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

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.

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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.

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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.

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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. 

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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.

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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.

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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

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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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As we discussed previously, AT&T has been sending threatening letters to prepaid card providers who offer local telephone numbers as an alternative to 1-800 access.  In our last post, we noted that the parties were far apart in their legal positions and we warned you to "stay tuned" for developments.  That warning proved appropriate, for on July 2, 2009, AT&T brought suit against a prepaid provider for failing to pay access charges on calls originated through local telephone numbers.

AT&T brought its lawsuit in federal district court against IDT Telecom, Inc. and Entrix Telecom, Inc., an affiliate of IDT.  The complaint alleges three counts (violations):  1.  Violation of the AT&T LECs' federal tariffs; 2.  Violation of the AT&T LECs' state tariffs; and 3.  Unjust Enrichment. 

It is noteworthy that AT&T chose not to bring claims against the CLEC(s) that provided the local numbers to IDT.  Instead, AT&T is suing IDT, even though IDT did not receive traffic directly from AT&T.  The lack of a direct relationship will make it harder for AT&T to establish that IDT is a customer under either the federal or state tariffs alleged to be violated. 

Presumably, IDT will move to refer the case to the FCC under the doctrine of primary jurisdiction.  If IDT is successful, the FCC will have to decide what, if any, access charges apply when customers dial local numbers to reach a prepaid card provider.  That question has been before the Commission since 2006, but the FCC has not yet made a decision.

The complaint is available here.

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In the last month, AT&T sent another round of demand letters to prepaid card providers seeking access charges on prepaid card calls. AT&T sent the first round of such letters in the fall of 2008. Now, we are seeing signs that a second group of targets has received similar letters. In all of these letters, AT&T targets prepaid calling card providers who make available local telephone numbers as an alternative to 1-800 access numbers. In this scenario, the prepaid provider typically purchases local DID numbers from a CLEC, and resells this local service along with its prepaid card service. The arrangement is similar to "foreign exchange" service in that it provides a distant entity with a "local" presence, accessible by dialing a local number, instead of requiring customers to dial long distance. AT&T contends that the use is subject to its access tariffs, and has threatened lawsuits against prepaid providers that do not cease and desist from the practice.

AT&T's first round of letters prompted a dust-up in the FCC's pending intercarrier compensation docket.  More recently, Cinco Telecom, which received one of AT&T's second round of letters, asked the FCC for clarification in the face of AT&T's threats. This request was followed by a letter from One Communications, supporting the need for clarification. On June 15, 2009 AT&T filed a response to the Cinco Telecom Corp. letter. The response submitted by AT&T denounces any need for clarification, stating that the request is "unfounded because the Commission’s order is quite clear." But AT&T ignores the pending petition for reconsideration in the docket that asks for the very relief AT&T claims is clear. And AT&T still does not explain how its tariff enables it to bill a prepaid provider for traffic when the prepaid card provider does not subscribe to any AT&T service.

The letter is significant because AT&T opens a new front against prepaid card providers -- the payment of USF. Prepaid calling card providers, like other providers of telecommunications services, must contribute directly to the federal USF based on their interstate and international telecommunications revenues. In the letter, AT&T complains that by using local dialed numbers, prepaid card providers receive an intrastate service instead of an interstate service, thereby reducing the interstate revenues available to the USF. Tellingly, AT&T copies Enforcement Bureau staff, in a clear attempt to bring additional investigations upon prepaid card providers.

Only one thing is clear in this situation: AT&T and the prepaid card providers are far apart on this issue. We have not seen any evidence that AT&T has filed suit against a prepaid card provider, but that may just be a matter of time. Unless the FCC acts, of course. Stay tuned.

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A group of international prepaid card companies have petitioned the FCC for a rule change that will allow them to file their own FCC Form 499As to cover the universal service fund assessments on their traffic.  The companies contend that the current rule unfairly punishes them and causes them to overpay into the USF by millions of dollars.  Because they have virtually no U.S. domestic calling, the companies qualify for the FCC's "88-12" rule treatment; that rule instructs carriers with more than 88% of their traffic being international to pay USF only on their domestic U.S. revenues. But another FCC rule tells carriers with "de minimis" amounts of U.S. domestic traffic not to file the Form 499A at all, instead being treated as "end users" whose traffic is lumped into that of their underlying carrier and paid for by that carrier. A carrier is de minimis when its contribution to the USF would be less than $10,000.  The combination of these rules causes many international carriers to lack the ability to file their own Form 499A because they are de minimis, but when their traffic is lumped in with another carrier that does not qualify for 88-12 treatment, the international carrier is then charged USF on its full volume of traffic.  For example, a carrier with $9,920,000 in international revenue and $80,000 in domestic U.S. revenue would have a USF assessment of about $9,600 ($80,000 x 12% = $9,600).  That would make the carrier de minimis and require it to report its revenue to its underlying carrier rather than file its own Form 499A.  But in many cases that underlying carrier does not itself qualify for 88-12 treatment and thus must pay $1,200,000 on the $10,000,000 of revenue realized by its international wholesale customer.  This amount is then passed through to the wholesale customer.  As a result, the international company must pay $1.2 million to its vendor rather than $9,600 to the USF.  The Petition to the FCC asks the agency to allow international carriers in such circumstances to file an FCC Form 499A of their own and pay directly rather than through their underlying carrier.  The Petition has gone on public notice and comments may be found here.

 

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Major prepaid calling card distributors have agreed to pay $2.25 million as part of a settlement to resolve Federal Trade Commission charges that they made false claims to consumers about the number of minutes of talk time their prepaid calling cards would provide. The companies targeted their advertising at recent immigrants, who the FTC said depend on the cards to stay in touch with friends and family in other countries. The defendants’ cards, which retail for $2 to $10, are sold through small retailers such as grocery and convenience stores, gas stations, and newsstands in Florida, Massachusetts, New Jersey, New Hampshire, and Rhode Island.

The settlement resolves charges brought by the FTC last May against Alternatel, Inc., Voice Prepaid, Inc., G.F.G. Enterprises, LLC, also d/b/a Mystic Prepaid, Voice Distributors, Inc., Telecom Express, Inc., and their individual principals, Nickolas Gulakos, Moses Greenfield, Lucas Friedlander, and Frank Wendorff. The Commission vote to approve the settlement was 4-0. The proposed settlement was filed in the U.S. District Court for the Southern District of Florida in Miami.

In its lawsuit, the FTC charged that the companies misled consumers about the number of minutes of talk time their prepaid calling cards provided. The FTC said its testing showed that consumers received only about half the advertised minutes. In addition, the FTC alleged that the defendants’ cards carried hidden fees. For example, while the defendants’ ads for their cards often prominently claimed “no connection fees;” they then failed to clearly disclose a host of fees, such as “hang-up” and “maintenance” fees and “destination surcharges” that could wipe out the value of the cards. Such fees were said to be disclosed in a font size that was too small and stated in confusing language. At the request of the FTC, shortly after the case was filed, the court issued a temporary injunction against the companies.

In addition to the payment of $2.25 million, as part of the settlement announced today the defendants have agreed to a Consent Decree barring them from misrepresenting the number of minutes of talk time consumers will receive from prepaid calling cards, and requiring them to disclose any applicable material limitations, such as any fees or charges.

The settlement is part of an ongoing FTC crackdown on disclosures in the prepaid calling card industry. The FTC has brought similar charges against Clifton Telecard Alliance, another major prepaid calling card distributor. The FTC has also established a joint federal-state task force concerning deceptive marketing practices in the prepaid calling card industry and has other active prepaid calling card investigations. So far, the FTC has limited its actions to card distributors and has not sought to challenge prepaid carriers themselves; carriers are exempt from FTC authority as they are regulated as common carriers by the FCC. In recent times, however, the FTC has expressed frustration over the limitation on its powers and Congress has considered legislation to remove the common carrier exemption from FTC enforcement authority.

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