IP CTS allows individuals who have difficulty hearing but are speech-capable to use a telephone with an IP-enabled device to communicate over the Internet by simultaneously listening to and reading captions of what the other party is saying. The FCC established the TRS Fund specifically to fund the costs of interstate TRS and contributions were limited to the interstate revenues of telecommunications service providers as well as interconnected and non-interconnected VoIP providers. However, to encourage development of emerging forms of TRS, like IP CTS, the FCC adopted an interim measure that allowed for providers of IP CTS (and other Internet-based TRS) to receive compensation for providing the service (whether interstate or intrastate) through the TRS Fund.

In recent years, there has been a significant increase in IP CTS use and similarly, the amount paid to reimburse service providers, which the FCC projects will account for 64.5% of all TRS Fund payments for the 2019-2020 fund year. As a result, the FCC has taken a number of actions aimed at curbing costs for the service. In 2018, the FCC adopted a reform package that included (1) revising the rate methodology used to compensate IP CTS providers and (2) imposing interim compensation rates to bring compensation closer to the FCC-determined actual average provider costs. Earlier this year, the FCC approved additional reforms to address waste, fraud, and abuse by requiring IP CTS providers to submit user registration information to the existing video relay service database to limit program access to only those determined to be eligible to use IP CTS.

With this new Order, the FCC responds to concerns raised by some telecommunications providers about the unfair burden IP CTS support puts on TRS Fund contributors that provide mainly interstate services. Now, the FCC adjusts the contribution mechanism for IP CTS to establish a more permanent approach and make the responsibility for IP CTS support more equitable amongst voice service providers. The FCC explains that IP CTS is available to consumers in every state and captions are provided for interstate as well as intrastate calls. Therefore, the Order expands the required TRS Fund contribution base for IP CTS to include the total interstate as well as intrastate end-user revenues for telecommunications and VoIP service providers. While the total contributions needed to support the TRS Fund is not expected to change, the FCC estimates that this change will result in a 59% decrease in the percentage of interstate end-user revenues on which TRS Fund contributions will be based.

The FCC grounded its authority for this decision in section 225 of the Communications Act, which directs the agency to make sure both intrastate and interstate TRS is available. In the Order, the FCC explains that a state’s decision to offer funding for only some TRS (excluding IP CTS) does not affect the FCC’s authority to direct intrastate funds to the service. To implement the change, the FCC will adopt a single IP CTS contribution factor to be applied to TRS contributors’ revenues. Intrastate telecommunications and VoIP providers must contribute revenue to fund intrastate IP CTS beginning with the TRS Fund Year 2020-21.

Under the FCC’s proposal, the Fraud Division would be comprised of existing Enforcement Bureau staff reassigned from other divisions who currently work on USF-related investigations. Once established, the Fraud Division is expected to collaborate with the FCC’s Office of the Inspector General, the Department of Justice, and other federal and state agencies to prosecute fraud involving USF programs. But beyond its proposed basic composition and collaborations, the FCC offered few details regarding how the new Fraud Division fits into its existing enforcement structure. For example, the Order provides no information regarding the anticipated size or leadership of the Fraud Division. The Order also does not explain whether the proposed Fraud Division would operate as a replacement for or some other evolution of the Enforcement Bureau’s existing USF Strike Force established in 2014, which the FCC similarly charged with combating waste, fraud, and abuse in USF programs. In addition, the Order does not indicate what role, if any, the new Fraud Division would have in prosecuting violations involving other FCC-supported programs, such as the Telecommunications Relay Services. Finally, unlike the other Enforcement Bureau divisions, which generally are organized around a broad subject matter (e.g., spectrum, media), the new division would be organized around a particular violation: USF fraud. Thus, it remains to be seen how the new Fraud Division would operate in concert with its concomitant divisions during investigations and enforcement actions.

As the FCC’s Fraud Division proposal involves internal Enforcement Bureau reorganization and does not alter existing regulations, it is not subject to notice and comment rulemaking. In accordance with federal law, however, the Fraud Division will not be established until the FCC’s reorganization plan receives approval from the White House Office of Management and Budget as well as both the House and Senate Appropriation Committees. The FCC did not provide a timeframe in which such approval is expected.

The Truth in Caller ID Act prohibits certain forms of “spoofing,” which involves the alteration of caller ID information. While Congress recognized certain benign uses of spoofing, federal law prohibits the deliberate falsification of caller ID information with the intent to harm or defraud consumers or unlawfully obtain something of value. Back in June 2017, the FCC accused Mr. Abramovich and his companies of placing millions of illegal robocalls that used spoofing to make the calls appear to be from local numbers to increase the likelihood that the called party would pick up, a practice known as “neighbor spoofing.” The robocalls indicated that they came from well-known travel companies like TripAdvisor, but in reality the robocalls directed consumers to foreign call centers that had no relationship with the companies. Mr. Abramovich did not deny that his companies placed the spoofed robocalls, but argued that he lacked the requisite intent to defraud or cause harm, and noted that only a fraction of the consumers targeted actually answered the robocalls. Mr. Abramovich also argued that the third-party companies that hired to him to run the robocall campaign and the carriers that transmitted the robocalls should share in the liability for the violations.

The FCC disagreed. First, the FCC found that the use of neighbor spoofing and the references to well-known travel companies demonstrated an intent to defraud consumers. The FCC also found that Mr. Abramovich intended to harm the travel companies by trading on their goodwill and harmed consumers by spoofing their phone numbers, resulting in angry return calls by robocall recipients. Second, the FCC rejected the argument that liability should be based on the number of consumers who actually answered, explaining that the Truth in Caller ID Act only requires that a spoofed call be placed with fraudulent intent, not that the call actually reach a consumer. Finally, the FCC emphasized that Mr. Abramovich and his companies, not the third-party travel companies or the carriers, actually placed the spoofed robocalls and therefore bore sole responsibility for the violations. In fact, the FCC stated that the spoofed robocalls harmed the carriers by burdening their networks and engendering consumer complaints.

The fine is important for reasons beyond its size. For one, the fine came less than a year after the FCC issued the associated notice of apparent liability – an unusually quick turnaround for such a complex case that represents a shift to accelerated enforcement in line with Chairman Pai’s prior calls for a one-year deadline for forfeiture orders. Moreover, the FCC imposed the record-setting fine despite Mr. Abramovich’s claims that he cannot pay it. The FCC is required by the Communications Act to consider a party’s ability to pay when assessing forfeitures. As a result, the FCC historically will reduce a fine to approximately 2-8% of a party’s gross revenues in response to an inability to pay claim and significantly lowered fines under this framework just over a year ago. However, inability to pay is just one factor in the FCC’s forfeiture analysis and the agency determined that the repeated, intentional, and egregious nature of Mr. Abramovich’s violations warranted the unprecedented fine. While the FCC’s rejection of the inability to pay claim is not unprecedented, it leaves open the question of whether and how the FCC expects Mr. Abramovich to pay the fine. In many cases, parties receiving large fines can negotiate lower settlements with the Department of Justice when it brings a collection action on behalf of the FCC, but such settlements are not guaranteed. As a result, it appears the FCC’s primary goal was to establish a strong precedent to deter future violators rather than to actually receive payment.

Two Commissioner statements on the item also deserve attention. Although voting to approve the fine, Commissioner O’Rielly dissented in part, questioning the FCC’s assertion that spoofed robocalls cause harm regardless of whether consumers actually hear the message. Commissioner O’Rielly agreed that Mr. Abramovich and his companies intended to defraud call recipients, but he did not find sufficient evidence to indicate that Mr. Abramovich and his companies specifically considered the potential harm to consumers with spoofed numbers or the referenced travel companies. The dissent appears concerned that the FCC automatically will infer an intent to harm any time neighbor spoofing is used, even when such spoofing does not involve fraud, creating a strict liability regime. Meanwhile, Commissioner Rosenworcel highlighted the need for comprehensive regulatory reform to combat illegal robocalls. Specifically, Commissioner Rosenworcel noted the recent federal court decision setting aside key aspects of the FCC’s robocalling rules and requiring the FCC to revisit its definition of an autodialer. The Commissioner also pointed to the glut of outstanding petitions at the agency seeking exemptions and technical limitations to the robocalling rules. The Commissioner signaled that the FCC’s focus on robocalling issues will involve as much rulemaking as enforcement.

We will continue to follow the actions of the FCC and lawmakers and post any new developments regarding robocalling and spoofing here.

The Rural Health Care Program (“RHCP”) is sure to face increased scrutiny in the wake of a $18.7 million proposed fine issued by the Federal Communications Commission (“FCC”) at its January meeting against a telecommunications reseller for allegedly defrauding the program. The FCC claims that DataConnex, one of the top five recipients of RHCP funding, violated the program’s competitive bidding rules and submitted falsified documents to increase the support it received. The FCC recently ramped up enforcement involving the RHCP and proposed significant reforms last month aimed at improving oversight and deterring fraud. The FCC’s actions potentially foreshadow additional restrictions on the use of RHCP consultants and the amount of available funding.

The RHCP offers funding to rural health care providers to make telecommunications services more affordable. Under the program, contracts for telecommunications services are awarded through an open competitive bidding process designed to select the most cost-effective bid. The RHCP’s Telecom Program allows service providers to receive payments based on the difference between the normally higher rates for telecommunications services in rural areas and the generally lower rates charged in urban areas. The FCC alleges that DataConnex engaged in a multi-year scheme with a healthcare consultant, through which DataConnex referred rural healthcare providers to the consultant with the understanding that the consultant would direct the healthcare institutions to select DataConnex as their telecommunications service provider. In exchange, DataConnex purportedly paid hundreds of thousands of dollars to a company owned by the consultant. DataConnex also allegedly misrepresented the costs of urban telecommunications services to boost the support it received from the RHCP.

Following recent trends in enforcement actions involving federal funds, the FCC upwardly adjusted the proposed fine to include a penalty equal to three times the amount DataConnex received from the program and threatened to revoke the company’s authorizations to provide service. In addition, recognizing the disruption the enforcement action posed to healthcare providers contracting with DataConnex, the Commission indicated it would consider waiving the competitive bidding rules to allow affected institutions to select a new RHCP service provider.

FCC Chairman Pai noted that the proposed fine represents the second enforcement action in the past year involving charges of RHCP fraud. Last summer, the FCC issued an amendment to its first-ever RHCP enforcement action, increasing the proposed penalty against telecommunications service provider Network Services Solutions and its chief executive for allegedly using inside information to gain an unfair advantage in the competitive bidding process. The FCC cited the Network Services Solutions case in support of RHCP reforms it proposed last month. Specifically, the FCC proposed establishing a benchmark to identify outlier requests for RCHP support and subject such requests to increased scrutiny. The FCC also proposed bolstering the RCHP competitive bidding rules and imposing more detailed requirements for determining urban and rural service rates. Critically, the FCC sought comment on whether it should implement disclosure requirements regarding the use of RHCP consultants and restrictions on the receipt of gifts in connection with funding requests.

Through its recent enforcement actions, the FCC appears to be making the case for significant reforms to the RHCP that will impact telecommunications service providers, healthcare institutions, and the healthcare consultant industry. As a result, stakeholders should carefully monitor the FCC’s actions and consider participating in the rulemaking process. The attorneys of Kelley Drye & Warren have significant experience with RHCP regulations and compliance, and can assist telecommunications and healthcare providers with navigating new rules and responding to FCC actions.

The E-Rate program is the country’s largest educational technology program and assists schools and libraries with obtaining affordable telecommunications and internet services. Under the program, educational institutions receive a discount from the FCC (through the Universal Service Administrative Company) on equipment and services provided by vendors. The discounts range from 20 to 90 percent, with higher discounts targeted to institutions located in high-poverty and rural areas. In order to receive the discount, institutions must use a competitive bidding process that treats price as the primary factor for selecting a vendor. Importantly, institutions may not receive any gifts or other payments in exchange for picking a vendor. Institutions also must pay a portion of the costs for the services and equipment to further incentivize the selection of the lowest-cost bid.

Federal prosecutors alleged that the CEO of a group of charter schools received thousands of dollars from a contracting executive in exchange for selecting the contractor as the schools’ E-Rate service provider. According to the indictment, the pair falsely certified to the FCC that the vendor selection followed the competitive bidding rules and submitted invoices for equipment and services that were never provided to the schools. Prosecutors also alleged that the schools never paid their required portion of the costs for the discounted equipment and services. In addition to potential prison time, prosecutors sought the recovery of any money or property traceable to the alleged E-Rate fraud.

The FCC also may take enforcement action against the schools and the contractor. The FCC recently increased its oversight of the E-Rate program following an uptick in complaints concerning conflicts of interest in bids as well as submissions of falsified claims. Late last year, the FCC required the E-Rate service provider to the New York City Department of Education to return over $17 million in subsidies after a school system consultant submitted fraudulent invoices for work performed by subcontractors he owned. The FCC already required the school system to pay $3 million and adopt a number of compliance measures to resolve the investigation, including the establishment of an E-Rate training program for school leadership and the appointment of an independent compliance monitor. The settlement represented the first time the FCC took enforcement action against an educational institution (instead of a vendor) for E-Rate violations. Moreover, the FCC previously proposed a fine of more than $100,000 and sought to recover E-Rate subsidies from an AT&T subsidiary for allegedly overcharging schools a rate 400 to 500 percent higher than the rate available to other customers.

Large penalties for E-Rate violations are common. First, the FCC often applies a “treble damages” factor to E-Rate overcharges, which can significantly increase fines. Second, the FCC normally imposes a separate fine for each false certification or invoice submitted, which can serve as a forfeiture multiplier. Third, the FCC generally seeks full restitution of improperly disbursed E-Rate support, including for support disbursed beyond the normal one-year statute of limitations for FCC enforcement actions, arguing that such action does not represent a separate fine but rather a recovery of federal funds.

The indictment and recent FCC E-Rate enforcement actions highlight the importance of putting in place strong compliance safeguards governing the request for and use of federal universal service support. Service providers and support recipients therefore should review their E-Rate compliance policies and procedures carefully.