Approaching Core Contracts Carefully Negotiated Agreements with Carriers and End-Users are Vital   By Thomas K. Crowe, Esq.   In many respects, telecommunications providers, including facilities-based and resale carriers, wireless providers, MVNOs and prepaid calling card providers, operate businesses dependent upon a series of key contractual partnerships, the most important of which are with their underlying carrier(s), sales agents or distributors, and end user customers. The contracts these providers establish with their end users are often more subtle, taking the form of point-of-sale disclosures and, in most cases, an FCC-required price list as well as state-filed tariffs.  If any of these core contracts represents a “bad deal”, the providers’ business model is in jeopardy.  Thus, negotiating sound core contracts should be a top priority for service providers.   The following are key considerations in the contracting process:   Underlying Carrier Agreements A service provider typically negotiates an agreement with its underlying carrier before it is operational, making it a critically important agreement.  In some cases, these agreements define the regulatory classification of the service provider, committing it to a regulatory classification that may, or may not, work for its own operating purposes.  On more than one occasion, providers new to the industry and the wiles of carrier agreement teams have committed themselves to unfavorable carrier contracts that ultimately led to their financial undoing. Negotiating carrier agreements, often presented as one-sided, “take-it-or-leave-it” deals should be approached cautiously and only with experienced counsel.   Minimum Commitment. The minimum commitment, which also goes by other names, is a hallmark feature of many carrier agreements. Under a minimum commitment, the customer agrees to purchase a certain minimum volume of services (on an annual or monthly basis) that is usually measured in dollars. If the minimum commitment is not met, a shortfall penalty is typically assessed.   The carrier account team will endeavor to sign a provider up for an elevated revenue commitment, often more than a provider can deliver. A new provider must be realistic (that is, conservative) in projecting the volumes it can generate and ensure that there is an adequate monthly or annual cushion to ensure that shortfall penalties are avoided. It is also important to understand what counts toward the commitment. Does it include all traffic covered by the deal, or are certain traffic, surcharges, etc. excluded in calculating the minimum commitment?   Recently, certain carriers have offered relatively short-term deals without commitments, which are often ideal for start-up providers.   Termination Rights. Most service agreements impose a potentially heavy financial penalty if the agreement is terminated by a telecommunications provider prior to the end of the term. It is not uncommon for providers to seek to terminate the agreement early for a variety of reasons. Unfortunately, many such providers do not fully comprehend the impact of the termination penalty.   Since virtually all underlying carriers will not hesitate to pursue collection actions in court for the full amount of the termination penalty in combination with any shortfall charge (the combined total of which can be financially staggering), service providers contemplating entering an agreement must realistically assess the impact of the termination penalty and aggressively negotiate it if it is excessive. It should also be obvious that a party may terminate a contract if the other party breaches the agreement. Sometimes, however, carrier agreements give the carrier and not the provider this right. Provisions must be negotiated to ensure fair treatment.   Payment Provisions. Disputes over terms of payment often result from oppressive payment provisions that telecommunications providers fail to negotiate. Providers should pay close attention to, among other things, the grace period before payment is due, the ability to dispute those charges and interest applicable to late payment.   The grace period (the time period in which payment is due before interest or other penalties apply) is particularly important. As counsel to service providers, we have witnessed numerous instances where a carrier invoice arrives at the end of the grace period, long after the invoice date. Instead, tying the payment date to the date a bill is received or to a verifiable electronic billing date allows for a longer grace period and helps avoid interest and other penalties from accruing.   Carrier agreements often limit dispute rights, including prohibiting set-off of the disputed amount from payments. While a number of considerations come into play here, providers should ensure that agreements do not limit their ability to set off disputed amounts and that carriers do not have the right to terminate the agreement for nonpayment of legitimately disputed amounts.   Other Terms. A host of other issues must also be carefully considered. For example, carrier agreements typically pass through a number of regulatory surcharges and administrative fees that must be both understood and ultimately passed along to customers (see Customer agreements below).   Although no longer commonplace, language requiring exclusivity generally should not be accepted. Stabilization of applicable carrier rates is also an important goal. Underlying carriers are required by FCC regulations to ensure that their prepaid and reseller customers have obtained the necessary authorizations from the FCC, so be sure that if your company provides interstate telecommunications service, it has registered to provide such services via a Form 499-A. Finally, general terms such as termination, assignment, nondisclosure, etc. are often drafted to give liberal rights to the carrier but not to the provider. All such provisions should be modified accordingly.   Customer Agreements Although most service providers have large numbers of customers which may acquire their product or service at a retail outlet or over the Internet, providers still need to establish a binding legal contract with purchasers of their product or services. The reasons for this include limiting provider liability in the event of a dispute and establishing the customer’s consent to a variety of surcharges as well as specific international and domestic rates.  Start-up providers sometimes neglect this important step, leading to potential liability through customer class action lawsuits.   FCC regulations require that international and domestic rates, terms and conditions be disclosed on a service provider’s website in the form of a price list. State regulations may separately require that state tariffs be maintained, which generally will give rise to price/term agreements with respect to intrastate rates.  By complying with these requirements and using appropriate language in point-of-sale (POS) or website disclosures (including referencing the price list/tariffs), providers can create an enforceable agreement between users and the company. Since the price list/tariffs will contain extensive liability limitation provisions, these provisions will generally govern the customer-provider relationship. To successfully cover all points and minimize exposure, disclosure provisions need to be carefully synchronized with price lists, tariffs and other marketing materials. Distributor Agreements Key issues here include termination provisions, liability limitation provisions, defining sales territories, evergreen provisions, card refunds, taxes, protection of intellectual property rights and fraud control. Other fundamental issues should also be addressed such as establishing an independent contractor relationship, indemnification, confidentiality, dispute resolution and the like. Applicable regulatory considerations should be taken into account to ensure that the agreement conforms to federal and state legal requirements. Providers should ensure that their contracts are properly drafted and negotiated, as core agreements can have an enormous impact on their businesses.   The author is a Washington, D.C.-based attorney specializing in communications, VoIP, wireless and prepaid legal/regulatory matters. To obtain additional information regarding any of the issues covered above, please contact Thomas K. Crowe at (202) 263-3640 or visit our website at www.tkcrowe.com.  The foregoing is intended to provide a general overview only and should not be viewed as a substitute for conferring with qualified legal counsel. Each new business will have unique requirements that should be analyzed by counsel.  Please note that these materials were last updated on June 15, 2007, and do not include developments occurring after that date.