

For good measure, Allcom also expressed support of a numbers-based USF contribution methodology.

Undoubtedly, Allcom is not the only prepaid card provider that has followed AT&T and Verizon's lead in reporting prepaid card revenues. We expect most other providers to report revenues in this way pending FCC action on the USAC request.

AT&T, Verizon Cease Reporting Face Value of Prepaid Cards Sold Wed, 12 May 2010 07:47:19 -0400 If you were planning to disregard a Form 499-A instruction, would you report yourself to the FCC? That is exactly what AT&T and Verizon have now done with regard to their reporting of prepaid card revenues. Both AT&T and Verizon have told the FCC that retroactive to January 1, 2010, they will report the revenues actually received from selling prepaid cards to distributors or other carriers, rather than the face value of the cards. Since prepaid cards often are sold into the distribution chain at a 30-40% discount off the face value, this move will significantly reduce AT&T and Verizon's USF obligations from the sale of prepaid calling cards.

Click the link for more background on the change.

At issue is the method by which telecommunications carriers must report their revenues from the sale of prepaid calling cards. For years, the Form 499-A Instructions have stated that prepaid calling card providers should report the "face value" of the cards that they sell for distribution to end users. Prepaid card providers are instructed to do so even though GAAP generally only permits carriers to report revenue actually received from these sales, and even though more general Form 499-A instructions use the same "revenues received" standard. In the prepaid industry, most cards are first sold to distributors, who often pay 60-70% of the face value to the carrier (keeping the remaining 30-40% as their compensation for distributing the cards). Prepaid card providers often do not know how much the cards are sold for at retail.

Requests to change or clarify the rule have been pending for years. In October, 2006, AT&T filed a USF appeal asserting the prepaid carriers should report the revenues received, not the face value of the cards. [IDT, for its part, contends that sales to distributors are not sales to "end users" and therefore should not be reported by IDT as USF revenue. See IDT's 2006 and 2008 USF appeals.] More recently, USAC filed a request for guidance with the FCC, which has been put out for comment. The USF appeals and USAC's request for guidance remain pending before the FCC.

AT&T and Verizon grew impatient with the FCC's inaction and have now unilaterally changed their practices. As Verizon explained in its letter, "for this year and in future years, Verizon will report in its assessable base of universal service revenues only those revenues that Verizon actually received from selling prepaid calling cards -- not the ultimate retail price of those cards when they are resold." This change will significantly reduce Verizon's USF contributions for 2010 and in future years.

Enforcement Alert: Prepaid Card Marketing Investigations Opened Wed, 07 Apr 2010 10:00:00 -0400

Late last week, the FCC sent inquiry letters to a number of prepaid calling card providers concerning their marketing practices. This action represents the first significant entry by the FCC into prepaid calling card marketing practices. Prior to this action, prepaid card enforcement activities have been conducted in private litigation brought by a large prepaid carrier, before a handful of state attorneys general and, in the case of non-carrier distributors, before the Federal Trade Commission. However, the FTC is barred from taking action against common carriers. The FCC's action suggests that the Commission is attempting to close the gap in compliance within the prepaid industry by acting directly against carriers that offer prepaid cards.

Details about the FCC requests are available after the jump.

FCC investigations are not disclosed publicly, so I cannot publish any documents for this entry. However, we understand that identical letters were sent to several carriers that provide prepaid calling card services. The letters seek broad classes of documents, including advertisements for prepaid cards, contracts with distributors and rate decks for the carrier's services. The letters also ask for detailed information about the provisioning of prepaid card services, and an identification of which entities perform certain functions related to the marketing, distribution and use of prepaid calling cards. Carriers are given 30 days from the date of the letter to provide the requested documents and information. All responses must include a sworn declaration from an officer confirming that all requested information was provided.

It is clear from the letters that the FCC seeks to examine the content and sufficiency of a carrier's disclosures to prepaid card consumers. While FCC enforcement of misleading carrier marketing is rare, the Commission has asserted jurisdiction over marketing practices under Section 201's requirement that carrier practices be "just and reasonable." Notably, however, the investigation letters do not cite to this line of cases, nor do they rely on the Commission's Truth in Billing regulations. The letters cite only to the Communications Act as a whole for the agency's authority.

New FTC Commissioners Confirmed Tue, 09 Mar 2010 15:58:38 -0500 It has been quiet on the FCC front as all hands seem to be focused on the upcoming National Broadband Plan. In the meantime, I didn't want this development at the FTC to go unnoticed. Our firm's sister blog, Adlawaccess, provided this report on the confirmation of two new Commissioners. A statement by the FTC Chairman is available here.

With the FTC active in enforcement on prepaid card and mobile marketing matters, and with the FTC seeking an end to the "common carrier exception" to its jurisdiction, it is worth monitoring activities at the FTC.

New USF Form Announced; Audio Bridging Changes Headline the Revisions Tue, 23 Feb 2010 07:31:24 -0500 UPDATED -- FORM 499 RELEASED

The FCC's Wireline Competition Bureau announced the new FCC Form 499A today. This form, which must be used to file the April 1 annual revenue report, includes several potentially significant changes. Audio bridging providers (conference service providers) and those close to the de minimis threshold are most affected.

As of COB yesterday, only the announcement was available. The 499A itself will be released today and I will update this post when it is available. UPDATE: The new Form 499A is available here.

Follow the jump for a discussion of the changes.

According to the public notice, the primary changes are:

* several revisions regarding the obligations of stand-along conferencing providers to pay USF. The FCC added a check box for audio bridging providers, updated their "who pays what" chart to include audio bridging and added a description of audio bridging providers. Last year, the FCC mistakenly referred to audio bridging providers as "telecommunications service providers" and then quickly corrected that error. I will be checking to see if the new guidance is consistent with the Calling Card Classification Order. UPDATE: The form confirms that audio bridging providers offering service on a non-common carrier basis are only subject to USF, and not TRS and other funds. However, on p. 29 (fn 47) the instructions again mistakenly refer to audio bridging as "telcommunications services."

* adjusted the de minimis estimation factor and the circularity factor to account for the new 14% USF contribution factor. This is a sure sign that a USF factor in the 14% range is here to stay. Important Note: The FCC did not adjust the "Limited Interstate Revenues Exemption" (LIRE) threshold, even though the USF factor now exceeds the threshold. Thus, there is a possibility that a carrier's interstate revenue percentage will exceed 12% but the carrier will still pay more in USF than its total interstate revenues. Such a result was declared unlawful by the 5th Circuit Court of Appeals in 1999.

* "added more specific language, consistent with the body of the text" to require CMRS and interconnected VoIP providers to submit traffic studies if they are not relying upon the safe harbor percentage of interstate calling. The filing obligation (not a prior approval requirement) has existed for some time, but compliance with it was low. I expect this will be an area for enforcement inquiries this year.

More when the Form is released. Stay tuned.

Prepaid Card Provider Seeks Stay, Dismissal of AT&T Access Charge Suit Wed, 06 Jan 2010 07:00:00 -0500 A few months ago, AT&T sued IDT Corp. for failing to pay access charges allegedly due on local-dialed prepaid calling cards. As we expected, IDT has moved the court to stay, or in the alternative, dismiss, AT&T's action. IDT contends that the FCC, not the court, should decide whether access charges apply to this type of call. In a strategic move, IDT seeks a stay of the case, rather than referral of AT&T's complaint to the FCC for resolution.

The case bears watching because AT&T appears to be using the IDT litigation as a test case before proceeding with actions it has threatened against other providers. If IDT is successful, AT&T likely will have to present its case directly to the FCC, perhaps by filing a petition for declaratory ruling, or maybe by bringing a formal complaint before the Enforcement Bureau. Alternatively, AT&T may switch approaches and seek to recover access charges from the CLECs to whom it hands off the calls.

In the meantime, AT&T has continued to send monthly demands to prepaid card providers, allegedly calculating the amount of access charges due from the carrier. We are not aware of any other cases AT&T has filed against prepaid card providers. Yet.

Follow the jump for a discussion of the pleadings on IDT's motion.

In its motion, IDT criticizes AT&T's lawsuit as "a transparent attempt to use litigation to undermine ongoing regulatory proceedings pending before the FCC." Citing to the Arizona Dialtone petition for reconsideration, which remains pending, IDT seeks a stay until the FCC resolves the issues "within the greater framework of its other carrier compensation-related decisions." Notably, IDT seeks a stay, rather than referral of the complaint to the FCC. IDT thus joins AT&T in avoiding asking the FCC to resolve the claim.

As an alternative, IDT claims that AT&T's complaint should be dismissed for failure to plead a claim on which relief can be granted. In this portion of its motion, IDT attacks AT&T's tariff-based theory of recovery. IDT notes that AT&T fails to cite any specific tariff provisions that it breached, and asserts that AT&T has not alleged that IDT subscribed to any AT&T access service.

AT&T's opposition claims, as AT&T has asserted in disputes with other prepaid card providers, that the FCC has "conclusively decided" that access charges apply to prepaid cards, so there is no reason for a stay. AT&T reads the June 2006 Prepaid Calling Card order as establishing a comprehensive order mandating access charges for all types of prepaid calling card traffic.

Regarding IDT's motion to dismiss, AT&T both claims that the violation is in trying "to evade the AT&T LECs' switched access tariffs altogether" and that IDT has "constructively ordered" service under its tariff.

In the reply brief, IDT does a good job responding to AT&T's constructive ordering claim. Pointing out that IDT receives service from CLECs, not from AT&T, IDT claims it could not have constructively ordered service from AT&T. IDT relies on precedent from Advamtel involving CLEC access charges that AT&T (operating as an IXC) refused to pay. IDT asserts that the requirements for constructive ordering are not satisfied because IDT has not interconnected with AT&T and AT&T delivers service to a third party, not to IDT's "premises" as required under the tariff.

Briefing was completed on December 29. We will be watching for further developments.

Hearing on Calling Card Consumer Protection Bill Today Thu, 03 Dec 2009 08:00:00 -0500 The House Energy and Commerce Committee, Subcommittee on Commerce, Trade and Consumer Protection, will hold a hearing today on the "Calling Card Consumer Protection Act of 2009" (HR 3993). The bill would require prepaid calling card providers and their distributors to disclose all applicable rates and other terms and conditions to consumers. The FTC would be empowered to enforce the requirements, including against common carrier prepaid card providers.

Rep. Engel (D-NY) introduced the bill on November 3, 2009. This is the first hearing on the bill.

Scheduled witnesses today will be:

  • Lois Greisman, Director, Division of Marketing Practices, Federal Trade Commission
  • Sally Greenberg, Executive Director, National Consumers League
  • Patricia Acampora, Commissioner, New York State Public Service Commission, National Association of Regulatory Utility Commissioners
  • Alie Kabba, Executive Director, United African Organization
  • Scott Ramminger, President, American Wholesale Marketers Association