Telecom Law Monitor : Washington D.C. Telecom Lawyer & Attorney : Kelley Drye & Warren Law Firm : New York, Chicago, Connecticut, New Jersey, Brussels

The enforcement date for the FTC "Red Flag Rule" to prevent identity theft  has been extended until November 1, 2009 in order to give businesses more time to understand the rule and take steps to comply.  The rule applies to any entity under FTC jurisdiction that is a "creditor" or "financial institution" and which maintains customer accounts which extend credit through post-paid arrangement.  This would include a VoIP provider that bills monthly after the fact, for example.  For those subject to the rule, they must take steps outlined by the FTC to allow them to look for "red flags" which might indicate identity theft from their customer information.  Click here for more information.  The rule should be taken seriously, both because FTC enforcement action can be taken against companies who fail to comply, and because failure to comply might create follow-on civil liability in class action or consumer lawsuits.  Additional information about the Red Flag Rule is also available on Kelley Drye's Advertising Law blog.

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The Federal Trade Commission has sued Diamond Phone Card and two individuals for allegedly(1) misrepresenting the number of minutes provided by the cards and (2) failing to disclose adequately the effect of fees on the number of minutes available.  Federal Trade Commission v. Diamond Phone Card, Inc. (U.S.E.D.N.Y. No. 09-3257).  The Complaint asks for a permanent injunction to prevent future violations, refunds and restitution for consumers, and the agency's costs of investigation. 

This case was announced on August 5, and follows the FTC's June settlement with Clifton Telecard Alliance (paid $1.3 million) and the February settlement with Alternatel and Mystic Prepaid (paid $2.25 million).   All three cases have been brought against card distributors, not telecom carriers, in deference to the "common carrier" exclusion from the FTC's enforcement jurisdiction.  Diamond Phone is based in the New York City area.  The FTC News Release announcing the suit thanked authorities in El Salvador, Colombia, Egypt, Mexico, Panama and Peru for their help in investigating the case.  The news release and a link to the Complaint can be found here. 

It is noteworthy that the Diamond Phone cards included written disclosures on their posters and on the cards themselves, as described in the FTC Complaint.  Diamond also had voice prompts.  However, the FTC lawsuit alleges the disclosures are inadequate because they are too small (10 point font on posters), are too separated from the larger rate claims (at the bottom of the poster) and were too vague ("connection fee may apply").  The disclosures on the cards themselves were said to be in 5 point font that is "nearly impossible to read" and appear on a portion of the card which is below a perforation and discardable.  The FTC said it tested several cards and the initial prompts stated different numbers of minutes than that stated on the cards and posters, and that even those minutes were not actually delivered. For example, the FTC said that a 50 minute card initially prompted 37 minutes and then delivered only 20 minutes in a single call.   Another card was said to be for 400 minutes to Mexico, but prompted 391 minutes and delivered only 106 minutes in a series of five calls of about 20 minutes each.

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             Local resellers of AT&T ILEC services have sued AT&T over the treatment of promotions offered by AT&T ILECs to new retail customers. Budget Prepay v. AT&T, Inc., Civ. Action No. 3:09CV1494-P (U.S.N.D. Texas – Dallas). The resellers contend that AT&T must give its wholesale customers, like them, the full value of any promotions that AT&T provides to new AT&T retail customers. For example, if Southwestern Bell offers new retail customers a $100 credit to sign up for new local telephone service in Texas, the resellers argue that Southwestern Bell is required to give wholesale customers the same $100 promotion for each new local customer they put on AT&T’s network. AT&T rejects this claim and contends that it may give its wholesale customers a lesser promotional amount than its retail customers. This argument has festered for over two years and now has escalated into millions of dollars in dispute. Recently, it has bubbled over into federal district court lawsuits in Texas and North Carolina.  CGM, Inc. v. BellSouth, Civ. Action No. 3:09-CV-377 (W.D.N.C) (Full disclosure, the author is counsel to the reseller in the North Carolina case.)

        Wholesale prices for local resellers are set by the State public utility commissions following FCC guidelines. The approach mandated by law is a “costs avoided” analysis that starts with the retail price and then applies discounts for wholesale customers based on costs that the ILEC avoids in serving wholesale customers rather than retail customers. This reduction in price is expressed as a percentage discount from the retail price, and in most states falls in a 15-20 percent range. Thus, in a typical state, if the monthly cost of local telephone service from BellSouth is $40, the wholesale discount might be 20 percent, resulting in a wholesale price of $32. For the past two years, AT&T has taken the position that any promotions given to resellers should first be discounted by an amount equal to the percentage discount applicable to wholesale pricing in general. For example, in a state with a 20 percent wholesale discount, a retail promotion of $50 would result in a discounted promotional payment to resellers of only $40. It is this $10 difference that is in dispute in most cases.

            The disputes have been pending for more than two years, but were recently given impetus by a new AT&T policy. In Accessible Letters published in July and August, AT&T announced a new formula for calculating the promotional amounts to be paid to resellers starting September 1. (“Accessible Letters” are public announcements by which AT&T states new policies it intends to apply to wholesale arrangements.) The new formula itself is extremely complex, but the bottom line is that the typical wholesale promotional amount will stop being approximately 80 percent of the retail amount – and instead drop to about 15 percent.  

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