In 2013, the FCC proposed a $7.6 million fine against Advantage Telecommunications Corp. (Advantage), alleging it “slammed” consumers by changing their long distance carriers without authorization and “crammed” unauthorized charges onto their bills. The FCC further claimed that Advantage violated the FCC’s truth-in-billing rules and its telemarketers engaged in deceptive marketing. Although the FCC determined that Advantage committed the violations in the Forfeiture Order, it reduced the fine to $1 million. Under the Communications Act, the FCC must consider a party’s ability to pay when determining fine amounts. The FCC will review tax returns, financial statements, and any other documentation offering a reliable picture of a party’s financial status. Critically, the FCC normally only considers a party’s gross revenues, not the net profits earned by the party, when assessing an inability to pay claim. As a result, the fact that a party operates at a loss or faces significant operational costs does not automatically qualify it for a penalty reduction. If a party demonstrates an inability to pay, the FCC historically has reduced the fine imposed to approximately 2-8% of the party’s average gross revenues.

Advantage turned over three years of recent tax returns, but argued that the FCC should consider its net revenues and the reputational harm it suffered because of the FCC’s investigation when assessing its ability to pay. Advantage highlighted its costs associated with marketing, customer service, regulatory compliance, and paying the network providers whose service it resells. The difference between gross and net revenues often can be substantial for service resellers and other low-margin businesses like prepaid calling card providers.

The FCC refused to consider these expenses in its inability to pay calculation. But in a departure from past enforcement actions, the FCC explained its continued reliance on gross revenues over net revenues when determining a party’s ability to pay. First, the FCC stated that relying on net revenues encourages companies to “gold plate” operations by inflating expenses so they can claim limited profits in response to a proposed fine. Second, the FCC argued that a net revenue-based approach would require its staff to expend considerable time and effort reviewing company expenses to determine their legitimacy. The FCC stated that the potential for gamesmanship and protracted expense reviews justified its use of gross revenues as the primary yardstick for assessing inability to pay claims.

Based on Advantage’s tax returns, the FCC determined that the company’s average gross revenues were “far below” the $7.9 million proposed forfeiture. But instead of lowering the fine to the standard 2-8% of average gross revenues, the FCC found that Advantage deserved only a “partial” reduction to $1 million. While recognizing the importance of its inability to pay analysis, the FCC noted that the Communications Act also requires it to weigh a party’s financial condition against other mitigating factors, including the violations’ egregiousness and the substantial harm caused to consumers. The FCC pointed to Advantage telemarketers’ deceptive marketing practices and the company’s refusals to provide refunds for unauthorized charges as examples of egregious misconduct causing substantial consumer harm. The FCC found that such misconduct prevented Advantage from receiving a full inability to pay forfeiture reduction.

Beyond the rare inability to pay guidance, the Forfeiture Order also raised eyebrows by drawing a partial dissent from Commissioner O’Rielly. Although he did not provide a statement explaining his dissent, Commissioner O’Rielly previously criticized the FCC’s reliance on gross revenues as the metric for assessing inability to pay claims. Commissioner O’Rielly criticized his colleagues during the prior Administration for failing to recognize the detrimental effect large fines can have on the continued viability of low-margin companies and pushed for consideration of net revenues when determining inability to pay.

Although the FCC again rejected a net revenues-based framework, the Forfeiture Order signals the FCC’s openness to inability to pay claims and underscores the importance of a company’s financial condition when defending against significant enforcement penalties.

Three recent FCC enforcement actions have involved the voluntary disclosure element. In this post, we will take a look at each, to see if anything has changed in the FCC's approach to voluntary disclosure.

First, we begin with the statute. Section 503(b)(2)(E) requires the Commission, when assessing a forfeiture, to consider "the nature, circumstances, extent and gravity of the violations and, with respect to the violator, the degree of culpability, any history of prior offenses, ability to pay, and such other matters as justice may require." This standard is repeated in Section 1.80(b)(8) of the Commission's rules. Section 1.80 further lists specific criteria the Commission will consider to increase or decrease the forfeiture in specific cases. Among its "downward adjustment" criteria is the violator's "good faith or voluntary disclosure." Three cases in the past two months have dealt with the voluntary disclosure element of FCC forfeitures: Unipoint Technologies. In Unipoint Technologies, the FCC had proposed a forfeiture of $179,000 for violations of the FCC's carrier registration rules and associated payment and reporting obligations. The $179,000 figure was reached by adding the informal base forfeiture amounts the Commission has used for each associated violation to reach the total forfeiture. Unipoint sought reduction of the forfeiture for, among other reasons, its voluntary disclosure of the violations.

In the Forfeiture Order, however, the FCC rejected these claims. The Commission did not dispute that Unipoint brought the violations to the FCC's attention, but it nevertheless concluded that a downward adjustment was not warranted. The Commission declared that a downward adjustment is appropriate,

only if two conditions are met: (1) the disclosing company has taken corrective measures prior to a Commission inquiry or initiation of an enforcement action; and (2) there cannot have been a lengthy delay between the time that the company learned of the violation and the time it brought the violation to the Commission's attention.

Radio License Holding XI, LLC. In Radio License Holding, the FCC affirmed its proposal to assess a $44,000 forfeiture for 11 violations of the Commission's sponsorship identification rules. The respondent, Radio License Holding (Radio License) contended, among other things, that it discovered the violations and "took prompt action to correct the problem" before receiving the FCC's inquiry.

The Commission declined to reduce the forfeiture for two reasons. First, it noted that, while Radio License "resumed compliance" after discovering the violations, it did not disclose them to the FCC. Second, the Commission faulted Radio License for failing to take corrective action with regard to the prior violations, such as by making announcements that the previous broadcasts were sponsored stories, not news broadcasts.

Rubard, LLC d/b/a Centmobile. Finally, in December, the FCC released a Consent Decree with Rubard, LLC d/b/a Centmobile (Centmobile) for for violations of the FCC's carrier registration rules and associated payment and reporting obligations. This action was a Consent Decree, so fewer facts surrounding the investigation and potential violations are disclosed. However, the action is notable because the target entity was a start-up dial-around provider of international telecommunications services. Per the Consent Decree, the entity operated for approximately 13 months before voluntarily coming forward to seek an international 214 and register with the Commission. This seems to be an unusually short time period to prompt an enforcement action -- Unipoint, for example, operated for nearly three years before filing for authorization. Moreover, Centmobile came forward before an FCC inquiry, and appears to have been prompt in correcting its violations (it filed its first 499-A, for example, only seven weeks late).

Nevertheless, the Centmobile agreed to a voluntary contribution of $185,000. This appears to be the undiscounted fine the FCC would impose for (1) failing to register as a carrier ($100,000) and (2) failing to file a CPNI certification ($25,000), plus $15,000 each for four failures to file the quarterly prepaid card provider certifications. (The FCC has not set a base forfeiture for the quarterly certifications, but $15,000 would be in the range it might assess.) In other words, it does not appear that Centmobile received any downward adjustment for its voluntary disclosure to the FCC.

* * * These cases indicate that the Commission has not softened its stance on voluntary disclosures, and, if anything, has been less hospitable to those who come forward voluntarily. The lesson appears to be that the best way to reduce a forfeiture is to correct any violations as early as possible. If one does this, it will have fewer violations to resolve, and thus will pay a lesser amount. Even the entity that comes forward to disclose its violations is likely to pay the same amount (or close to it) for each violation. I'm not sure that's the message the FCC intends to send, however.