Legal Alerts and Articles

FCC Takes First Step Towards Reforming Universal Service Fund

Thu, 06 May 2010 11:40:35 -0400

On April 21, 2010, the Federal Communications Commission (FCC or Commission) released a Notice of Inquiry (NOI) and Notice of Proposed Rulemaking (NPRM) soliciting public comment as the first step towards reforming the existing Universal Service Fund (USF) program. The USF program has come under fire in recent years because the USF contribution factor has escalated from under 6 percent in 1998 to more than 15 percent today, and because it does not support broadband services (only voice). Initial comments with respect to the NOI and NPRM are due sixty days from their publication in the Federal Register and reply comments are due ninety days from publication in the Register.

Background

The goal of the USF program has been to ensure that consumers have access to telecommunications services in areas where the cost of providing such services would otherwise be prohibitively high. While the existing system has been successful in facilitating access to affordable voice services throughout the nation, it was not designed to specifically promote access to broadband services.

The Commission’s NOI and NPRM follow on the heels of its March 16, 2010 Joint Statement on Broadband which states that “[t]he nearly $9 billion Universal Service Fund (USF) and the intercarrier compensation (ICC) system should be comprehensively reformed to increase accountability and efficiency, encourage targeted investment in broadband infrastructure, and emphasize the importance of broadband to the future of these programs.” On the same day, the FCC delivered to Congress a National Broadband Plan recommending that the Commission adopt cost-cutting measures for existing voice support and create a Connect America Fund (“CAF”) to support the provision of broadband communications in areas that would be unserved without such support, or that depend upon Universal Service support for the maintenance of existing broadband service.

The FCC’s reform effort is influenced substantially by the National Broadband Plan. The Plan recommends the creation of a CAF to address the broadband availability gap in unserved areas and to provide any ongoing support necessary to sustain service in areas that require public funding, including those areas that may already have broadband. In addition, the Plan recommends that the Commission direct public investment toward meeting an initial national broadband availability target of 4 Mbps of actual download speed and 1 Mbps of actual upload speed. The National Broadband Plan used an initial target of 4 Mbps actual download speed and 1 Mbps of actual upload speed to develop an analysis of the number of people that lack access to broadband capability today. The Plan estimated that 14 million people living in 7 million housing units in the United States currently do not have access to terrestrial broadband infrastructure capable of meeting this target, referred to as “the broadband availability gap.”

The National Broadband Plan states that the Commission’s “long range goal should be to replace all the legacy High-Cost programs with a new program that preserves the connectivity that Americans have today and advances universal broadband into the 21^st century.” Specifically, the Plan recommends that the new CAF adhere to the following principles: 1) the CAF should only provide funding in geographic areas where there is no private sector business case to provide broadband and high-quality voice grade service; 2) there should be at most one subsidized provider of broadband per geographic area; 3) the eligibility criteria for obtaining broadband support from the CAF should be company- and technology-agnostic, so long as the service provided meets the specifications set by the FCC; 4) the FCC should identify ways to drive funding to efficient levels, including market-based mechanisms where appropriate, to determine the firms that will receive CAF support and the amount of support they will receive; and 5) recipients of CAF support must be accountable for its use and subject to enforceable timelines for achieving universal access. The Plan also recommends that the FCC create a fast track program in the CAF for providers to receive targeted funding for new broadband construction in unserved areas, and create a Mobility Fund to provide one-time support for deployment of 3G networks, to bring all states to a minimum level of 3G (or better) mobile service availability.

The NOI

In its NOI, the Commission seeks public comment on a range of issues, many of which are related to the National Broadband Plan. Significantly, the NOI highlights the need for comment from insular areas and tribal governments. According to the NOI, “we request comment on whether there are any unique circumstances in insular areas that would necessitate a different approach.” In addition, the NOI states “[w]e encourage input from Tribal Governments on all of these issues, and specifically ask whether there are any unique circumstances in tribal lands that would necessitate a different approach.”

Among other things, the NOI seeks comment on whether the Commission should use the National Broadband Plan model as the starting point for developing a cost model to use in determining future support for broadband-capable networks that provide voice service. Comments are invited on any aspect of the National Broadband Plan. The NOI also seeks comment on whether the Commission should base any new CAF support on the forward-looking economic costs of an efficient provider, rather than on historic embedded costs. Keeping in mind that the plan recommended that funding “be company- and technology-agnostic”, the NOI seeks comment on what technology platforms should be included in the forward-looking cost model if the Commission decides to base broadband support on the forward-looking economic costs of an efficient provider. The NOI also seeks comment on what geographic area the Commission should use in calculating the cost of deploying a network and providing services.

Another area in which the Commission seeks comment is with respect to an expedited process for providing funding to extend networks in unserved areas. Among other things, the NOI seeks comment on the best way to create an accelerated process to distribute funding to support new deployment of broadband-capable networks in unserved areas during the period that the agency is considering final rules to implement fully the new CAF funding mechanism. In addition, the NOI seeks comment on whether some form of competitive procurement auction would be an efficient method to determine subsidies for the extension of new broadband-capable infrastructure in unserved areas.

The NPRM

The National Broadband Plan recommends that the Commission cut inefficient funding of legacy voice service, and refocus Universal Service funding to directly support modern communications networks that will provide broadband as well as voice services. In its NPRM, the Commission proposes to contain growth in legacy High-Cost support mechanisms as a critical first step to transitioning to a more efficient and accountable funding mechanism.

The NPRM generally seeks comment on controlling the size of the High-Cost program, and on specific steps to cut legacy High-Cost support. Specifically, the Commission seeks comment on capping legacy High-Cost support provided to incumbent telephone companies at 2010 levels, which would have the effect of creating an overall ceiling for the legacy High-Cost program. In addition, the NPRM seeks comment on the costs and benefits that would be realized by converting all rate of return carriers to price cap regulation or other incentive regulation. The NPRM seeks comment on whether the Commission should convert Interstate Common Line Support (ICLS) to a frozen amount per line, which would have the effect of limiting growth in the legacy High-Cost program. In addition, the NPRM seeks comment on the elimination of Interstate Access Support (IAS).

Consistent with recommendations in the National Broadband Plan, the NPRM seeks comment on whether the Commission should issue an Order to implement the voluntary commitments of Sprint and Verizon wireless to reduce the High-Cost funding that they receive as competitive eligible telecommunications carriers (“ETCs”) to zero over a five-year period as a condition of earlier merger decisions. In addition, the NPRM seeks comment on whether the Commission should phase out remaining competitive ETC funding under the existing funding mechanisms over a five-year period, and target the savings toward the deployment of broadband-capable networks and other reforms in the National Broadband Plan.

Again, it is significant to note that the Commission specifically seeks comment from insular areas and tribal governments. According to the NPRM, “we request comment on whether there are any unique circumstances in insular areas that would necessitate a different approach.” Similarly, the NPRM states “[w]e are particularly interested in input from Tribal Governments on these specific proposals, and specifically ask whether there are any unique circumstances in Tribal Lands that would necessitate a different approach.”

The USF is America’s largest telecommunications subsidy program, redistributing nearly $9 billion per year. Reforms to expand the program’s reach to encompass broadband networks could have effects, intended or unintended, on the ultimate USF contribution factor, thereby directly impacting communications service providers which presently contribute to the program. Moreover, reform could impact Universal Service (both voice and broadband), and Universal Service benefits in insular and tribal areas. In the past, insular and tribal areas have been remarkably successful in ensuring that they receive the benefits of USF distributions.

If you have questions or are interested in submitting comments by the deadline, please feel free to contact us.

April 2010

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FCC Overturns USAC Determination

Thu, 13 May 2010 14:59:49 -0400

In an Order released on April 30, 2010, the Federal Communications Commission’s (FCC’s) Wireline Competition Bureau struck down a determination of the Universal Service Administrative Company (USAC) which would have required a 499 filer to contribute to the Universal Service Fund (USF) based on revenues from its provision of internet access service.

The 499 filer in this case was U.S. TelePacific Corp. (TelePacific), which provides services in California and Nevada. TelePacific leases T1 lines from incumbent Local Exchange Carriers and uses them to sell a bundle of services, including internet access services, email services, and other features to small business customers. TelePacific also offers its customers voice telephony services, often bundled with its internet access service, over the same facilities. TelePacific’s voice telephony services are not at issue here, as the company contributes to the USF with respect to such services.

In its 2008 FCC Form 499-A (reporting revenues for 2007), TelePacific reported revenue from its internet access service as an information service not subject to Universal Service assessments. On December 10, 2009, USAC rejected TelePacific’s filing, concluding that its services provided over T1 lines were basic transmission services classified as a telecommunications service, and thus subject to USF reporting and contribution obligations. Accordingly, USAC ordered TelePacific to revise its 2008 FCC Form 499-A and any other past FCC Forms 499-A in which TelePacific reported its internet access service revenues as exempt from contributions, and to refile those forms. TelePacific then formally requested that the FCC review USAC’s decision. In its Order, the FCC’s Wireline Competition Bureau agrees with TelePacific that its internet access service is not currently subject to USF contribution requirements, and that USAC’s findings were in error. The FCC found that USAC’s reasoning was flawed, since it based its finding that TelePacific’s internet service was subject to USF solely on the fact that the facilities (T1 lines) used to provide the service are typically used for basic transmission service. The FCC bases its decision on its 2005 Wireline Broadband Internet Access Services Order, which concluded that wireline broadband internet access services are not subject to Universal Service contributions. (On the other hand, wireline broadband services that are provided as basic transmission services are subject to USF contributions.) The FCC’s determination specifically clarifies that the internet access service portion of TelePacific’s services is not subject to USF under existing Commission precedent.

Since TelePacific offers both internet access service and voice telephony service, the FCC’s Wireline Competition Bureau concludes that it does not have sufficient information in the record to determine the specific USF assessment which should be levied on the revenues derived from the sale of T1 lines to TelePacific. As a result, TelePacific was ordered to provide to the Wireline Competition Bureau a detailed explanation of the methodology by which it apportions revenues derived from its sales to end users of voice telephony and other services utilizing leased T1 lines and how it reports such revenues on FCC Forms 499-A.

The Wireline Competition Bureau’s ruling is significant for three reasons. First, it demonstrates that the FCC is not reluctant to overturn USAC in instances where it believes that USAC has improperly applied USF assessment obligations to services which should not be subject to USF. Second, it reaffirms that broadband internet access service is not subject to USF contributions, regardless of the type of wireline facility over which the service is provided. And third, it clarifies that in instances where providers offer both telephony and other services such as internet access services over leased T1 lines, only those specific services subject to USF assessments should be reported for USF purposes on an FCC Form 499. If you have any questions regarding this FCC ruling, please do not hesitate to contact us.

May 2010

FCC Initiates Inquiry into Broadband Network Failures

Fri, 30 Apr 2010 13:02:26 -0400

On April 21, 2010, the Federal Communications Commission (“FCC” or “Commission”) released a Notice of Inquiry (“NOI”) soliciting public comment on the resilience and survivability of the national broadband infrastructure in the event of attacks, natural disasters, or network overload. The Notice of Inquiry (in PDF format) can be downloaded from the FCC’s website at: http://bit.ly/cFNPCG.

The American Recovery and Reinvestment Act of 2009 (ARRA) directed the FCC to prepare a National Broadband Plan (“NBP”) and report that plan to Congress. One particular portion of the plan addressed ways in which the broadband infrastructure can “advance consumer welfare…public safety and homeland security…and other national purposes.” The objective of this FCC NOI is to, consistent with the recommendations of the NBP, enhance understanding of the present state of survivability in broadband communications networks and to explore potential measures to reduce network vulnerability to failures or severe overload conditions, such as would occur in natural disasters, pandemics, terrorist attacks and other disasters or events that would restrain communications abilities.

The Commission’s NOI acknowledges that reliance on broadband communications networks is increasing across all elements of our society and all sectors of our economy. The NOI also acknowledges that broadband core networks are generally presumed to be quite survivable.

Notwithstanding this, the NOI seeks public comment on the survivability features and risks presented by the physical architecture of current broadband communications networks. For example, what are the major single points of failure in broadband architectures (for example, edge route, gateway router, transport links, cell sites, and VoIP servers)? What are the impacts of failure of these points? What measures do communications providers take to minimize the presence of single points of failure in broadband architectures? In addition, what should the FCC’s role be in increasing the level of redundancy in broadband communications networks, taking into consideration the tradeoffs between potential regulatory burdens and the benefits of increased survivability?

The NOI also seeks comment on the risk of physical link failures along with the resulting risk of redundancy failures in broadband communications networks. According to the Commission, “[w]e are concerned that the level of redundancy and effectiveness of that redundancy in routing around failures may be inadequate in broadband communications networks.” The NOI seeks comment, for example, as to what extent core and edge network links are protected with “dark” backup links. The NOI asks as to whether there are instances where backup circuit paths occupy the same physical link as the primary circuit path. Further, the NOI asks how the FCC can enhance the chances that redundancy works in broadband communications networks without unduly burdening network operators. While the NBP recommends that any plan ensure that broadband satellite service is a part of any emergency preparedness program, the NOI does not specifically acknowledge this point.

Finally, the NOI seeks comment on the ability of broadband access networks (i.e., cable, DSL, fiber to the home, etc.) to maintain effective operation during severe network congestion or overload. In this regard, the Commission notes that “[l]arge-scale events such as pandemics or bioterror attacks may cause dramatic changes in broadband usage patterns as traffic that is ordinarily confined within enterprise or academic networks or passed between enterprise-grade access networks suddenly shifts onto residential-access networks.” In addition, the NOI asks whether there is a need for ways to prioritize broadband traffic during emergencies.

Initial comments on the NOI are due within 45 days from its publication in the Federal Register and reply comments are due within 75 days from publication in the Register.

The ability of broadband communications networks to sustain failure of network equipment or severe overload is a critical national priority. It affects not only federal, state, and local governments, but also providers which support public safety communications as well as the insular areas and Tribal nations.

If you have questions or are interested in submitting comments, please feel free to contact us.

April 2010

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Increased Penalties to CPNI Rule Violators

Wed, 03 Mar 2010 10:39:49 -0500

Earlier today, the Enforcement Bureau ("Bureau") of the Federal Communications Commission ("FCC") released two new Omnibus Notices of Apparent Liability for Forfeiture ("NALs") citing several companies for apparently violating the FCC's rules requiring the submission of an annual Customer Proprietary Network Information ("CPNI") Compliance Certificate which was due on or before March 1, 2009. These companies were each assessed a proposed forfeiture penalty in the amount of $25,000, an increase from the $20,000 penalty proposed in the Omnibus Notice of Apparent Liability for Forfeiture issued February 2009 (which assessed penalties for violations of the March 1, 2008 filing deadline).

In addition to the NALs, the Bureau also issued individual letters of inquiry to several companies concerning their apparent failure to file annual CPNI Compliance Certificates on or before March 1, 2009. Apparently, these letters requested that the recipients either a) provide the Bureau with proof that a CPNI Compliance Certificate was filed or b) file the Certificate within 30 days. The Bureau is likely to issue another Omnibus NAL assessing penalties against companies that do not comply or provide the appropriate responses to these inquiries.

These actions taken together indicate that the FCC is continuing to take enforcement of CPNI rules, including the annual March 1^st filing, very seriously. Accordingly, it is absolutely crucial that all telecommunications service and interconnected VoIP providers subject to the FCC's CPNI rules submit this year's required filing by March 1, 2010. Failure to do so will most likely lead to significant penalties in the near future.

If you require assistance with preparing your company's March 1, 2010 CPNI filing, or with responding to a letter of inquiry or Notice of Apparent Liability from the Enforcement Bureau, please contact us.

February 2010

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FCC Extends E-rate Funding to Interconnected VoIP and Text Messaging Services

Tue, 27 Apr 2010 11:50:30 -0400

In a Report and Order ("Order") released on December 2, 2009, the FCC released the Eligible Services List ("ESL") for the 2010 E-rate funding year, which begins on July 1, 2010 and concludes on June 30, 2011. The Order, among other things, extends E-rate funding eligibility to interconnected Voice over Internet Protocol ("VoIP") and text messaging services.

Since its implementation in 1998, the FCC's E-rate program provides discounts on eligible telecommunications and information services to schools and libraries under the Schools and Libraries Universal Service Support Mechanism. The Universal Service Administrative Company ("USAC") reimburses service providers on discounts that are passed onto participating schools and libraries. The ESL classifies telecommunications and information services into five general categories of services eligible for E-rate support: telecommunications service, internet access, internal connections, basic maintenance of internal connections, and miscellaneous. The telecommunications service and internet access categories receive Priority 1 funding while the other categories receive Priority 2 funding. Priority 1 services are allocated greater resources than Priority 2 services.

Interconnected VoIP and Text Messaging Services

Pursuant to the Order, interconnected VoIP and text messaging services are now eligible for funding under the E-rate program. The Order allows interconnected VoIP services to be classified under both the telecommunications service and internet access categories of the ESL, thereby allowing the schools and libraries to receive discounted interconnected VoIP services from either a telecommunications service provider or from an internet access provider. Interconnected VoIP service is eligible for Priority 1 funding, as it provides real time, two-way communications similar to other Priority 1 services. However, not all components of an interconnected VoIP system are eligible for Priority 1 funding. Internal VoIP connections are only eligible for Priority 2 funding and end-user equipment components of interconnected VoIP systems are not eligible for any E-rate funding.

E-rate support now also extends to text messaging services, but only when such services are used for educational purposes, which the FCC defines as "activities that are integral, immediate, and proximate to the education of students or library patrons." Special features, software, and/or applications that facilitate the mass distribution of text messages or creation of distribution groups are ineligible for E-rate funding. The Order classifies text messaging under the telecommunications service category of the ESL because it is usually offered in conjunction with wireless telephone service.

It is important to note that the FCC has not yet designated the regulatory classification for either interconnected VoIP or text messaging services. The Order clarifies that ESL categorization of text messaging and interconnected VoIP has no relation to the ultimate regulatory classification of these services.

Clarification of Services Eligibility

The Order also clarifies the eligibility of other services included in the ESL. For video on-demand services, the Order delineates the portion of the service eligible for funding as internal connections, which transports video to the classroom or parts of the library, and the portions ineligible for funding, which are the parts of the service that store video content. Whereas Ethernet previously was categorized under internal connections, the FCC now categorizes it under the telecommunications service category because the service has expanded from internal networks to networks that span great distances.

Additional clarification is also provided for the categorization and portions of other services previously eligible for funds, including web hosting, wireless LAN controllers, interconnected VoIP-related software, and virtualization software. The Order also lists services specifically excluded from the new ESL, including telephone broadcast messaging services and softphones.

To view the Order please see http://bit.ly/4BjTKk. The complete ESL is available at http://bit.ly/6BOn6A.

Competitive Bidding Process

In order to obtain E-rate support for the provision of eligible services to schools and libraries, service providers must participate in the E-rate competitive bidding process. To do so, service providers must first obtain a Service Provider Identification Number ("SPIN") by filing a completed Form 498 with USAC. Providers can then search for service requests from schools and libraries by reviewing information posted on USAC's website.

Registered service providers may submit bids for specific requests, and if selected to provide the proposed services, work with the school or library to complete the rest of the funding application process. USAC began accepting service requests on December 3, 2009 and the requests are concurrently posted onto USAC's website as they are received and processed. A school or library must wait at least 28 days from the time its request is posted on USAC's website before selecting a service provider. To obtain support in the 2010 E-rate funding year, a service provider must be selected by the school or library and USAC notified of the selection by February 11, 2010.

For more information on the competitive bidding process, please see http://www.universalservice.org/sl/.

Request for Comment

In the Order, the FCC also seeks comment on the inclusion of additional services in the E-rate program for 2011 and subsequent years, including firewall, scheduling services, and wireless internet access applications. Comments will be due 30 days after the Order is published in the Federal Register.

If you have any questions or would like assistance with participating in the E-rate process, please do not hesitate to contact us.

December 2009

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Proposed Rulemaking on Network Neutrality

Sun, 27 Dec 2009 07:17:08 -0500

On October 22nd, the Federal Communications Commission ("FCC") released a Notice of Proposed Rulemaking ("Notice") proposing new rules to protect the openness of the Internet. Facing what FCC Chairman Julius Genachowski called "the dangerous combination of an uncertain legal framework with ongoing as well as emerging challenges to a free and open Internet", the FCC's Notice seeks comment on the codification of six principles, as well as the application of those principles to non-wireline broadband and so-called "managed services" or "specialized services".

Background

In 2005, the FCC announced four general principles which would guide its interpretation of the Communications Act of 1934, as amended, to encourage broadband deployment as well as preserve and promote the open and interconnected nature of the internet. These principles stated that broadband consumers were entitled to a) access any lawful internet content of their choice; b) run applications and use services of their choice; c) connect legal devices of their choice; and d) competition among network, application, service, and content providers. However, these principles were merely stated as a means of guiding FCC policy, and were not established as enforceable rules.

In the Notice, the FCC identifies several challenges which it feels are threatening the openness of the internet to a degree which warrants new rules. In addition to the lack of competition among broadband providers, the FCC identifies the development of tools that allow network operators to prioritize or degrade different types of traffic as a primary challenge. The practice of traffic discrimination, the FCC says, has "the potential to change the Internet from an open platform that enables widespread innovation and entrepreneurship to an increasingly closed system with higher barriers to participation and reduced user choice and competition."

New Rules

In order to maintain the open and interconnected nature of the internet, the FCC now seeks to adopt as formal rules the four principles adopted in 2005 (see above), as well as two additional principles. The two additional principles that the FCC seeks to codify would require that broadband service providers a) treat all lawful content, applications and services in a nondiscriminatory manner, and b) disclose such information concerning network management to the public as is reasonably required to ensure the enjoyment of the protections provided by the other five principles. The FCC generally recognizes that the new rules will be subject to the demands of law enforcement, national security, delivery of emergency communications, and reasonable network management concerns. In addition, the FCC has stated that the new rules would not prohibit service providers from blocking the transfer of unlawful content.

Other Issues

While the FCC affirms that the six principles for which it has proposed new rules should apply to all broadband platforms, it recognizes in its Notice that the differing technologies and regulatory frameworks of non-wireline broadband (e.g. wireless broadband, satellite broadband, etc.) may require different implementations and applications of the new rules.

In addition, the FCC's Notice raises the issue of what it calls "managed" or "specialized" services, that is services which are internet-based and may utilize the same broadband networks, but which provide products or services which may be different from general broadband access from a regulatory and policy standpoint (e.g. IP-based voice and video subscription services). The Notice indicates that the FCC seeks to specifically define these types of services and determine whether, and if so to what extent, they should be subject to the six draft rules proposed in the Notice.

Request for Comment

The Notice requests comment from the public on all of the proposals and issues mentioned above. Comments are due to the FCC by January 14, 2010, and reply comments are due by March 5, 2010. For filing instructions or additional information about the proposed rules, see the Notice, which can be viewed at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-09-93A1.pdf.

If you have any questions or would like our assistance, please do not hesitate to contact us.

November 2009

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FCC USF Order Denies Review of USAC Findings

Sun, 27 Dec 2009 07:19:21 -0500

In an Order released on August 17, 2009, the FCC's Wireline Competition Bureau ("Bureau") denied requests filed by Global Crossing Bandwidth, Inc. a) seeking review of the Universal Service Administrative Company's ("USAC's") February 15, 2007 audit of that company's 2005 FCC Form 499-A and b) appealing USAC invoices submitted to Global Crossing based on the audit report. USAC's audit found that Global Crossing incorrectly recorded revenues from reseller customers that did not contribute to the Universal Service Fund ("USF") in 2004 as carrier's carrier revenue (i.e., Block 3 revenue), as opposed to end user revenue (i.e., Block 4 retail revenue) on which Global Crossing's USF contribution assessments are based. The ruling appears to represent an effort by the FCC to bolster the verification obligations it places on wholesale carriers with respect to their reseller customers.

USAC's Internal Audit Division audited Global Crossing's 2005 FCC Form 499-A, reporting calendar year 2004 revenues. In the audit report, USAC found, in part, that Global Crossing reported as reseller revenue certain revenues from customers that did not in fact contribute to the USF in 2004. Global Crossing failed to heed USAC's recommendation that it report as end user revenue the revenue from those customers that did not contribute to USF and failed to refile its 2005 FCC Form 499-A. Consequently, USAC calculated Global Crossing's outstanding obligations, treating as end user revenue all revenue from Global Crossing's customers that did not directly contribute to USF, and invoiced Global Crossing in October and November 2007 for the additional USF contributions owed. In defending USAC's actions, the Bureau's Order rejects the arguments, discussed below, raised by Global Crossing.

First, Global Crossing challenges USAC's assessment of USF contributions to Global Crossing and argues that those contributions should be recovered directly from Global Crossing's reseller customers. According to the Bureau's Order, "[a]lthough resellers have an obligation to contribute based on revenue received from their end user customers, the underlying carrier has an independent obligation to accurately report the revenue received from its customers [footnote omitted]." If an underlying carrier does not directly provide evidence to demonstrate its "reasonable belief that its customers were resellers that would directly contribute to the universal service fund", then the FCC will consider the revenue from those customers to be end user revenue and will look to the underlying carrier for the USF contribution.

According to the Order, the FCC has provided guidance on how a carrier may meet the reasonable expectation standard in its FCC Form 499-A instructions. Wholesale carriers can satisfy the reasonable expectation standard by maintaining certain minimum information on each reseller (i.e., Filer 499 ID, legal name, address, name of a contact person, and phone number of a contact person); and by verifying by the use of a certification that each reseller will: 1) resell the filer's services in the form of telecommunications; and 2) contribute directly to the federal USF support mechanisms; or by retaining a printout from the Commission's website at http://gullfoss2.fcc.gov/cgb/form499/499a.cfm indicating that the reseller is a current contributor to the Fund. A current reseller certification permits a wholesale carrier to demonstrate that its customer is in fact a reseller. According to the Order, "a wholesale carrier can substantiate its reasonable expectation regarding the status of a customer by retaining a current and properly executed reseller certification." For more information on reseller certifications, see http://www.tkcrowe.com/annual-usf-exemption-certificates/.

In a clarifying footnote, the Bureau points out that the issue in this case is not whether resellers have an obligation to contribute directly to the USF, but whether Global Crossing has an independent obligation to perform its own due diligence in establishing a reasonable expectation that its customers are resellers that will contribute on their own behalf.

The Order reasons that if a carrier fails to demonstrate that it either has affirmative knowledge that its customer is contributing to USF as a reseller, or has a reasonable expectation that its customer is contributing as a reseller based on guidance provided in the FCC Form 499-A instructions, or other reliable proof, USAC may reclassify that carrier's reported reseller revenue as end user revenue. That is precisely what occurred in this case. USAC's determination was based upon findings that Global Crossing's evidence consisted of "outdated certifications, contract provisions, company website information and product description", all of which did not support a finding that Global Crossing had a reasonable expectation that its customers would contribute directly to USF as resellers.

Second, Global Crossing argues that USAC misapplied the 2005 FCC Form 499-A instructions to the facts of this case, since those instructions permit it to rely on evidence other than a valid reseller certificate or Filer ID and website confirmation in establishing its expectation. While recognizing that Global Crossing was correct that a wholesale carrier may establish its reasonable expectation in ways other than those listed in the FCC Form 499-A instructions, the Bureau upholds USAC's finding that Global Crossing did not demonstrate in this particular case that it had such a reasonable expectation. Global Crossing also argues that USAC's assessment of contributions on revenue reported as reseller revenue by Global Crossing violates the Administrative Procedures Act, because USAC is exceeding its authority by creating a new rule and doing so without public notice and comment. The Bureau upholds USAC's determination that this argument is unfounded, citing several Commission orders supportive of this general principle.

Finally, the Bureau upholds USAC's rejection of Global Crossing's appeal of its October and November 2007 billing statements. For all the reasons set forth above, the Order upholds the USAC invoices which included additional USF contribution adjustments based on the audit finding that end user revenue for which Global Crossing's customers had not directly contributed should be included.

Significantly, the Bureau's Order notes that Global Crossing was required to pay the disputed invoices under the "pay and dispute" policy while its appeal was pending. Under the "pay and dispute" policy, contributors are required to pay disputed invoices without setoff or adjustment.

A copy of the Bureau's Order can be accessed at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-09-1821A1.pdf. Should you have any questions regarding the Order, please do not hesitate to contact us.

August 2009

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CPNI Consent Decrees Released

Sun, 27 Dec 2009 07:19:34 -0500

The FCC's Enforcement Bureau has begun releasing orders adopting "consent decrees" settling previously-initiated actions against a large number of companies for alleged Customer Proprietary Network Information ("CPNI") violations for failing to submit a compliance certificate on or before March 1, 2008. As of August 3, 2009, twelve such orders have been released, each of which adopts a consent decree which settles the action for a "voluntary contribution" of $1,000. Any entity cited in the Bureau's February 25, 2009 Omnibus Notice of Apparent Liability for Forfeiture ("Omnibus Notice") should consider whether pursuing such a settlement may be in its best interest.

The Bureau's Omnibus Notice assessed a proposed forfeiture in the amount of $20,000 against approximately 650 companies which allegedly failed to file CPNI compliance certifications on or before March 1, 2008, covering the 2007 calendar year. The Bureau found this to be a violation of Section 222 of the Communications Act of 1934, as amended, and Section 64.2009 (e) of the Commission's rules, among other things. Cited companies were given until March 26, 2009 to either a) pay the proposed forfeiture amount; or b) file with the FCC a formal written statement seeking either cancellation or reduction of the proposed forfeiture. Many companies elected to file formal written oppositions contesting the proposed $20,000 penalty.

The twelve orders recently released by the Bureau adopting Consent Decrees signal that the Bureau is apparently receptive to negotiating potentially attractive settlements in these individual cases. Any company facing a proposed $20,000 forfeiture in this matter could potentially benefit by approaching the Bureau to request a meeting to pursue settlement and negotiate a consent decree. This is particularly the case for organizations which failed to submit a compliance certificate, but were otherwise in compliance with the FCC's substantive CPNI rules.

The twelve consent decrees negotiated to date appear to resolve the pending actions in a manner beneficial to the parties involved. First, the consent decrees definitively terminate the investigations (removing the uncertainty associated with a pending federal enforcement investigation) and make clear that the Bureau will not use facts developed in the investigations to take action against the companies. Second, the cases are resolved for a "voluntary contribution" to the United States Treasury in the amount of $1,000, payable within 30 days. This is significant in that the payment is not officially classified as a "forfeiture" or "penalty" but rather a "voluntary contribution." Often, federal and state compliance filings and applications inquire as to whether the filer has ever been subjected to a government penalty or sanction, and the characterization of "voluntary contribution" typically will enable a negative answer to such an inquiry. Finally, the consent decrees include language stating that they do not render a judgment on the merits of the case or a factual or legal finding or determination regarding noncompliance. In other words, each party's record remains untarnished and absent a finding of a violation.

If your company or organization was cited in the Omnibus Notice (and may have also filed a response), please feel to give us a call to discuss whether pursuing a consent decree would be beneficial.

August 2009

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Broadband Grants Notice of Funds Availability Issued

Sun, 27 Dec 2009 01:37:33 -0500

On July 1, 2009, the Rural Utilities Service ("RUS") of the Department of Agriculture and the National Telecommunications and Information Administration ("NTIA") of the Department of Commerce released a Notice of Funds Availability ("NOFA") announcing the policies and application procedures for the first round of funding for broadband initiatives established pursuant to the American Recovery and Reinvestment Act of 2009 ("Recovery Act"). Pursuant to the Recovery Act, the RUS has established the Broadband Initiatives Program ("BIP"), and the NTIA has established the Broadband Technology Opportunities Program ("BTOP").

Program Summaries

BTOP will make grants available for deploying broadband infrastructure in unserved and underserved areas in the United States. There will be three categories of projects funded by BTOP: (a) broadband infrastructure - projects that deliver broadband service through last mile or middle mile facilities; (b) public computer center - projects that expand publicly accessible computer centers, such as community centers, community colleges and public universities; and (c) sustainable broadband adoption - projects that promote broadband demand, including broadband education, awareness, training, access, etc.

BIP will extend loans, grants, and loan/grant combinations to facilitate broadband deployment in rural areas. Grants are to be used to fund applications proposing to exclusively serve remote, unserved, rural areas. Applications which would serve non-remote or underserved areas would be funded by loans or loan/grant combinations. RUS will favor applications that propose a higher percentage of loan funds, and applicants may request one-hundred percent (100%) loan funding if desired.

All applications to fund broadband infrastructure in service areas which are at least seventy-five (75) percent rural are required to be submitted under BIP. However, applicants may also choose to be considered for BTOP funding, but must complete any additional elements required for BTOP applications. NTIA may make choose to make awards to such programs under BTOP if RUS decides not to fund them under BIP.

Application Timeline and Process

Applications for funding under both BTOP and BIP will be accepted from July 14, 2009 until August 14, 2009. Applicants may submit paper applications in limited circumstances (i.e., applicants with disabilities or if electronic filing would impose a hardship), but will generally be required to submit applications electronically. Electronically filed applications are due by 5:00 pm Eastern time on August 14, 2009.

In order to submit an application, all applicants must have a Dun and Bradstreet Data Universal Numbering System ("DUNS") number, and must also be registered with the Central Contractor Registration ("CCR") database and have a current CCR (CAGE) number. (A DUNS number is needed to register with CCR.) Note that processing times may be associated with obtaining DUNS and CAGE numbers, so these should be obtained ahead of time.

There will be a two step review process for the applications. Applicants that are considered the most highly qualified will advance to the second step of the review, during which additional information will be requested from the applicant. The second step of the review for BTOP applications will, among other things, also allow for evaluation and recommendation by the Governors of each state which would be affected by the applications. Awards will be made on a rolling basis, subject to funding availability, and RUS and NTIA intend to start announcing awards on or about November 7, 2009.

Eligibility and Evaluation Criteria

In order to qualify for funding, applicants (and applications) must meet minimum eligibility criteria including, for example, the following: applicants must be an eligible entity; applications must be fully completed and submitted timely; proposed services must meet the NOFA's definition of broadband; proposed projects must be technically feasible; applicants must commit to non-discrimination and interconnection obligations, among other things. A full list of eligibility criteria can be found in Section V of the NOFA. These are the minimum requirements in order to qualify for funding.

Applications for BIP and BTOP funding will then be scored and evaluated based upon objective criteria grouped into four general categories: (1) project purpose; (2) project benefits; (3) project viability; and (4) project budget and sustainability. Each project category (projects under BIP and the three BTOP project categories discussed above) will have its own specific criteria for scoring and evaluation based upon these four general categories. Each application will be scored against the objective criteria, and not against other applications. All of the application review criteria can be found in Section VII of the NOFA.

Applications

Since there is likely to be potentially significant preparatory work involved, companies interested in applying for funds should commence work on applications immediately. Applications and proposed projects should be reviewed carefully to ensure compliance with eligibility criteria and for maximum conformity with scoring and evaluation criteria.

July 2009

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Renewed Focus on FCC 214 Licensing

Sun, 27 Dec 2009 01:43:13 -0500

Obtaining start-up authority under Section 214 is one of the most important regulatory hurdles a new telecommunications provider must overcome before offering international service in the U.S. This fact was recently underscored by a Notice of Apparent Liability issued by the FCC’s Enforcement Bureau proposing to assess a $100,000 penalty or forfeiture against a prepaid calling card provider which had operated without such authorization. Obtaining Section 214 authority also potentially subjects a provider to a range of other federal compliance obligations.

All telecommunications providers (including facilities-based carriers, resellers, prepaid calling card providers and many wireless service providers) offering calling between the U.S. and foreign points must obtain a certificate of authority under Section 214 of the Communications Act of 1934 (“Act”). It is unlawful to offer or advertise services allowing international calling without first obtaining a Section 214 license. While the application is pending, a provider generally may not commence offering services. In short, a 214 authorization is a license to offer international telecommunications service. Because this requirement stems from Section 214 of the Act, it is generally referred to as a “214 license”, “214 authority”, “214 certificate”, “214 authorization”, or simply “214”.

Potential Penalties

On June 4, 2009, the FCC proposed to levy a fine or forefeiture in the amount of $100,000 against a prepaid calling card provider offering international services without Section 214 authority. The company originally applied for Section 214 authority on February 17, 2006, after having begun to offer service in May 2005. Its application was eventually granted on June 18, 2008, following referral of its application to the Executive Branch (i.e., the Federal Bureau of Investigation, the Department of Justice, and/or the Department of Homeland Security) for a protracted review of national security, law enforcement, foreign policy and trade concerns. During the course of the review, the company indicated that it had accumulated a customer base of at least 1,000 retail end users and had earned several million dollars in revenue from its prepaid calling card services in calendar year 2007 alone. Subsequent to the grant, the FCC’s Enforcement Bureau initiated an investigation into whether the company had violated FCC rules by operating without prerequisite Section 214 authority.

The FCC’s decision to levy the proposed forfeiture is based on several factors. First, the Commission found that the company operated unlawfully without Section 214 authority from May 2005 until June 18, 2008. Second, the FCC found that the company failed to obtain interim temporary authority (called a “special temporary authority”) while its application was pending. Third, the FCC found the violation to be “egregious” warranting a higher forfeiture amount since the company’s revenues during the period of unlawful operation were high. This decision will likely serve as the model for future Enforcement Bureau actions against providers operating without Section 214 authority.

The Application Process

FCC rules require that all 214 applications be filed electronically through the FCC’s website. “Paper applications” are not accepted. The current FCC filing fee for Section 214 applications is $1015. The application should appear on Public Notice as accepted for streamlined (or expedited) processing by the FCC’s International Bureau within 2 to 3 days of receipt of payment. Once accepted for streamlined processing, the application is generally granted automatically the day after a 14 day waiting period (i.e., 15 days later).

Some applications, however, do not qualify for streamlined processing which means that additional time beyond the 14 day processing cycle is required to assess these applications. Generally speaking, there are four circumstances which can arise where the FCC will not process a 214 application under streamlined processing. The first occurs where the applicant is affiliated with a foreign carrier in the destination market it seeks to serve, unless the applicant can make a special showing. The second circumstance occurs where the applicant has an affiliation with a dominant U.S. carrier whose international switched or private line services the applicant seeks authority to resell. The third circumstance that can arise disqualifying an application from streamlined processing is when the applicant seeks authority to provide switched basic services over private lines to a country for which the FCC has not previously authorized the provision of switched services over private lines. Finally, a “catch all” category exists where at any time during the fourteen day period, the FCC can inform the applicant that its application is no longer eligible for streamlined processing. Since the World Trade Center attacks of September 11, 2001, the FCC has used this “catch all” category to remove a significant number of 214 applications from streamlined processing at the request of the Executive Branch, which has identified such applications for closer scrutiny.

While FCC regulations allow foreign-owned companies to apply for and hold FCC 214 licenses, applications from these companies are far more likely to be pulled for closer scrutiny by the Executive Branch. Executive Branch inquiries typically request additional information (sometimes significant additional information) about the applicant, its ownership, where its business records will be located, and the specific types of telecommunications services it plans to provide. These investigations can delay final action on an application for weeks or possibly even months, and should be approached carefully.

Once application processing is complete and the FCC is prepared to grant an application, it issues a second Public Notice which lists approved applications. This second Public Notice serves as the official certificate for the applicant that it is authorized under Section 214 of the Act to provide international service between the U.S. and foreign points.

Common misconceptions surround Section 214 licenses. For example, despite the belief of some, prepaid calling card providers as well as prepaid wireless providers are required to hold 214 authorizations if their service allows calls to be placed between the U.S. and foreign points. Another “misconception” is that providers can “ride on” the 214 license of another carrier or their underlying provider. This is not true, and providers that resell the international services of other 214-authorized carriers are required to have their own 214 authorization.

Ongoing Federal Compliance

Operating as a Section 214 licensee entails a range of ongoing federal compliance obligations. One requirement is to keep the FCC updated as to any substantial changes in ownership, transfers of control, or other changes in the regulatory status of the license. Any such changes need to be promptly reported to the FCC. In addition, a 214 licensee must disclose its rates, terms and conditions to the public (usually via a Price List posted on its website); pay certain regulatory fees and surcharges (including possibly the Universal Service Fund (“USF”) assessment); as well as even comply with rules for when it discontinues service or ceases operations. Thus, Section 214 licensing is anything but a one-step, one-time obligation.

One point warranting special consideration is the USF assessment. New telecommunications providers need to carefully consider how their businesses will be impacted by the USF. Providers are required to obtain separate authorization to provide such service by submitting selected portions of an FCC Form 499A. This effectively registers the company with the USF program under which most providers are assessed for USF at 11.3% (presently) of their gross interstate and international revenues. USF contributions are calculated based on quarterly submissions of FCC Form 499Q and annual submissions of FCC Form 499A (due each April). Carriers are invoiced by the Universal Service Administrative Company and payment is required on a monthly basis. Providers are allowed to pass along these assessments to their customers.

Providers offering international-only services or offering only a small percentage of interstate services (i.e., less than 12% of combined international/interstate) can be exempt under the FCC’s rules from paying USF on their international service revenues. Even if a provider does not offer interstate services, however, it still will need to submit an FCC Form 499A each April 1. The reason for this is that other regulatory fees are assessed by means of this form which international-only providers must pay. These assessments cover the following programs: the North American Numbering Plan (NANP) assessment, Local Number Portability (LNP) assessments, and Telecommunications Relay Services (TRS) fees.

The USF assessment is a substantial regulatory surcharge which clearly will impact a provider’s price structure. When applying for Section 214 authorization, a provider should be mindful of the USF assessment and take it into account as part of its overall regulatory compliance plan.

Conclusion

The fact remains that obtaining authority under Section 214 is one of the most important regulatory hurdles a new telecommunications provider must overcome before offering service in the U.S. With growing scrutiny of Section 214 applications by the Executive Branch and important ongoing federal compliance obligations, Section 214 licensing should not be taken lightly.

June 2009

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Ensuring Compliance with FCC Privacy (CPNI) Rules

Sun, 27 Dec 2009 01:59:16 -0500

FCC CPNI Action

Mon, 18 Jan 2010 11:58:51 -0500

On February 25, 2009, the FCC's Enforcement Bureau released an Omnibus Notice of Apparent Liability for Forfeiture ("Omnibus Notice") citing a large number of specifically-named telecommunications service providers for apparently violating the FCC's rules requiring the submission of an annual Customer Proprietary Network Information ("CPNI") Compliance Certificate on or before March 1, 2008. These companies were each assessed a proposed forfeiture penalty in the amount of $20,000.

Through a series of separate, individual Notices of Apparently Liability for Forfeiture, the Bureau also additionally assessed proposed forfeitures in varying smaller amounts against several companies which, although they filed requisite CPNI Compliance Certificates by the deadline, submitted deficient Certificates.

Forfeitures for Failure to File CPNI Certifications by March 1, 2008

The Bureau's Omnibus Notice finds that approximately 650 companies failed to file CPNI Compliance Certifications on or before March 1, 2008, covering the 2007 calendar year. The Bureau found this to be a violation of Section 222 of the Communications Act of 1934, as amended, and Section 64.2009(e) of the Commission's Rules, among other things. The Omnibus Notice indicates that the Enforcement Bureau sent letters of inquiry to many of these companies asking them to supply evidence of their annual CPNI Certification filings.

A copy of the Omnibus Notice containing an appendix listing the specific sanctioned companies can be accessed at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-09-426A1.pdf.

The Bureau's Omnibus Notice assesses a proposed forfeiture or financial penalty in the amount of $20,000 against each cited company. This represents a revised forfeiture approach since previously the Bureau had been utilizing standard forfeiture amounts of $100,000 against carriers for violations of the Commission's CPNI rules. While the Omnibus Notice indicates that this new approach is based on a number of factors, one of those factors is that the vast majority of companies affected are smaller companies.

Forfeitures for Companies Submitting Deficient CPNI Certifications

Separate Notices of Apparent Liability for Forfeiture find that while some companies did submit CPNI Compliance Certifications by March 1, 2008, such Certifications were deficient in that they failed to comply with the specifics of the FCC's CPNI filing obligations. These actions levy proposed penalties of up to $10,000 against each cited company.

Deadline for Response

Cited companies either failing to file CPNI Certifications by the March 1, 2008 deadline or submitting deficient Certifications have until March 26, 2009 to either a) pay the proposed forfeiture amount (payment instructions are set forth in the Omnibus Notice); or b) file with the FCC a formal written statement seeking either cancellation or reduction of the proposed forfeiture. The FCC has previously recognized that there are several grounds upon which it may reduce a proposed forfeiture. It should be noted that these matters constitute formal Enforcement Bureau proceedings, and specific rules and requirements apply to the filing of a response.

According to FCC Acting Chairman Michael J. Copps, who issued a separate statement, "[c]arriers' obligation to annually certify that they have implemented a CPNI protection plan is essential to ensuring their compliance with the Commission's rules as well as our ability to monitor their compliance. The broad nature of this enforcement action hopefully will ensure substantial compliance with our CPNI rules going forward as the Commission continues to make consumer privacy protection a top priority."

Please do not hesitate to contact us if you are interested in our assistance in submitting a formal written statement contesting any of the above forfeitures, or if you have questions. For background information with respect to the FCC's CPNI rules, please see http://www.xchangemag.com/articles/ensuring-compliance-with-fcc-privacy-rules.html.

February 2009

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New FCC VoIP Rules

Tue, 29 Dec 2009 22:39:24 -0500

On October 21, 2008, the FCC adopted new rules intended to facilitate the provision of 911 and enhanced 911 (E911) service by providers of Interconnected Voice over Internet Protocol ("interconnected VoIP") service. Specifically, the FCC's Report and Order ("Order") achieves this by giving interconnected VoIP providers rights of access to any and all capabilities necessary to provide 911 and E911 services from entities that control those capabilities.

Background

On July 23, 2008, the President signed into law the New and Emerging Technologies 911 Improvement Act of 2008 ("NET 911 Act") to promote public safety by facilitating the rapid deployment of interconnected VoIP 911 and E911 services, and to encourage the Nation's transition to a national IP-enabled emergency network. The NET 911 Act imposes on interconnected VoIP providers the obligation to provide 911 and E911 service, supplementing the FCC's current rules imposing 911 and E911 requirements on such providers (see 47 C.F.R. §§ 9.1 et seq.). The NET 911 Act also imposes express obligations on the owners or controllers of capabilities that can be used for 911 or E911.

Access to 911 and E911 Capabilities

As mandated by the NET 911 Act, the FCC's new rules require the owner or controller of a capability that can be used for 911 or E911 service to make that capability available to a requesting interconnected VoIP provider. Typically, owners or controllers of such capabilities include incumbent Local Exchange Carriers ("LECs"); wireless service providers; states, localities and public safety access points ("PSAPs"); and third party commercial providers which route E911 calls to the appropriate PSAP.

According to the FCC's new rules, if the owner or controller makes a requested capability available to any wireless provider for its provision of 911 or E911 service, the owner or controller must make that capability available to interconnected VoIP providers. Additionally, even if the owner or controller does not make the requested capability available to any wireless providers, the owner or controller must make that capability available to a requesting interconnected VoIP provider if the capability is necessary to enable the interconnected VoIP provider to offer 911 or E911 service.

However, the FCC's new rules do not grant interconnected VoIP providers an unlimited right of access to a requested capability. If an interconnected VoIP provider obtains access to a capability pursuant to the new rules, it must use that capability only for the purpose of providing 911 or E911 service.

Rates, Terms and Conditions

The FCC's new rules also require that the rates, terms, and conditions on which a capability is offered to an interconnected VoIP provider be reasonable. For purposes of enforcement, the FCC will consider rates, terms, and conditions to be reasonable if they are: (1) the same as the rates, terms, and conditions that are made available to wireless providers, or (2) in the event such capability is not made available to wireless providers, the same rates, terms, and conditions that are made available to any telecommunications carrier or other entity for the provision of 911 or E911 service.

To the extent that an owner or controller of a capability provides a capability to more than one wireless provider or other entity, an interconnected VoIP provider that requests access to such capability is entitled only to the rates, terms and conditions made available to any other provider (i.e. an interconnected VoIP provider is not allowed to "pick and choose" the best rates, terms and conditions from several available service agreements).

Although the FCC will not require owners and controllers of capabilities for the provision of 911 or E911 service to publish their rates, terms, and conditions or file them with the Commission, its new rules do require owners and controllers of such capabilities to ensure that interconnected VoIP providers have ready access to the rates, terms, and conditions on which a capability is provided.

Technical, Network Security and Privacy Requirements

Finally, the FCC's Order directs interconnected VoIP providers to comply with all applicable industry security standards. Recognizing that the security of the nation's emergency services network depends on many interlocking measures, the FCC's Order states that the network elements used to provide 911 service must be kept both physically secure and secure against unauthorized electronic access, such as through hacking. The Order also contemplates that incumbent LECs and other owners or controllers of 911 or E911 infrastructure will acquire information regarding interconnected VoIP providers and their customers for use in the provision of emergency services, but expressly prohibits the use of customer information obtained as a result of the provision of 911 or E911 services for marketing purposes.

Effective Date

According to the Order, the new rules are to take effect 30 days after publication in the Federal Register subject to OMB approval.

A copy of the FCC's Order and new rules can be accessed at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-249A1.pdf. Please do not hesitate to contact me if you have questions regarding the FCC's Order or new rules.

October 2008

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Annual USF Exemption Certificates

Thu, 31 Dec 2009 04:33:33 -0500

This is to remind wholesale telecommunications providers of their obligation to obtain on an annual basis an updated USF Exemption Certificate from their reseller customers.

In a Legal Alert earlier this year, we explained that providers of wholesale telecommunications to other carriers/resellers ("wholesale providers") of their obligations to 1) confirm that reseller customers have registered under the FCC's Universal Service ("USF") program, 2) verify the reseller's USF contribution status on the FCC's website, and 3) obtain a signed certification from the reseller regarding its USF exemption/contribution status ("USF Exemption Certificate"). Wholesale providers that do not fulfill these obligations may be liable for USF charges on services provided to their reseller customers. These obligations apply to both pure wholesale providers and mixed wholesale providers, or providers which offer both wholesale and retail services.

Wholesale providers are generally not liable for USF contributions on services provided to reseller customers, as long as the wholesale provider has verified (through the steps mentioned above) that the reseller customer is itself a contributor to the USF program. If a reseller is a contributor, then the wholesale provider can report revenue derived from that reseller on Block 3 of the FCC Form 499-A, and the wholesale provider will not be liable for USF contributions on that revenue ("wholesale revenue"). The key is to ensure that a reseller's USF contribution status is properly verified.

USF Exemption Certificates are the cornerstone of this verification process. However, wholesale providers should be aware that the obligation to obtain USF Exemption Certificates from reseller customers is ongoing. According to the FCC's Form 499-A Instructions, wholesale providers are required to obtain updated USF Exemption Certificates from resellers on at least an annual basis, or more frequently whenever a reseller's USF contribution status changes. Each year, wholesale providers should obtain updated USF Exemption Certificates to their reseller customers in order to satisfy this legal requirement. Not only does this step satisfy the rules, it also affords an opportunity to make other appropriate revisions to USF Exemption Certificates based upon changes in the wholesale provider's business developments.

If a wholesale provider does not have current USF Exemption Certificates on file for a particular reseller customer, the Universal Service Administrative Company ("USAC") could reclassify wholesale revenue derived from that customer as end-user revenue, thereby subjecting the wholesale provider to additional USF contributions.

In addition to ensuring that updated USF Exemption Certificates are obtained annually from resellers, wholesale providers should also take the opportunity to consult with counsel regarding any changes in regulations which could affect their USF exemption strategy. Changes in the regulatory environment (as well as in the wholesale provider's own business operations) could very well necessitate modifications to the form and/or content of the USF Exemption Certificates being used.

Please do not hesitate to contact us if you have questions about, or need assistance with, the FCC's USF Exemption Certificate requirements.

October 2008

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FCC Conference Calling Order

Thu, 31 Dec 2009 04:38:05 -0500

On June 30, 2008, the FCC released an order ("InterCall Order") rejecting InterCall, Inc.'s ("InterCall's") appeal of a determination by the Universal Service Administrative Company ("USAC") that the company's voice conferencing services were "telecommunications services" subject to Universal Service Fund ("USF") contributions. Last week, the FCC requested public comment on petitions for reconsideration of this determination filed by Global Conference Partners, A+ Conferencing Ltd., Free Conferencing Corporation, and the Conference Group. Comments are due by September 8, 2008 and reply comments are due by September 22, 2008.

Background

InterCall is a provider of, among other things, conference calling services. These services allow conference participants to connect, via a toll-free number purchased by InterCall, to an audio bridge which connects the participant to others in the conference. Generally, charges for the toll-free calls were passed on to the customer. In its FCC Forms 499-A and 499-Q, the company treated this revenue as non-telecommunications revenue, arguing that conference calling providers were end users for the purposes of USF contributions, and therefore did not contribute directly to the fund. USAC, which audited the company in 2007, took the position that conference calling services were subject to USF contributions because the FCC Form 499-A instructions requires companies to report "toll teleconferencing services". InterCall appealed USAC's decision before the FCC arguing that, even if its products could be considered "toll teleconferencing services", such requirement could only be imposed on conference calling service providers after full notice and comment proceedings.

FCC Order

In its InterCall Order, the FCC rejected the appeal, finding that InterCall's services were "telecommunications services" under the FCC's rules and prior decisions. It rejected InterCall's argument that it is an end user of telecommunications services because conference calling products allow customers to transmit voice communications between specified points, and therefore meet the definition of "telecommunications" under federal statutes. Therefore, the FCC reasoned, prior FCC rules and orders were sufficient to apply USF filing and assessment requirements to InterCall.

InterCall also argued that its services were "information services" because the company's conference products allowed customers additional functionality such as muting participants, recording, and access to operator assistance. The FCC also rejected this argument because the services were not sufficiently integrated with the telecommunications portion of the products.

However, recognizing that underlying carriers have generally "treated these providers as end users and have assessed universal service contribution fees", the FCC decided to enforce USF requirements on a prospective basis only. This means that conference calling providers, in general, will be required to file the FCC Forms 499 and contribute USF from the effective date of the InterCall order (July 30, 2008) forward.

Other Regulatory Implications

Because the InterCall Order classifies conference calling products as "telecommunications services", conference calling providers may be subject not only to Universal Service regulatory obligations, but a whole host of other federal regulatory obligations as well. This includes, but is not limited to, obligations to safeguard Customer Proprietary Network Information ("CPNI"), Communications Assistance for Law Enforcement Act ("CALEA") obligations, payment of annual regulatory fees, and other reporting requirements. These additional requirements will increase the regulatory burden on conference calling providers, increasing the expense and creating several legal liabilities which were not present prior to this decision.

Because of this impact on conference calling businesses, four companies have filed petitions of reconsideration of the InterCall Order and the FCC, as indicated above, has requested public comment.

Please let us know if you have any questions or are interested in participating in this proceeding

August 2008

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More FCC USF Enforcement

Thu, 31 Dec 2009 04:38:55 -0500

Recently, the Federal Communications Commission ("FCC") levied a financial penalty for Universal Service Fund ("USF") violations that represents its largest to date. Global Crossing North America, Inc., and two of its subsidiaries (collectively, "Global Crossing") apparently failed to make timely required USF contributions. Based on its enforcement investigation, the Commission proposed a $10 million penalty or forfeiture for the violations. The proposed forfeiture dwarfs the vast majority of financial penalties issued by the FCC to date for USF violations.

In addition to the unprecedented Global Crossing Notice of Apparent Liability ("NAL"), the FCC also released NALs against Compass Global, Inc. ("Compass Global"), a wholesale provider which packaged its services as a platform for prepaid calling card providers, and Telrite Corporation ("Telrite"), a toll reseller. Each of these proposed forfeitures approached $1 million.

The FCC concluded in each of these three enforcement proceedings that the forfeitures it has issued to date have not created a sufficient incentive for providers to make timely USF payments. The FCC takes non-compliance with USF obligations seriously since such violations are a threat to the integrity of the USF system and because violators obtain a competitive advantage compared with other providers that fulfill their USF obligations. As a result, beginning with these three NALs, the FCC has drastically changed its methodology for calculating penalties in a way that will significantly increase financial liability. Given the agency's clear frustration with USF violations, even larger and greater numbers of USF forfeitures are likely in the future.

New Methodology

In prior investigations, forfeitures were based solely on violations that began in the year prior to commencement of the FCC's investigation. However, the FCC is now basing its proposed forfeitures on "not only violations that began within the last twelve months, but all violations, whenever they began, unless they were cured more than one year ago." An outstanding balance, no matter how old, can be subject to an enforcement action for a year after the violation is cured.

In addition to prosecuting all obligations uncured during the prior year, the FCC continued to propose a base forfeiture of $10,000 for each month in which a carrier has failed to fully pay required universal service contributions and $20,000 for each month in which a carrier has failed to make any required universal service contribution, plus an upward adjustment of one-half of the largest USF contribution that was not fully paid. Although this aspect of the forfeiture calculation remains consistent with prior enforcement actions, total potential forfeiture liability is now greatly increased.

Global Crossing

USF: According to the NAL, Global Crossing, a major provider of interstate telecommunications, showed a "pattern of delinquency" by failing to make on-time USF contributions. The company would remit USF contributions to USAC, according to the Commission, only before being referred to the Department of the Treasury for collection. According to the FCC, these large "catch-up" payments caused a substantial strain on the USF system because the stream of revenue failed to be constant and circumvented normal debt collection procedures. Global Crossing, according to the NAL, did not make any USF payments in 15 months and only remitted partial payment in 16 months of the period covered by the NAL.

TRS: In addition to USF, Telecommunications Relay Service Fund ("TRS") invoices are generated from the FCC Form 499-A. Global Crossing, according to the NAL, failed to submit on-time payments for TRS on four occasions during the same period. The Commission also found that the company violated this obligation.

Liability: Applying the forfeiture calculation method to Global Crossing's violation, the FCC proposed a base forfeiture amount of $20,000 for each month in which Global Crossing failed to remit any contribution (a total of 15 months) and $10,000 for each month in which Global Crossing failed to remit the full amount invoiced by USAC (a total of 16 months). As with other enforcement actions in the past, the company's proposed forfeiture was also subject to the upward adjustment. Given the magnitude of Global Crossing's largest unpaid balance, these exceeded $9 million dollars. The FCC also proposed a forfeiture amount for unpaid TRS contributions with a similar upward adjustment, totaling $579,291. In sum, the overall proposed forfeiture was $10,518,013.

Compass Global

Compass Global was investigated for not filing annual FCC Forms 499-A since it first provided service in 1998 (however, the NAL only covered the period from January 2005 onward). In response to the FCC's investigation, the company presented several arguments that its products should not be treated as regulated services, and would therefore not be subject to USF filing and related contribution requirements. As described below, the FCC rejected each of these arguments.

"IP-in-the-middle": Compass Global argued that it only provided an IP backbone and that it receives and transmits communications exclusively in Internet Protocol. However, the FCC rejected this argument because, according to prior FCC decisions, "the fact that Internet Protocol is used exclusively as transport for the traffic has no bearing on whether these voice and data services are appropriately considered telecommunications service." The services are not linked with information-processing capabilities, but are primarily used for the basic transmission purposes and therefore will be considered "telecommunications services" subject to FCC regulation.

Information service: Compass Global's second argument was that its services were not "telecommunications services" but rather an unregulated "information service" because it offers only IP-based wholesale products. However, the Commission rejected this argument because Compass Global does not claim that its services enabled end-users to generate, acquire, store, transform, process, retrieve, utilize or make available information, which would be required to be classified as an information service.

Wholesale: Finally, Compass Global argued that, as a wholesale provider, it cannot be regulated as a provider of telecommunications services. "Telecommunications services" are services that are offered "for a fee directly to the public or to such classes of users as to be effectively available to the public." Since the company does not offer services directly to the public, it argued, this definition did not apply. However, the Commission rejected this argument, noting that Compass Global failed to argue that its services were not offered indiscriminately to all companies seeking to provide prepaid calling cards. The Commission therefore concluded that Compass Global can be regulated as a provider of
telecommunications services.

USF: As a result of the FCC's rejection of the arguments listed above, Compass Global has been required to file the FCC Form 499-A and make contributions on assessable USF revenues since 1998, when it began providing service. It did not register at that time, nor did it make contributions based on its revenues which should have been classified as telecommunications services. Thus, it failed to comply with the FCC's USF registration, reporting, and contribution requirements.

TRS, NANPA, LNP, and Regulatory Fees: The company also failed to make contributions to TRS, Local Number Portability cost recovery mechanisms ("LNP"), North American Numbering Plan Administration cost recovery mechanisms ("NANPA), and FCC regulatory fees. Each missed payment is considered a separate continuing violation.

Liability: Compass Global was subject to the same calculation method. The Commission proposed a forfeiture of $20,000 for each of the 22 months it did not make USF contributions plus an upward adjustment of $79,503. Similar to Global Crossing, the FCC proposed a forfeiture of $249,100 for unpaid TRS obligations, with upward adjustment. In addition to USF and TRS forfeitures, the Commission added a $10,000 forfeiture for each failure to make NANPA, LNP, and regulatory fee payments (totaling $40,000). Compass Global's total liability was $828,613.

Telrite

USF: According to the FCC, Telrite greatly underreported its USF assessable revenues on the FCC Forms 499-Q from November 2005 through May 2007 as well as on the FCC Forms 499-A covering the years from 2005 and 2006. In turn, the company paid each USAC invoice in full. However, USAC's invoices significantly understated the size of the contribution due because the invoices were generated from inaccurate information. Unlike the other recent NALs, the FCC went out of its way to underscore the importance of reporting accurate information. This is "especially critical because the Commission does not audit each carrier's filing" and companies must be deterred from submitting "deceptive and inaccurate" revenue information.

TRS, NANPA, LNP, and Regulatory Fees: By underreporting its revenues, Telrite also did not make full contributions to the other funds associated with the FCC Form 499-A. As a result, it underpaid TRS, NANPA, LNP and regulatory fee contributions.

Liability: Applying the new calculation method, the FCC proposed a forfeiture of $10,000 for each of the 23 months in which the company did not fully contribute to USF and $20,000 for each of the four months where the company made no payments at all, totaling $310,000. This was also subject to an upward adjustment of $417,438. Unlike the other recent NALs, the FCC also imposed a fine of $100,000 for filing inaccurate FCC Forms 499-A misreporting revenues for 2006 and 2007. In addition to USF and TRS forfeitures, the Commission added a $10,000 forfeiture for each failure to make NANPA, LNP, and regulatory fee payments (totaling $50,000). Telrite's total liability was $924,212.

These recent FCC enforcement actions underscore the importance of filing the required FCC Forms 499-A and Q; remitting USF, NANPA, LNP, and regulatory fee contributions on a timely basis; as well as accurate reporting of telecommunications revenues. Particularly in view of the FCC's new forfeiture computation methodology, failure to fulfill any one of these mandatory regulatory obligations can lead to potentially high monetary forfeitures.

Please feel free to contact us if you have any questions or if we can be of assistance.

April 2008

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FCC Cracks Down on Informal Complaints

Thu, 31 Dec 2009 04:39:47 -0500

On February 19, 2008, the Federal Communications Commission ("FCC") released thirteen (13) Notices of Apparent Liability for Forfeiture ("NALs") proposing to levy fines against carriers for failure to respond to FCC informal complaints. The base forfeiture amount for failure to provide written responses to an FCC communication as directed is $4,000 per informal complaint. As the Commission points out, however, monetary forfeitures can be levied up to $130,000 per violation, and up to a maximum of $1,325,000 for a continuing violation. In the recent set of NALs issued by the FCC for failure to respond to informal complaints, the specific fines levied ranged from $4,000 to $96,000, depending on the number of informal complaints involved.

On March 2, 2007, nearly one year ago, the FCC released a Public Notice reminding carriers of the importance of compliance with informal complaint rules and that failure to timely respond to informal complaints as directed will be subject to enforcement action. A copy of that Public Notice is can be accessed at the following link: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-07-989A1.pdf. The recent releases of these NALs as well as other recent FCC actions underscore the FCC's commitment to aggressively enforcing its informal complaint rules.

Please feel free to contact us if you have any questions regarding your company's compliance with the FCC's informal complaint procedures and requirements.

March 2008

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New State USF Programs

Thu, 31 Dec 2009 04:40:47 -0500

Service providers, including toll resellers, prepaid providers, MVNOs and wireless service providers, are increasingly facing a relatively new multijurisdictional obligation: state universal service funds ("USF"). State-level USF can now be found in approximately twenty-four (24) U.S. states and territories, each with varying assessment rates, filing schedules and governing regulations. State USF programs are generally similar to the federal USF program but, unfortunately, each state USF program must be approached on an individual basis in each state in which a provider offers in-state service. Providers not remitting state USF payments or filing required forms face multiplying penalties and liability.

State USF assessment rates vary from approximately 0.03033% to 6.95% of intrastate telecommunications revenues. Assessment rates are normally revised annually, biannually, or quarterly by the appropriate state USF administrator or public utilities commission ("PUC"). On the low end of the spectrum, the assessment rate for Nevada USF is currently set at 0.0%, (meaning that no remittance contributions were necessary for the current period), though carriers must continue to file and report revenue to the USF administrator.

Similar to the federal USF program, states generally permit carriers to pass along the applicable surcharge to end users. Many states have specific requirements as to how the charge must read on an end user's billing statement, if applicable. If providers choose to collect payment from end users for state USF, they will often have to file concurring tariff sheets to that effect with the state PUC.

Over half of the state-level USF programs in force are managed directly by PUCs. The remaining states are managed by one of a small number of neutral third-party administrators or consultants, the largest of which is Solix Inc. In recent months, third-party administrators such as Solix Inc. have been performing audits of telecommunications carriers to ensure compliance and proper remittance of contributions to the various state programs.

States often require monthly reporting and remittances for USF. As with federal USF, telecommunications revenues typically will determine payment frequency. For example, in Nebraska, companies that generate less than $20,000 per year in revenue may file quarterly; otherwise they must file on a monthly basis. In Nevada, carriers can chose to either file quarterly or annually. Kansas carriers with anticipated annual intrastate retail revenue below $50,000 must file an election with the Kansas USF administrator if they wish to report and pay on any basis other than monthly. Kansas carriers earning less than $50,000 are required to pay on a quarterly, semi-annual, or annual basis, depending on specific revenue calculations. In numerous states, a mandatory annual true-up (comparable to the federal program) is required for revenue generated in the previous year.

As with the federal USF program, states will not hesitate to penalize carriers for failure to file forms, submit forms on time, or pay remittances to the fund. Each state has its own procedures for enforcement. If a company is found in violation of state regulations, it stands to be fined by the state PUC. Particularly in states that are managed by third-party administrators such as Solix Inc., risks for non compliance are rising. As a result, there is no reason to suspect states to be any less aggressive than the FCC has been in penalizing carriers for similar USF-related offenses.

State USF obligations, while still evolving, are here to stay. They require no less attention than the federal USF program by service providers. If your company has questions regarding its state USF obligations, or requires assistance, please do not hesitate to contact us.

February 2008

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New FCC Slamming Rules

Mon, 18 Jan 2010 11:21:00 -0500

On January 9, 2008, the Federal Communications Commission ("FCC" or "Commission") released its Fourth Report and Order ("Order"), which modifies its current "slamming" or carrier change verification rules. Specifically, the Order modifies the carrier change verification process to require: 1) confirmation that the consumer understands specifically that a carrier change is being authorized; 2) disclosure that completion of the verification will allow the carrier change to be effectuated; 3) that the date of each verification is obtained at the time of verification; and 4) confirmation that the consumer understands that the phrase "long distance service" includes state-to-state and international long distance.

The requirements and revisions outlined in the Order generally become effective thirty (30) days after publication in the Federal Register. To ensure compliance and minimize potential federal and state slamming liability, carriers offering 1+ services will want to consider revising their verification scripts or, in the event that they rely upon scripts used by verification companies, requiring such companies to do so.

Confirmation of Intent to Change Carriers

The revised rules address the Commission's concerns that some carriers are using misleading language to deceive consumers into believing that something other than a carrier change is being authorized (e.g., upgrade to existing service, bill consolidation service, etc.). Thus, the new rules will require that verifiers confirm the consumer understands the authorization is for a carrier change, and not just simply an upgrade or change to an existing service. Since the current rules already require confirmation that a consumer "wants to make the carrier change," the new requirement is unlikely to necessitate a drastic change to verification scripts that do not characterize "carrier change" in a potentially misleading fashion. Further, the required confirmation - like several of the other rule changes adopted by the FCC's Order - could affirmatively benefit carriers in that it could aid in refuting false slamming claims by showing that the consumer had a clear understanding and intent to change carriers (as opposed to just upgrading an existing service).

Verification Completion Disclosure

The current FCC verification rules prohibit verifiers from providing any additional information regarding a carrier's services. Thus, verifiers are not allowed to answer any additional questions the consumer might have during the verification process. Instead, if the consumer has additional questions for the carrier's sales representative during the verification process, the verifier has the option of immediately redirecting the consumer to the sales representative (thereby terminating the verification process), or having the consumer defer the question until after the verification process is completed.

Many consumers may complete the verification process (deferring their questions for the sales representative until later) thinking that they still have an opportunity to revoke the authorization (or even that final authorization had not been given) until after further speaking to the carrier's sales representative. However, once the verification process has been completed, regardless of whether the consumer has additional questions, the carrier change authorization is effective. Rather than forcing verifiers to disclose this at the beginning or end of the verification (which the Commission rejected as being either confusing or likely to discourage additional questions), the FCC adopted an approach that only requires an affirmative disclosure if the consumer has additional questions for the carrier's sales representative during the verification.

Thus, if a consumer has additional questions during the verification, the verifier must directly disclose to the consumer that a carrier change nonetheless can be effectuated or processed once the verification is completed. Alternatively, if a carrier elects to allow consumers to revoke a carrier change authorization within a certain amount of time after the verification, this policy can be disclosed to the consumer instead.

Obtaining Date of Verification

The Commission's new rules require that the date (but not the time) of verification be ascertained and recorded, at the time of the verification, in a form that can be readily identified by future reviewers (i.e., federal and state regulators). However, the Commission did not prescribe a specific means by which the date of verification needed to be obtained. Therefore, verifiers have the option of either verbally confirming the date with the consumer, electronically date stamping the recorded verification, or obtaining the date of verification by some other means which satisfies the requirement. The new date requirement is meant to address instances in which carriers might use outdated verifications in an attempt to legitimize an unauthorized switching of a consumer back to the carrier after the consumer has already completed a switch to another carrier. On the other hand, it will be to a carrier's advantage to have a dated verification in order to defend against consumers that may falsely allege that such a situation (and a slam) occurred.

Long Distance Definition

Finally, the new rules require that any description of "long distance service" (or "interLATA" service) convey that the term includes both state-to-state and international long distance. Therefore, verifiers will be required to affirmatively confirm that the consumer understands that "long distance" encompasses both state-to-state and international calling. (Note that this requirement will not apply in Hawaii, where state-to-state and international calling are distinctly separate services.)

Effect of New Requirements

While these new rules aim in part to further protect consumers from slamming, carriers should also benefit from the changes. The new requirements have the effect of eliminating confusing and disputable components of the verification process, thereby minimizing carrier exposure to potentially significant federal and state slamming liability. Thus, it may be prudent for carriers to revise their 1+ verification scripts even before the new rules officially take effect.

Should you require assistance in modifying a verification script to comply with the new rules or have questions, please do not hesitate to contact us.

January 2008

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Alert Index

Tue, 19 Jan 2010 10:23:47 -0500

FCC CPNI Filings Due 3/1/08

Mon, 18 Jan 2010 11:05:54 -0500

On December 6, 2007, the FCC announced that its amended Customer Proprietary Network Information ("CPNI") rules received OMB approval and became effective December 8, 2007. The amendments generally tighten CPNI regulations applicable to telecommunications carriers and VoIP providers. For a summary of these rules, please visit http://www.tkcrowe.com/new-fcc-cpni-rules/.

Since the new rules are in effect, companies that have not updated their CPNI compliance policies are subject to FCC enforcement actions and risk being assessed fines and penalties. These companies should comply with the new regulations as soon as possible in order to minimize these risks.

Such companies should first update their current CPNI policies to incorporate the new FCC requirements including, among other things, stricter (a) authorization procedures, (b) marketing restrictions, and (c) procedures for responding to CPNI security breaches. In addition, such companies should generate a CPNI statement detailing the company's specific CPNI compliance policies.

The FCC requires a company officer to certify that the provider is in compliance with FCC CPNI regulations. This certification must be filed with the FCC by March 1, 2008.

If your company has not already revised its CPNI policies to conform to the new FCC regulations, it should do so as soon as possible. Please let us know if you would like assistance in updating your company's CPNI policies.

December 2007

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Prepaid Legislation

Mon, 18 Jan 2010 11:02:39 -0500

On August 3, 2007, Congressman Eliot L. Engel (D - N.Y.) introduced a bill in the U.S. House of Representatives ("House") which proposes to adopt stringent disclosure requirements for prepaid calling card providers and distributors. H.R. 3402, referred to as the "Calling Card Consumer Protection Act," was introduced the day before the House adjourned for its Summer District Work Period (August 6 - September 3). If enacted into law, the bill would establish a nationwide uniform disclosure standard which would impact the disclosure, advertising, and billing practices of the U.S. prepaid calling card industry.

Disclosures

The bill would apply strict disclosure requirements to both prepaid calling card providers and prepaid calling card distributors (excluding retail level merchants). Specifically, the bill would require providers and distributors to expressly disclose (on the prepaid calling card or its packaging, and on websites): (1) the dollar value or minute value of the card; (2) all terms and conditions including, but not limited to, fees, limitations on the use of minutes, surcharges, refund policies, and expiration; (3) the name of the service provider; and (4) the provider's customer service number and hours of service. For prepaid service providers (that do not necessarily use a card, but excluding wireless providers) that offer the purchase of services via the Internet, this information would be required to be prominently displayed on the provider's website. In addition to providing these disclosures on the products and on websites, the same disclosures would also be required on all corresponding advertising and point-of-sale materials. To the extent that a foreign language is used on the card or marketing materials, providers and distributors would be required to provide the same disclosures in that language.

Prohibited Practices

In addition to the required disclosures, the bill also prohibits providers and distributors from assessing any fees or imposing any charges not disclosed as described above. Further, providers would be prohibited from the practice of providing fewer minutes than the number of minutes actually promoted or disclosed (including through the service provider's voice prompt system) for each prepaid calling card or service. Likewise, distributors would be prohibited from distributing cards from providers known to engage in such practice. Providers would also be prohibited from assessing any fee or charge for unconnected calls. Finally, unless an expiration date is clearly disclosed, prepaid calling cards and services would be prohibited from having expiration dates less than a year from the date of first use, or the date last recharged, as applicable.

Enforcement

The bill would give the Federal Trade Commission authority to enforce violations of the legislation as unfair or deceptive acts or practices. The bill grants state attorneys general the authority to bring civil actions, on behalf of the residents of their state, in order to enjoin practices, enforce compliance with the legislation, and even to obtain compensation and damages.

Status of the Legislation

The House has been adjourned since the bill's introduction so there have been no recent developments. Similar legislation has not been proposed in the Senate (which is also adjourned at the moment) as of yet, and the bill will not become law until both houses of Congress come to an agreement, and the President has signed it. H.R. 3402 has been referred to the House Committee on Energy and Commerce ("E&C"), and will likely go next to the E&C's Subcommittee on Commerce, Trade, and Consumer Protection, where a hearing could be held to discuss the merits of the bill, and to propose and make any initial changes before it is referred to the full E&C Committee. Industry experts and representatives may be invited to participate as panelists for the hearing. However, any action on the bill (including whether or not a hearing will even be scheduled) will not move forward until after Congress reconvenes on September 4, 2007.

Legislative Outlook

It appears that the legislative push to further regulate the prepaid industry may be connected to a lawsuit filed this year by IDT Telecom, Inc. ("IDT") in a federal district court against competing prepaid providers (see our Legal Alert: "IDT Suit Against Prepaid Providers" sent on March 20, 2007). IDT's complaint alleged that the competitors promised more minutes than they actually delivered to consumers, and that the competitors' alleged deceptive disclosures and practices were unlawfully drawing customers away from IDT. H.R. 3402 focuses on essentially the same issues addressed in IDT's complaint. However, as of the date of this email alert, there has been no confirmation that either IDT or any of its competitors is responsible for backing the bill. Whether or not there is any relation to IDT's lawsuit, the bill adds the looming presence of federal disclosure requirements and restrictions to the growing list of legal and regulatory considerations which prepaid providers and distributors must take into account.

Please do not hesitate to contact us if you are interested in participating in the legislative process regarding H.R. 3402 or have questions about the bill.

August 2007

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New FCC 214 Rules

Mon, 18 Jan 2010 10:58:04 -0500

The Federal Communications Commission ("FCC" or "Commission") announced revisions to its rules applicable to Section 214 authorizations (required before telecommunications providers can offer international, outbound U.S. service). These changes, summarized below, primarily affect a) service discontinuances; b) whether affiliated companies can "share" Section 214 authorizations; c) asset sale and control change obligations; and d) Section 214 obligations related to CMRS providers and MVNOs.

Discontinuance of International Service

FCC rules require telecommunications providers to provide notice to both customers and the FCC prior to discontinuing international toll service. This notice must be given 60 days before the discontinuance. Under the new, revised rules, the FCC shortened the customer notification period for a competitive provider's discontinuance of international service from 60 days to 30 days. As competition for international telecommunications services has increased, the Commission reasoned, customers no longer need the full 60 days to find a replacement carrier. In addition, the FCC now requires competitive providers to file the discontinuation notice sent to customers with the Commission at the same time as it is sent to customers.

Commonly-Controlled Subsidiaries

Under current FCC rules, a wholly-owned subsidiary of a Section 214 licensee (a provider which is 100% owned by a Section 214 licensee) can provide telecommunications service under its parent company's license. This is the only permitted instance of Section 214 "sharing." Under existing rules, a commonly-controlled subsidiary (subsidiaries that are controlled, but not wholly owned, by a Section 214 licensee) must obtain its own authorization. The FCC considered but declined to amend its rules to allow a commonly-controlled subsidiary to provide service under the Section 214 authorization of the controlling (but not 100% controlling) entity. The FCC's decision was influenced by Executive Branch concerns over its ability to screen Section 214 applications for national security and law enforcement concerns. Generally, the Department of Homeland Security will investigate any application in which any individual foreign owner has a greater than 10% share. This inquiry could be circumvented, according to the FCC, if commonly-controlled subsidiaries were not required to apply for their own Section 214 authorization. Thus, a company controlled by a Section 214 licensee seeking to provide telecommunications service must apply for its own authority unless it is 100% owned by that licensee.

Transfer of Ownership

Existing FCC regulations require prior Commission consent to a change in controlling ownership in a Section 214 licensee. For example, when an individual who has less than 50% interest in a licensee obtains more than 50%, he must first file a transfer of control application with the FCC. The FCC amended its rules to require filing of a transfer of control application when there is a "reverse" change of ownership of a licensee from over 50% to less than 50%. In these instances, even if the entity which held de jure control (i.e., a greater share the 50%) maintains de facto control (i.e., still is operationally in charge of the company), a transfer of control application must be submitted. For example, under the amended rule, if a company owns 55% of a Section 214 licensee and sells 6% of those shares to another entity, it would be required to obtain prior Commission approval of the sale by filing a transfer of control application.

Asset Acquisition

The FCC requires providers to file an application and seek approval when assets, including the provider's customer base, are assigned from one provider to another. However, some providers have been confused as to whether a transfer of a provider's customer base should be treated as an assignment or a discontinuance of service. In amending its rules, the FCC added a note clarifying that asset acquisitions that do not result in a loss of service to customers should be treated as an assignment rather than a discontinuance of service. Thus, even though customers will no longer be served by the same provider, the FCC requires the provider selling its base to file an application for assignment, and gain prior Commission approval, rather than simply treating the transaction as a discontinuance of service.

International 214 Authorizations for CMRS Resellers and MVNOs

Existing FCC rules require CMRS providers that offer service through pure resale (i.e., MVNOs) to file for international Section 214 authority prior to commencing service, just like any other telecommunications carrier. Because the CMRS resale market is highly competitive, the FCC considered exempting these CMRS providers from the Section 214 obligation prior to providing service and instead creating a post-service notification procedure. However, the FCC declined to adopt such an approach because the record on this issue was not fully developed. Despite this, the FCC has left open the possibility of implementing such a notification process in the future.

International Roaming

Existing FCC rules are silent as to whether a Section 214 licensee has authority to resell U.S.-inbound service from foreign carriers, leaving an open question as to a CMRS provider's or MVNO's ability to negotiate international roaming arrangements. This complicated such providers' ability to provide international roaming services. The FCC amended its rules to explicitly allow U.S. Section 214-authorized carriers to resell U.S.-inbound service from foreign carriers, whether or not the foreign carrier has U.S. authorization. The amendment explicitly authorizes all U.S.-authorized resale carriers (including CMRS providers and authorized MVNOs) to enter into roaming agreements with foreign carriers to allow U.S. customers to call home from foreign countries without obtaining further FCC approval. Although the rule applies to all carriers generally, this modification will enable CMRS providers and MVNOs to enter into international roaming agreements with foreign carriers without the need for additional FCC authorization.

The FCC's Section 214 rule changes represent yet another step by the agency to streamline its international licensing and compliance obligations.

Please feel free to contact us if you have any questions or we can be of any assistance to you.

July 2007

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FCC Extends Disability Rules and Proposes New E911 Standards

Mon, 18 Jan 2010 10:46:36 -0500

In its Report and Order ("Order"), released June 15, 2007 (adopted May 31, 2007), the Federal Communications Commission ("FCC") extended the disability access requirements of the Communications Act of 1934, as amended, to interconnected Voice over Internet Protocol ("VoIP") providers and equipment manufacturers. On May 31, 2007, the FCC also released a Notice of Proposed Rulemaking ("Notice") advancing various proposals involving Enhanced 911 ("E911") location accuracy standards, including a tentative conclusion to apply the accuracy standards for commercial mobile radio services ("CMRS") to certain interconnected VoIP services that can be used in more than one location. In addition to interconnected VoIP providers, the proposals in the Notice also stand to impact wireless or CMRS providers.

The FCC's Notice and Order illustrate an ongoing trend by the agency to further regulate VoIP offerings. In the last few years, the FCC has already extended various regulatory requirements to VoIP providers. Previous FCC decisions have required VoIP providers to comply with Universal Service Fund ("USF") contribution requirements, Communications Assistance for Law Enforcement Act ("CALEA") requirements, and E911 requirements.

Disability Access and VoIP

Section 255 Requirements

The most recent version of Section 255 of the Communications Act was adopted in 1999 to help ensure that both telecommunications equipment and services would be developed to be accessible to individuals with disabilities, if readily achievable. Since then, VoIP services have evolved and proliferated to a point where the FCC has taken special note of the increasing use of VoIP services as a substitute for traditional landline telephones. Consequently, the FCC commenced a rulemaking proceeding, on March 10, 2004, to determine whether or not Section 255 applies to interconnected VoIP providers.

The FCC's June 15, 2007 Order officially concludes that interconnected VoIP service providers (which allow users to receive calls from and terminate calls to the Public Switched Telephone Network) are now required to comply with the disability access obligations in Section 255 of the Communications Act. The Order further applies Section 255 obligations to manufacturers of equipment or Customer Premises Equipment ("CPE") designed to provide interconnected VoIP services or needed to effectively use VoIP services.

Specifically, the new rules require that a service provider must ensure its service is accessible to and usable by individuals with disabilities, if readily achievable. Manufacturers must ensure that equipment is designed, developed, and fabricated so that any portion is accessible to and usable by individuals with disabilities, if readily achievable. If either is not readily achievable, providers and manufacturers are required to make certain that services and equipment will be compatible with existing devices or equipment currently used by individuals with disabilities to achieve access.

Both service providers as well as VoIP equipment and CPE manufacturers are required to make accessible the information and documentation provided in connection with their service or equipment. Furthermore, providers and manufacturers are also required to: (1) consider accessibility throughout the design, development and fabrication process of services and equipment; (2) consider accessibility issues in the development of training for employees; and (3) maintain records of their compliance efforts that can be presented to the FCC in the event of consumer complaints.

Finally, the Order also requires all Section 255 covered providers and manufacturers to designate a company contact person/agent to handle accessibility complaints and inquiries. Contact information for a designated agent (including name, company name, address, email, phone and fax numbers, and whether the company is a manufacturer or provider) must be emailed to SECTION255_POC@fcc.gov within thirty (30) days of the effective date of the new rules.

Section 225 (TRS) Requirements

As part of the proceeding to evaluate Section 255 obligations, the FCC also attempted to determine what changes needed to be made to the Interstate Telecommunications Relay Services (TRS) Fund. These services allow individuals with hearing or speech disabilities to make and receive telephone calls with the assistance of an operator. Accessing TRS can be accomplished by dialing the 711 access number. TRS, which is governed by Section 225 of the Communications Act, is funded by contributions from all carriers providing interstate services based on revenue information reported on the FCC Form 499-A.

The June 15, 2007 Order also extends the requirements of Section 225 to interconnected VoIP service providers. Thus, interconnected VoIP providers will be required to make contributions to the Interstate TRS Fund beginning on the effective date of the rule revisions. For the 2007-2008 TRS Fund Year, interconnected VoIP providers will be assessed contributions (based on 2007 revenues) on a pro-rated basis. Section 225 also requires that interconnected VoIP providers implement 711 abbreviated dialing access to TRS. Providers are allowed to implement 711 access using the most economical and efficient means they choose. Finally, interconnected VoIP providers are required to conduct ongoing education and outreach programs to publicize the availability of 711 access to the largest number of consumers possible.

Proposed E911 Standards for VoIP

The FCC's Notice, released on May 31, 2007, contained a range of proposals for changes to current E911 standards and regulations. The Notice requests public comment on proposals to clarify the geographic scope of accuracy reporting, implement new technologies, and require mandatory schedules and methods for compliance testing, among other things (see list below). Furthermore, the Notice seeks to address several proposed changes to the accuracy standards and requirements for E911 services, including applying the accuracy standards of circuit-switched CMRS to interconnected VoIP services that may be used in more than one location.

There are currently different accuracy standards for network-based and handset-based technologies. Network-based technologies (using a form of triangulation) are required to report latitude and longitude information within accuracy of 100 meters for 67 percent of calls and 300 meters for 95 percent of calls. Handset-based technologies (handset based GPS) have requirements of 50 meters for 67 percent of calls and 150 meters for 95 percent of calls. The FCC's Notice tentatively concludes that, instead of the bi-furcated standards, a single, technology neutral, location accuracy requirement will be adopted. Moreover, due to advances in location technology, the FCC proposes to make location accuracy standards even more stringent than required by either of the current standards.

The FCC's Notice also tentatively concludes that certain interconnected VoIP services must utilize automatic location technology meeting the same accuracy standards that apply to services provided by circuit-switched CMRS. This would only apply to interconnected VoIP services that can be accessed in more than one location, as opposed to purely "fixed" VoIP services. For example, "portable" VoIP services, which may utilize handsets that can be used from any location with a broadband connection, would be subject to the same accuracy standards as either the network- or handset-based technologies described above. Furthermore, these interconnected VoIP services would be required to comply with the more stringent accuracy standards if and when they are introduced.

Unless otherwise noted, public comments for proposals and issues addressed in the Notice are due August 20, 2007, and reply comments are due September 18, 2007. Filings related to this Notice should refer to PS Docket No. 07-114 and WC Docket No. 05-196.

Other E911 Issues Addressed in the Notice

The FCC seeks to address ambiguities about the geographic areas that service providers use to test and measure accuracy and compliance levels for E911 service required under Section 20.18(h) of the FCC's rules ("Phase II"). The FCC seeks public comment on a tentative rule (and when that rule should take effect) that carriers required to meet Phase II requirements need to do so at the geographic area of each local Public Safety Answering Point ("PSAP"), as opposed to averaging compliance levels over an entire state or service area. Public comments for this proposal are due July 5, 2007, with reply comments due July 11, 2007.

The FCC proposes to implement a single, technology-neutral, location accuracy standard to provide uniformity in the system. As a corollary, the FCC is considering the implementation of an even higher accuracy requirement than what Phase II already calls for. This enhanced accuracy requirement could require other location data such as elevation information.

The FCC further seeks comment on the advances in various types of location technologies, and whether or not a hybrid (handset- and network-based) or other type of technology would provide a better solution to improving location accuracy.

The FCC also wishes to address concerns about the compatibility of E911 location technologies in situations involving roaming (wireless callers who are roaming on another carrier's network may not be provided Phase II service at all because that carrier is employing both a different type of wireless technology and location technology). The FCC seeks comment on whether a single technology could be employed across all platforms to achieve the required accuracy.

The FCC would like to inquire as to what methodologies carriers should employ to test for compliance with accuracy requirements, and whether any such methodology should be adopted in the FCC's rules. The FCC tentatively concluded that a mandatory testing schedule would be implemented, and requests comments on what testing intervals to use and how to handle the data generated from the tests (i.e. whether or not it needs to be filed with organizations other than the PSAP).

Please do not hesitate to contact us if you need assistance in complying with any of the new disability access rules, or if you have questions regarding the E911 Notice described above.

June 2007

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VoIP USF Ruling

Mon, 18 Jan 2010 10:41:54 -0500

On June 1, 2007, the U.S. Court of Appeals for the D.C. Circuit predominantly upheld the FCC's Universal Service Contribution Methodology Report and Order and Notice of Proposed Rulemaking ("USF R&O"). The USF R&O required interconnected VoIP providers to contribute to the Universal Service Fund ("USF"), established a 64.9% "safe harbor" for reporting interstate revenue and suspended the Carrier's Carrier rule for two quarters. Vonage Holdings Corporation ("Vonage") and the Computer and Communications Industry Association ("CCIA") challenged this decision. As discussed below, the Court largely upheld the FCC's USF R&O but vacated (or overturned) the FCC's requirement that interconnected VoIP providers obtain pre-approval of traffic studies (if they choose to use them) and the FCC's suspension of the Carrier's Carrier rule, which effectively assessed USF charges twice on interconnected VoIP providers for two quarters after the release of the USF R&O.

Applicability of USF

The CCIA challenged the FCC's authority to require interconnected VoIP providers to pay USF charges. Even though the FCC has not classified interconnected VoIP as a "telecommunications service", the FCC determined that interconnected VoIP providers are "providers of telecommunications" and, therefore, may be required to contribute to USF. The Court upheld the USF R&O and agreed that the FCC could require interconnected VoIP providers to contribute to USF.

The Safe Harbor

The safe harbor allows interconnected VoIP providers to report a certain "default" percentage of 64.9% interstate traffic if they are unable to determine which calls are interstate and international (subject to USF) and which calls are purely intrastate (not subject to USF). Vonage and the CCIA challenged the safe harbor as too high and argued for a lower threshold. Vonage asserted that since VoIP is an "all-distance" service, which includes local calls, it should be given a lower safe harbor. The 64.9% safe harbor ordered by the FCC is close to the interstate percentages reported by traditional wireline toll service providers and, according to Vonage, does not reflect an "all distance" service. However, the Court concluded the Commission's safe harbor was reasonable because interconnected VoIP products are more likely to attract customers interested in making a substantial number of interstate and international calls.

VoIP Traffic Studies

Under the USF R&O, interconnected VoIP providers must obtain prior approval to use data from traffic studies for the FCC Forms 499-A and 499-Q (if the company does not wish to invoke the safe harbor). Wireless providers, on the other hand, need only submit these studies contemporaneously with their FCC Form 499 filings. The Court struck down the pre-approval requirement because the FCC is required to apply USF obligations on an "equitable and nondiscriminatory basis." Thus, the FCC must apply the same traffic study approval measures to interconnected VoIP as it does to wireless carriers.

Carrier's Carrier Rule

In addition, the Court struck down the FCC's suspension of the Carrier's Carrier Rule, which exempts revenue generated from other carriers from a company's USF contribution base. The FCC suspended the Carrier's Carrier Rule for two quarters (the forth quarter of 2006 and the first quarter of 2007) fearing a net decrease in the USF contribution base. By suspending this rule, interconnected VoIP providers were required to contribute to USF directly as well as indirectly. An interconnected VoIP provider's underlying carrier was required to contribute to USF as if the VoIP provider was still an end-user and usually would pass on their USF charge to the interconnected VoIP provider. This resulted in the interconnected VoIP provider paying USF contributions twice for the two quarters the suspension was in effect. The Court vacated this suspension because the Commission's fear of decreasing the net contribution base did not justify these double charges. VoIP providers and their underlying carriers may have to revise their 2007 FCC 499-A filings.

Please feel free to contact us if you have any questions or we can be of any assistance to you.

June 2007

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FCC USF Enforcement

Mon, 18 Jan 2010 10:35:55 -0500

The FCC recently issued Orders of Forfeiture against InPhonic, Inc. ("InPhonic") and Global Teldata II, LLC ("Global Teldata"), two telecommunications providers which failed to remit Universal Service Fund ("USF") contributions, file FCC Form 499-A registrations, file FCC Forms 499-A and 499-Q reporting worksheets, and make monthly USF contributions. The FCC's May 3, 2007 Orders of Forfeiture demonstrate the costly penalties against telecommunications providers which fail to file mandatory USF reports and remit mandatory contributions.

Recent FCC Orders of Forfeiture

The Forfeiture Orders signal the FCC's increased enforcement resolve with respect to unpaid USF contributions. The providers each exhibited a history of failing to make contributions, a fact relied upon in setting the ultimate forfeiture amounts.

Failure to Register and Provide Revenue Information: Perhaps the most egregious violations, as determined by the FCC, are failure to register with the FCC and failure to provide revenue information to the Universal Service Administrative Company ("USAC") (by filing FCC Forms 499-A and 499-Q), which both include separate forfeitures, but also can increase forfeitures for failure to pay USF contributions. Failure to register and failure to provide revenue information is so egregious because it makes implementation of several FCC programs, including USF, TRS, and NANPA, more difficult or impossible and hampers efficient FCC enforcement of its Rules.

As an example, Global Teldata was assessed a forfeiture of $100,000 for failure to register with the FCC, $50,000 for failure to file the FCC Form 499-Q for November 1, 2004, and $86,774 for failure to make USF contributions for three of the previous twelve months. In deciding to assess a fine of $20,000 per month of non payment with an upward adjustment of one half the total unpaid USF contributions, the FCC noted that the company failed to perform its affirmative duties.

Companies electing not to file because they are de minimis should ensure that they qualify for the exemption. Global Teldata requested that FCC reduce the above fine arguing more latitude should be given to a company that just lost its de minimis status. However, the FCC stressed the importance of filing the first FCC Form 499-Q because that filing puts USAC on notice that the company will become a USF contributor. Furthermore, each company has an affirmative duty to calculate whether it qualifies for the de minimis exemption.

Lump Sum Late Payments: Simply paying off outstanding contributions in response to an FCC letter of inquiry ("LOI") will not release a provider from liability for penalties based on failure to make USF payments, including the upward adjustment. As an example, the Order issued against InPhonic, Inc. (a provider of mobile virtual network operator service, wireless information services, and activation and data services) assessed a forfeiture of $598,626 for failure to make USF contributions for seven out of the previous twelve months (recall that the FCC can only impose forfeitures for the year preceding the notice of apparent liability ("NAL")). This penalty was issued even though InPhonic made a payment of over $800,000 for USF contributions it owed from 2002 to 2004 in response to an FCC LOI. InPhonic was still subject to an upward adjustment penalty of one-half of the amount it paid for outstanding contributions, even though it had remitted a lump sum late payment. The penalties were imposed despite such late payment because InPhonic had failed to make USF contributions to USAC for a period of over two years after the company began offering interstate service (recall that the FCC can consider conduct prior to the previous year for purposes of determining the appropriate total forfeiture amount).

Penalties for Failure to Make USF Contributions

While there is no base forfeiture established in the FCC's Rules for failure to make USF contributions, the FCC has developed a formula that it now uses consistently to assess these penalties. If the FCC initiates enforcement proceedings against a provider, it can only impose penalties for violations that occurred within one year of the NAL. However, the agency can consider conduct prior to that time for purposes of assessing the total forfeiture amount, including the upward adjustment in the base forfeiture. The FCC will impose a base forfeiture of $20,000 for each month in which the provider has failed to make the required contribution. The base forfeiture is then subject to an upward adjustment of one-half of the provider's unpaid contributions. In addition to imposing fines on companies for failure to contribute, the FCC imposed a $100,000 fine on each company for failure to file a FCC Form 499-A registration and a $50,000 fine for each Telecommunications Reporting Worksheet (FCC Forms 499-A and 499-Q) not filed.

In addition to monetary forfeitures, providers failing to make USF contributions can be subject to more serious enforcement actions. Continuing violations can result in higher monetary forfeitures (as authorized by the Communications Act of 1934), holds on or dismissal of pending applications before the FCC, or possible revocation of operating authority.

Telecommunications providers of all types should closely examine their USF and federal regulatory fee compliance status in light of the FCC's increasing determination to impose heavy fines and penalties against non-compliant companies.

Please feel free to contact us if you have any questions or if we can be of assistance.

May 2007

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New FCC CPNI Rules

Mon, 18 Jan 2010 10:30:31 -0500

On April 2, 2007, the FCC released a Report and Order which adopts additional rules to protect customer proprietary network information ("CPNI"). Under the new rules, communications carriers must notify law enforcement of any breaches of CPNI, and they must also file annual CPNI certifications with the FCC. In addition, the FCC's new CPNI regulations cover providers of interconnected Voice over Internet Protocol ("VoIP") services. The new rules will take effect six months after publication in the Federal Register or when approved by the Office of Management and Budget, whichever is later. The FCC also released a Further Notice of Proposed Rulemaking to consider what further regulations might be necessary to protect CPNI.

The new regulations, following the recent release of several FCC decisions penalizing carriers for apparent CPNI rule violations (see http://www.tkcrowe.com/cpni-enforcement-actions/, underscore the FCC's heightened focus on the protection of CPNI. All carriers, including facilities-based and resale carriers, wireless providers, MVNOs and prepaid calling card providers, should commence preparations for complying with the new rules.

New Rules

CPNI is the individually identifiable information that is created by a customer's relationship with a communications provider, such as data about the frequency, duration and timing of calls, the information on a customer's bill and call-identifying information. Because of the sensitive nature of this information, CPNI is afforded greater protection under Section 222 of the Communications Act of 1934, as amended, than the other two general categories of customer information - aggregate customer information and subscriber list information. In its Report and Order, the FCC stated that it is now adopting additional protections for CPNI because "[t]he carriers' record on protecting CPNI demonstrates that" some carriers "have failed to adequately protect CPNI."

The new FCC CPNI rules are summarized below:

- Carrier Authentication. Since the release of call detail information over the telephone presents an immediate risk to privacy, carriers are prohibited from releasing call detail information based on customer-initiated telephone contact, except under three circumstances: (1) when a customer provides a pre-established password; (2) when a customer requests that the information be sent to the customer's address of record; or (3) when a carrier calls the telephone number of record and discloses the information. In addition, carriers must provide mandatory password protection for online account access. Online access based solely on a customer's readily available biographical information is prohibited. However, carriers are not required to reinitialize existing passwords for online customer accounts. At retail locations, carriers may continue to provide account access to customers who present valid photo IDs.

- Notice of Account Changes. Carriers must notify a customer immediately of account activity, such as a change to a password, an online account or an address of record. Notification may be by voicemail, text message or by mail to the customer's address of record.

- Notice of Unauthorized Disclosure of CPNI. If there has been a breach of CPNI, carriers must provide electronic notification of the breach within seven business days to the United States Secret Service ("USSS") and the Federal Bureau of Investigation ("FBI"). (The FCC will provide a link for the reporting of breaches at www.fcc.gov/eb/CPNI/.) In order to allow law enforcement time to conduct an investigation, carriers must wait another seven business days before notifying the affected customers of the breach (unless the USSS and FBI request that the carrier continue to postpone disclosure). However, carriers may notify customers sooner if there is a risk of immediate and irreparable harm. In addition, carriers must keep records of discovered breaches for at least two years.

- Joint Venture and Independent Contractor Use of CPNI. Carriers must obtain opt-in consent from a customer before disclosing a customer's CPNI to a joint venture partner or an independent contractor for the marketing of communications-related services to the customer. Under the current opt-out regime, the burden is on the customer; a carrier may share a customer's CPNI with another entity after providing notice to the customer, so long as the customer does not object. However, since current opt-out notices "are often vague and not comprehensible to an average consumer," the FCC said it is necessary to revise the rules to require express prior customer authorization.

- Annual CPNI Certification. Carriers must file an annual certification with the FCC, explaining any actions that they have taken against data brokers and summarizing all consumer complaints that they have received during the year relating to the unauthorized release of CPNI. This requirement will be in addition to the existing certification procedure, under which carriers must have an officer sign a compliance certificate each year attesting that the officer has personal knowledge that the carrier's procedures are sufficient to ensure compliance with the CPNI rules. Under the current rules, that certification must be made available to the public, but does not have to be filed with the FCC. The new annual certification filing that must be made with the FCC will be due by March 1 of every year, in EB Docket No. 06-36, and cover the previous calendar year. The first filing under the new rules will likely be due on March 1, 2008.

- Interconnected VoIP Service. The CPNI rules will apply to providers of interconnected VoIP service. Interconnected VoIP is telephone service via a broadband connection that utilizes Internet protocol and allows users to receive calls from, and terminate calls to, the public switched telephone network. Owing to the growth in popularity of VoIP services, the FCC noted that if it did not extend the CPNI regulations to interconnected VoIP, "a significant number of American consumers might suffer a loss of privacy and/or safety resulting from unauthorized disclosure of their CPNI."

- Enforcement Proceedings. Carriers must take reasonable measures to discover and protect against unauthorized access to CPNI. If there is a breach, the FCC will infer that the carrier's protection methods were insufficient. As the FCC stated, "We fully expect carriers to take every reasonable precaution to protect the confidentiality of proprietary or personal customer information." The FCC will not require carriers to encrypt their customers' CPNI, but it will expect them to do so if that would provide "significant additional protection against the unauthorized access to CPNI" at a reasonable cost. We expect the FCC's Enforcement Bureau to continue to aggressively penalize providers which fail to comply with the existing and new CPNI rules.

- Business Customers. In limited circumstances, carriers may establish by contract authentication procedures for business customers that are different from those in the new rules, so long as those customers have a dedicated account representative and the contracts specifically address the protection of CPNI.

Further Rulemaking

Finally, the FCC is seeking comment on the further expansion of the CPNI rules. Among other things, the FCC is considering whether password protection should cover not just account changes but all non-call detail CPNI; whether audit trails that record the disclosure of CPNI and customer contact should be required; whether safeguards to protect the physical transfer of CPNI among companies is necessary; and whether the amount of data that carriers retain should be limited. In addition, the FCC may examine what steps, if any, are needed to protect CPNI in mobile communications devices, such as, for example, providing for an easy and permanent method for consumers to permanently delete data on devices. Comments are due 30 days after publication in the Federal Register; reply comments are due 30 days after that.

The FCC's new CPNI rules demonstrate the seriousness with which it takes the protection of customer information. The additional requirements that they impose, such as law enforcement notification and annual certification, will require carriers to revise current compliance procedures. All carriers should begin reviewing their CPNI compliance systems in light of the new rules.

Please contact us if you have any questions.

April 2007

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CPNI Enforcement Actions

Mon, 18 Jan 2010 10:22:13 -0500

On March 26, 2007, the FCC's Enforcement Bureau ("Bureau") released Notices of Apparent Liability and Forfeiture ("NALs") against Amp'd Mobile ("Amp'd"), CTC Communications Corporation ("CTC") and Easterbrooke Cellular Corporation ("Easterbrooke") for apparent violations of the FCC's customer proprietary network information ("CPNI") rules. Although the specific deficiencies varied, in each case the Bureau proposed to assess a forfeiture of $100,000, based in particular on "the serious consequences that may flow from inadequate concern for and protection of CPNI." The scope of the investigations that led to these penalties suggests that the Bureau is taking a far more aggressive approach to policing the CPNI rules. All carriers, including long distance resellers, wireless providers, MVNOs and prepaid calling card providers, should review and assess their potential CPNI liability.

Background

CPNI is the personally identifiable information that is created by a customer's relationship with a communications provider. It includes the information on a customer's bill and call-identifying information. Section 64.2009(e) of the FCC's rules requires all telecommunications carriers to have an officer sign a compliance certificate each year affirming the officer's personal knowledge that the company maintains operating procedures that ensure compliance with the CPNI rules. There must also be an accompanying statement that describes how the operating procedures ensure compliance. Carriers must keep CPNI certifications on file and available to the public during regular business hours. Although the CPNI rules do not require annual filing at the FCC, last February the Bureau (as part of an enforcement investigation) required carriers to submit the certifications on only one week's notice. (See our Legal Alert dated January 31, 2006.)

In the March 26 NALs, the Bureau underscored the seriousness with which it takes the protection of CPNI from such threats as "data brokers," which offer to obtain telecommunications customer information for a fee. This followed NALs issued by the FCC's Enforcement Bureau in January 2006 which proposed to assess $100,000 penalties against AT&T, Inc. and Alltel Corporation for apparent violations of Section 64.2009(e). (AT&T and Alltel subsequently settled these proceedings by entering into consent decrees with the FCC that included voluntary contributions to the U.S. Treasury.) In setting the proposed forfeiture amounts in the three current cases, the Bureau stated that it is "guided by the principle that there may be no more important obligation on a carrier's part than protection of its subscribers' proprietary information."

Violations

In each case, the Bureau sent a Letter of Inquiry ("LOI") to the company requesting the compliance certificates for each of the last five years that the company was required to retain under Section 64.2009(e). According to one NAL, Amp'd failed to provide the required statement accompanying the certificate explaining how its operating procedures ensure that it is in compliance with the CPNI rules. The company's response stated that its operating procedures ensure that Amp'd is in compliance with the rules, but it did not state how those procedures ensure compliance. CTC's apparent violation involved not only CTC itself but three affiliates that it acquired in 2005. None of the documents that CTC submitted in response to the LOI contained a statement that a company officer had personal knowledge that CTC and the affiliates maintained operating procedures sufficient to ensure compliance with the CPNI rules, as required by Section 64.2009(e). Finally, Easterbrooke was found to have violated the CPNI rules when it responded to the NAL by noting that it had no written compliance certificates for the previous five years, but that it did have policies and procedures during that time for CPNI compliance. The Bureau found this to be a violation on its face of Section 64.2009(e), which requires actual certificates. All three companies will have opportunities to present evidence and arguments that the proposed forfeitures should be reduced or not imposed at all.

Compliance

These three NALs indicate that the Bureau is taking a harder line against CPNI violations. The Bureau has sent LOIs to several carriers, potentially at random. Therefore, carriers which have not done so should review their CPNI compliance status, especially with respect to the certification requirements in Section 64.2009(e). If an LOI is received, contact communications counsel immediately.

In addition, unlike the investigations of AT&T and Alltel in January 2006, the Amp'd, CTC and Easterbrooke LOIs requested each carrier's compliance certificates and supporting statements for the previous five years. Although carriers should be aware of past compliance over at least the past five years because the Bureau can use evidence of past noncompliance to increase the forfeiture amount, the FCC is only permitted to impose forfeitures for violations occurring within the past year. Therefore, carriers should be primarily concerned with current compliance and compliance over the past year.

Please feel free to contact us if you have any questions or we can be of any assistance to you.

March 2007

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IDT Suit Against Prepaid Providers

Thu, 07 Jan 2010 14:25:44 -0500

On March 8, 2007 IDT filed a lawsuit in a federal district court against twelve companies involved in providing prepaid calling card services and their officers and directors, alleging a "massive and systematic scheme" to mislead consumers under the Lanham Act's prohibition of deceptive trade practices and other state false advertising laws. IDT is claiming the defendants promised more minutes than they delivered to consumers, unlawfully drawing customers away from IDT's products and decreasing IDT's profits. This suit comes less than two months after a court granted preliminary approval to an unprecedented class action settlement in which IDT will refund over twenty million dollars to IDT customers for its own insufficient rate disclosures. For other prepaid providers, this suit serves as a warning that the consequences for inaccurate or insufficient claims made in advertising can originate not only from customers and regulators, but also competing prepaid providers.

According to IDT's complaint, defendants deliver fewer minutes than promised in their advertising campaigns. The named defendants are as follows: CVT Prepaid Solutions, Inc.; Dollar Phone Services, Inc.; Dollar Phone Enterprises, Inc.; Dollar Phone Corp.; Dollar Phone Access Inc.; Epana networks, Inc.; Locus Telecommunications, Inc.; STI Phone Card, Inc.; Telco Group, Inc.; VoIP Enterprises, Inc.; Find & Focus Abilities, Ink.; and Total Call International, Inc. IDT asserts that these providers overstate the amount of minutes left on the card in advertisements and on an automated voice prompt at the beginning of each call. This voice prompt is an important source of information to consumers and, according to IDT, is a major factor when consumers decide which calling card product to purchase.

IDT claims to have tested competitor's cards by making a single call that would use up all the balance of the product. IDT compared the voice prompt and minutes advertised with the actual call time of the single call and found that there was substantially less time on the card than the advertisements or voice prompt indicated. The results of this test show that actual talk time ranged from 55% to 70% of the talk to time advertised, from defendant CVT's cards and STI's cards respectively. The average talk time on cards from all defendants only gave consumers 60% of the talk time promised. IDT, on the other hand, claims to fully provide the potential minutes advertised.

IDT is asking the court for a preliminary and permanent injunction preventing the defendants and their officers, employees, attorneys, and those in privity with defendants from advertising calling card products with false or misleading materials, voice prompts, and other methods of promotion. In addition, IDT has requested the court to order a recall of all misleading advertising materials and to require defendants to provide notice to all distributors of their products of the false advertisements. IDT also is seeking to recover three times their lost profits and exemplary damages.

Please feel free to contact us if you have any questions or we can be of any assistance to you.

March 2007

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FCC Wholesale Ruling

Thu, 07 Jan 2010 14:19:17 -0500

In a ruling released on March 1, 2007, the Federal Communications Commission ("FCC") ruled that wholesale telecommunications carriers may interconnect with incumbent local exchange carriers ("ILECs") when they are reselling their services to other telecommunications providers, including Voice over Internet Protocol ("VoIP") service providers. The decision represents a victory for wholesale carriers, since it clarifies their right to interconnect with ILECs on behalf of their wholesale customers (irrespective of that customer's regulatory classification). It also benefits Voice over Internet Protocol ("VoIP") service providers, which rely upon intermediate wholesale providers to interconnect with the public switched telephone network ("PSTN") thereby ensuring that they have the connectivity they need to offer competitive telephone services.

Background

Time Warner Cable ("TWC"), which has been providing VoIP service since 2003, filed a petition for declaratory ruling with the FCC on March 1, 2006. It claimed that two of the underlying carriers from which it purchases wholesale telecommunications services were unable to provide those services to the company in parts of South Carolina and Nebraska. The utility commissions in those states permitted rural ILECs to decline interconnection with the carriers to the extent that the carriers were operating as wholesale service providers.

Specifically, the South Carolina Public Service Commission determined that MCI did not have the right to seek interconnection with rural ILECs in order to provide wholesale service to TWC, because the wholesale service was not a "telecommunications service" under the Communications Act, and MCI was thus not a "telecommunications carrier." Meanwhile, the Nebraska Public Service Commission denied the status of "telecommunications carrier" to another one of TWC's wholesale providers, Sprint, because its relationship with TWC was an "individually negotiated and tailored, private business arrangement" and therefore outside the scope of sections 251 and 252 of the Communications Act ("Act"). Without the wholesalers' ILEC interconnection agreements, TWC's VoIP customers are unable to connect to the PSTN or to the ILECs' E911 networks.

In its petition, TWC requested a ruling that telecommunications carriers may interconnect with ILECs to provide wholesale telecommunications services to other providers, such as VoIP providers. It also sought to clarify that interconnection rights under section 251 of the Act are not based on the identity of the wholesale carrier's customer.

Requests Granted

The FCC granted both of TWC's requests. First, it found that "telecommunications services," as defined under the Act, include both retail and wholesale services. The FCC explained that under long-standing precedent, "telecommunications services" are not only those that are offered "directly to the public," as the South Carolina Commission had asserted, but also those offered "to such class of users as to be effectively available directly to the public." Since MCI provides wholesale service to TWC, which TWC makes available to the public as a retail service, MCI - as a wholesale provider - is in fact providing "telecommunications services."

Second, the FCC found that the rights of a wholesale provider under the Act do not depend on the regulatory classification of the retail service that the end user receives. Thus, a wholesale provider may seek interconnection on behalf of a VoIP provider regardless of whether VoIP itself is classified as an information service or a telecommunications service. The FCC was careful to note that it was drawing no conclusion regarding the regulatory classification of VoIP, which the agency is still considering in a separate proceeding. The FCC added that its findings furthered its long-standing goals of promoting telephone competition and broadband deployment.

The FCC also rejected the contention that it lacked jurisdiction to consider TWC's petition because it involved state utility commission decisions. The FCC noted that TWC's petition ultimately concerned the Act, over which the FCC clearly has jurisdiction, and that since TWC asked only for a statement as to whether the South Carolina and Nebraska commissions' interpretations of the Act were correct, preemption of any specific state decisions was not an issue.

Net Effect

Since the FCC did not specifically preempt the South Carolina and Nebraska commission actions, it remains to be seen what effect the FCC's ruling will have on those decisions. Even so, the ruling is a net positive for wholesale carriers as well as the VoIP providers that receive service from them. The decision affirms the right of wholesale carriers under the Act to interconnect and exchange traffic with ILECs on behalf of other providers (even when those providers are offering VoIP services), as well as the right of VoIP providers to receive the benefit of those agreements. At the very least, it should make for a more level playing field for VoIP-based and other competitive telephone services, and it is likely to impact other state utilities commissions where proceedings on these same issues are pending.

Please feel free to contact us if you have any questions or we can be of any assistance to you.

March 2007

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FCC DAC Enforcement Action

Thu, 07 Jan 2010 14:12:42 -0500

In a ruling released on December 27, 2006, the Federal Communications Commission ("FCC") assessed a $466,000 penalty against Compass, Inc., d/b/a Compass Global, Inc. ("Compass Global"), a long distance reseller, for violations of the FCC's payphone (or dial around) compensation rules. The decision represents the agency's first enforcement action for non-compliance with the payphone compensation rules.

The FCC stated that it intends for the ruling "to serve as an example of the Commission's resolve to fully enforce compliance with its payphone compensation rules." Providers which own or lease switching equipment to complete calls are potentially impacted by the decision, including resellers and facilities-based carriers as well as prepaid providers.

Background

The FCC's revised payphone compensation rules, adopted in 2003 and effective on July 1, 2004, address how completing carriers - including long distance carriers, switch-based long distance resellers and local exchange carriers - compensate payphone service providers ("PSPs") for completed coinless access code or subscriber toll-free payphone calls. They are based on the notion that since prepaid providers and other carriers and resellers are the "primary economic beneficiaries" of payphone calls, they should have the primary responsibility for payphone compensation. Requirements include establishing a system for accurately tracking payphone calls and regularly auditing the system; submitting quarterly reports on call activity to PSPs; compensating PSPs on a quarterly basis for completed calls; and providing a sworn statement from the chief financial officer ("CFO") attesting to the accuracy and completeness of each quarterly payment. As the FCC noted in the Compass Global ruling, the compensation scheme that the payphone rules establish "is an interdependent one that relies on the cooperation of Completing and Intermediate Carriers with PSPs to ensure" that the aims of the rules are fulfilled.

On March 6, 2006, the FCC's Enforcement Bureau sent a Letter of Inquiry ("LOI") to Compass Global, a switch-based reseller, seeking information on its compliance with the payphone compensation rules. Compass Global did not respond within 30 days, as the LOI directed, and it did not fully respond until May 6, 2006. Upon review of that response, the FCC determined that Compass Global had committed five substantive violations of the payphone compensation rules.

Violations and Penalties

First, as required by the rules, Compass Global failed to establish by July 1, 2004 a system to accurately track coinless access code and subscriber toll free payphone calls to completion. The FCC noted that the company's "conduct falls far short of the Commission's requirement," adding that "it is still not clear that Compass Global has fulfilled its obligation" to accurately track calls. The payphone compensation rules provide for a base penalty of $3,000 per penalty, but permit "substantially higher" assessments - up to $1.2 million - for "egregious misconduct," "substantial harm," "substantial economic gain" or "repeated or continuous violation." Noting that failure to establish an accurate call-tracking system is "a serious dereliction of a Completing Carrier's responsibilities because it prevents the carrier from fulfilling any of the other payphone requirements," the FCC imposed a $50,000 penalty on Compass Global for this violation.

Compass Global's second violation of the payphone compensation rules was its failure to audit its call-tracking system in accordance with the specific requirements of the payphone compensation rules, for which the FCC imposed an additional $50,000 penalty. In addition, the FCC found that the company "willfully and repeatedly" failed to compensate PSPs for the toll-free calls it completed. The agency could not determine precisely how many calls went uncompensated, but it set a total forfeiture of $200,000, based on a $50,000 penalty for every quarter in the last year during which it failed to compensate PSPs for each call that it completed.

The final two substantive violations of the payphone compensation rules that the FCC determined Compass Global had committed were its failures to provide PSPs with quarterly call data reports and a sworn statement from its CFO certifying that its payments were accurate and complete. It explained that these violations are similar to, though not as serious in nature as, failure to file accurate and complete Universal Service Fund worksheets, which carries a $50,000 penalty. The FCC therefore assessed a total penalty of $160,000 for these two violations, or $20,000 for each quarter in the past year during which it failed to meet the data report and sworn statement requirements.

Finally, the FCC imposed a $6,000 penalty for Compass Global's failure to respond in a timely fashion to the March 6, 2006 LOI. The base forfeiture amount for such failures is $4,000, and the agency noted that in the past it has assessed a $20,000 penalty for failure to respond at all and an $8,000 penalty for an untimely response. Since Compass Global ultimately provided a full response to the LOI, the FCC said a smaller upward adjustment was appropriate.

The FCC concluded by noting that additional violations could subject Compass Global to further enforcement action, including revocation of its operating authority. In addition, it ordered the company to correct its violations of the payphone compensation rules and to submit within 30 days a report describing its plan for compliance with the rules that the agency determined it had violated.

Future Enforcement Action

The FCC's decision sends a strong signal that future violations of the payphone compensation rules will result in further enforcement actions and harsh penalties. This puts any communications provider that utilizes its own or leased switching equipment and offers access to its services through 1-800 numbers and access codes that may be used at payphones directly in the line of fire. The decision serves as a reminder that providers must ensure that they are in full compliance with the payphone compensation rules.

Please feel free to contact us if you have any questions or we can be of any assistance to you.

January 2007

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New VoIP Reporting Deadlines

Thu, 07 Jan 2010 14:02:39 -0500

On December 14, 2006, the FCC set two deadlines for important reporting requirements associated with interconnected VoIP provider compliance with the Communications Assistance for Law Enforcement Act ("CALEA"). Specifically, interconnected VoIP providers must file CALEA monitoring reports by February 12, 2007 and CALEA system security plans by March 12, 2007.

The FCC originally applied the requirements of CALEA to interconnected VoIP providers in a September, 2005 order. This past May, in a subsequent order, the FCC detailed the implementation requirements that interconnected VoIP providers must meet to comply with CALEA by May 14, 2007.

The two new CALEA reporting requirements further the continuing FCC trend of regulating interconnected VoIP providers. In 2005 the FCC extended E911 obligations to interconnected VoIP providers, and in 2006 the agency required VoIP providers to contribute to the Universal Service Fund ("USF").

Monitoring Report

The FCC determined in the May order that all interconnected VoIP providers must file a monitoring report with the FCC demonstrating the actions the company has taken towards CALEA compliance and establishing a date by which compliance is anticipated. Monitoring reports will be treated as confidential by the FCC and will not be made available routinely for public inspection. The deadline for filing this monitoring report is February 12, 2007.

The FCC's decision expressed concern about identifying impediments to timely compliance and required monitoring reports to avoid potential delays in compliance. VoIP providers must provide specific reasons for non-compliance if they will not meet the May 14 deadline, and must identify the company's expected compliance method. Interconnected VoIP providers can comply by using a) an accepted industry technical standard (the "safe harbor"), b) a Trusted Third Party (independent company that remotely manages the intercept process), or c) a customized compliance solution.

CALEA System Security Plan

Interconnected VoIP providers are also required to develop and file with the FCC a CALEA system security plan, a requirement to which other telecommunications carriers have been subject for several years. The system security plan includes company policies and procedures for providing call interception and access to call-identifying information only pursuant to lawful request; maintaining adequate records; and satisfying applicable reporting requirements. The system security plan also identifies a senior officer responsible for such company policies and procedures, recordkeeping and reporting. Companies that wish to withhold the report from public inspection must request confidential treatment pursuant to the FCC's rules. The FCC can assess a monetary penalty against any provider that fails to file a system security plan. The deadline for interconnected VoIP providers to file this plan is March 12, 2007.

Additional Requirements

In order to submit the monitoring report, interconnected VoIP providers must first provide company contact information, including an FCC Registration Number ("FRN") and Filer 499 ID. The Filer 499 ID is obtained by filing an FCC Form 499-A with the Universal Service Administrative Company ("USAC"), which interconnected VoIP providers should already have done by August 1, 2006. This registration sets the company up as a contributor under the federal USF program, as well as other federal subsidy programs.

If your company requires assistance in preparing and submitting a monitoring report, system security plan, FRN or FCC Form 499-A registration, please contact us.

December 2006

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FCC Imposes USF on VoIP and Increases Wireless USF "Safe Harbor"

Thu, 07 Jan 2010 13:58:08 -0500

On June 27, 2006, the Federal Communications Commission ("FCC") released the text of its Universal Service Contribution Methodology Report and Order and Notice of Proposed Rulemaking ("USF R&O") which increases the wireless "safe harbor" from 28.5% to 37.1% and extends Universal Service Fund ("USF") contribution requirements to "interconnected VoIP providers".

Due to the increased "safe harbor", the USF R&O will result in increased contributions for wireless providers, including Mobile Virtual Network Operators ("MVNOs"). It also extends USF contribution requirements for the first time to "interconnected VoIP providers", establishes a 64.9% safe harbor and requires such providers to submit an FCC Form 499-Q and 499-A registration on or before August 1, 2006.

Wireless Safe Harbor

Wireless providers (including MVNOs) are already required to contribute to USF by filing annual FCC Forms 499-A and quarterly FCC Forms 499-Q. However, due to the administrative difficulties associated with allocating interstate versus in-state calling by wireless customers, existing FCC rules have permitted wireless companies to assume that only 28.5% of their telecommunications revenues are interstate. This is known as the wireless "safe harbor." Pursuant to the USF R&O, the wireless "safe harbor" will increase to 37.1% starting with the FCC Form 499-Q due on August 1, 2006. This means that a wireless provider electing to use the "safe harbor", such as an MVNO, would contribute approximately 4% of its total revenues (37.1% times the applicable contribution factor for the quarter) to USF as interstate revenue.

The FCC set the 37.1% "safe harbor" by taking the highest percentage of interstate and international usage by a wireless company according to a traffic study conducted by TNS Telecoms for TracFone Wireless. The FCC indicated that it could have set the "safe harbor" at a higher level by assuming the upward trend in wireless revenues would continue and setting the percentage higher to avoid having to reset the "safe harbor" in another few years.

If a wireless provider chooses not to use the "safe harbor" it can contribute to USF based on actual revenues or use a traffic study to estimate revenues. Pursuant to the USF R&O, if the wireless provider chooses to use a traffic study, it must submit the study to the FCC and the Universal Service Administrative Company ("USAC") for review. The traffic study used for a particular quarter must be submitted by the deadline for that quarter's FCC Form 499-Q.

USF and Interconnected VoIP

The USF R&O requires, for the first time, providers of "interconnected VoIP service" to contribute to USF and to submit an annual FCC Form 499-A and four FCC Forms 499-Q per year. "Interconnected VoIP services" are those VoIP services that: 1) enable real-time, two-way voice communications; 2) require a broadband connection; 3) require IP-compatible customer equipment; and 4) permit subscribers to receive calls from and initiate calls over the public switched telephone network. Without determining whether VoIP services are "telecommunications service" or "information services", the FCC concluded that "interconnected VoIP providers" are "providers of interstate telecommunications" for purposes of the universal service requirements of the Telecommunications Act of 1996 and that the "public interest" requires that they contribute to USF.

Like wireless providers, "interconnected VoIP providers" can contribute by 1) using a "safe harbor" (set at 64.9%), 2) using actual revenues or 3) using a traffic study to estimate interstate revenues. The FCC set the VoIP "safe harbor" at 64.9% because it determined that "interconnected VoIP service" is predominantly used for interstate and international calling, like wireline toll service. The percentage of interstate revenues reported to the FCC by wireline toll providers is 64.9%, so the FCC established the same percentage as a "safe harbor" for "interconnected VoIP providers."

In addition, those "interconnected VoIP providers" that offer customers a bundled package of services that includes equipment and enhanced services may have difficulty allocating revenues from "interconnected VoIP services" as opposed to the equipment and enhanced services. In such circumstances, the FCC has determined that "interconnected VoIP providers" may use the two "safe harbors" from the FCC 's 2001 CPE Bundling Order. Pursuant to the CPE Bundling Order methodology, such "interconnected VoIP providers" can elect to either: 1) report revenues from bundled "interconnected VoIP services" and equipment/enhanced services based on the unbundled service offering prices, with no discount allocated to the "interconnected VoIP services"; or 2) treat all revenue from the bundled services as "interconnected VoIP service" revenue for purposes of USF. For example, if an "interconnected VoIP provider" provides a bundled service offering combining voice mail (an enhanced service offering that is $6 on a stand-alone basis) and "interconnected VoIP service" ($20 on a stand-alone basis) for a bundled price of $22, the "interconnected VoIP provider" has two options. It can either report $20 in "interconnected VoIP service" revenue (allocating no part of the $4 discount to the "interconnected VoIP service") or report the $22 bundled price (by electing to treat all bundled revenues as "interconnected VoIP service" revenues).

"Interconnected VoIP providers" that choose to report actual interstate revenues for USF purposes should beware that the FCC has indicated that such providers would possess the capability to track the jurisdictional confines of customer calls and would no longer qualify for the preemptive effects of the Vonage Order. Such a VoIP provider would therefore be subject to state regulation. The FCC preempted state regulation of Vonage in the Vonage Order because it was impossible for the company to separate its traffic (interstate versus intrastate) on a jurisdictional basis. Therefore, if an "interconnected VoIP provider" were able to separate interstate revenues from intrastate for purposes of USF, it would be able to do the same for purposes of state regulation.

"Interconnected VoIP providers" are also permitted to report interstate revenues based on a traffic study estimate. However, to do so, "interconnected VoIP providers" must first submit the proposed traffic study to the FCC for approval.

The USF R&O requires that "interconnected VoIP providers" file FCC Forms 499-Q, starting with the August 1, 2006 form, reporting revenue for the second quarter of 2006 and projecting revenue for the fourth quarter. Such providers are also required to submit annual FCC Forms 499-A, starting with the April 1, 2007 form, and an FCC Form 499-A registration (including a designated agent for service of process). The FCC Form 499-A registration should be submitted before or concurrent with the August 1, 2006 FCC Form 499-Q. Wholesale carriers supplying telecommunications services to "interconnected VoIP services" must continue to include the revenues derived from those services in their contribution bases for two quarters after the effective date of the USF R&O. This will likely result in both the wholesale provider and the "interconnected VoIP provider" contributing to USF on the same transmission and facilities, which the FCC recognizes.

Requirement for Interim Change

USF is a federal fund which collects a percentage of most providers' interstate and international telecommunications revenues to subsidize communications services for rural and low income areas, as well as for schools, hospitals and libraries (also known as the E-rate program). The current contribution factor is 10.5%, down 0.4% from last quarter. USAC determines the amount needed for disbursements, considers the assessable revenues and then sets the contribution factor to meet those requirements. Therefore, if assessable revenues decline or remain stagnant and the size of the fund's required disbursements increases, the contribution factor must be increased.

While the size of USF disbursements has increased from $4.4 billion in 2000 to $5.7 billion in 2004 to $6.5 billion in 2005, the assessable revenue base has declined from $79 billion in 2000 to $74.7 billion in 2004. This has put upward pressure on the contribution factor, which increased from 5.7% in first quarter of 2000 to 8.9% in the fourth quarter of 2004 to 10.5% in the current quarter (third quarter 2006). The decline in assessable revenue is due to the decline in long distance service revenues from $192 million in 2000 to $177 million in 2004. During the same time period, wireless service revenues have increased from $70 billion to $122 billion. While the FCC does not have information regarding the revenues of "interconnected VoIP providers," the subscriber levels for such providers have increased from 150,000 in 2003 to 1.2 million in 2004 to 4.2 million in 2005. Therefore, the FCC has increased the wireless "safe harbor" and extended USF contribution requirements to "interconnected VoIP providers" to increase the assessable revenue base.

Notice of Proposed Rulemaking

The FCC also seeks comment on several issues in the Notice of Proposed Rulemaking ("NPRM") included with the USF R&O. Specifically, the FCC seeks comment on: 1) whether to eliminate or raise the wireless interim "safe harbor"; 2) whether wireless providers can, or should be able to, determine their actual interstate and international end-user revenues; 3) how to determine the "safe harbor" percentage to better reflect market conditions on an ongoing basis, such as periodic adjustments to reflect revenue trends; 4) whether to reconsider the USF obligation imposed on "interconnected VoIP providers" and 5) whether "interconnected VoIP providers" can identify the amount of interstate and international (as opposed to intrastate) services they provide. In addition, Appendices C and D to the USF R&O are proposed revised FCC Forms 499-A (with instructions) and 499-Q (with instructions).

A copy of the text of the USF R&O can be accessed at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-06-94A1.pdf.

Please feel free to contact us if you have any questions or we can be of any assistance to you.

July 2006

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FCC Regulates Prepaid Card Providers

Thu, 07 Jan 2010 13:54:08 -0500

In a Declaratory Ruling and Report and Order released on June 30, 2006, the FCC clarified that all prepaid calling card providers ("PCCPs") offering telecommunications capability-including those offering menu-driven services as well as utilizing IP transport to deliver calls-are subject to federal regulation as telecommunications services providers. As such, PCCPs must contribute to the federal Universal Service Fund ("USF") and pay access charges. In addition to clarifying that PCCPs are required to transmit the Calling Party Number ("CPN") to interconnecting carriers, the decision establishes requirements that PCCPs report traffic data to underlying providers and file quarterly certifications with the FCC. The FCC's ruling applies retroactively to PCCPs utilizing IP transport but prospectively to PCCPs providing menu-driven services. Intended to level the regulatory playing field for PCCPs and reduce the potential for "gaming" of the regulatory system, the decision is expected to have a significant impact on PCCPs and underlying providers which serve PCCPs.

Classification

The FCC's decision specifically addresses a) menu-driven prepaid calling cards and b) prepaid calling cards that utilize IP transport to deliver all or a portion of the call. While specifically finding that both types of prepaid calling products are telecommunications services and not unregulated information services, the decision also concludes more broadly that "all prepaid calling card providers will now be treated as telecommunications service providers". The FCC's decision notes that if, in the future, PCCPs introduce new prepaid calling cards which they believe should be classified as unregulated information services, they should petition the FCC for a waiver or declaratory ruling to secure such a classification.

Menu-driven prepaid calling cards allow the user the option of utilizing the card as a transmission service or to access additional information (such as sports, weather, restaurant or entertainment information, time, reverse directory assistance, stock quotes, sports scores and schedules, horoscope information, etc.). In analyzing such cards, the FCC relies upon the Supreme Court's recent Brand X Decision where the Court stated that the key question in classifying offerings with both telecommunications and information service capabilities is whether the telecommunication transmission capability is "sufficiently integrated" with the information services component "to make it reasonable to describe the two as a single, integrated offering". In the case of menu-driven prepaid calling cards, the FCC finds that there is no functional integration between the information services features and the use of the telephone calling capability. In other words, the telecommunications component is "completely independent" of the enhanced menu features and thus this component constitutes a regulated telecommunications service.

In assessing prepaid calling cards that utilize IP transport to deliver all or a portion of the call, the FCC looked to its 2004 IP-in-the-Middle Order which concluded that AT&T's use of IP transport to route 1+dialed interexchange calls constitutes a telecommunications service. In that ruling the FCC found that an interexchange service that a) uses ordinary customer premises equipment with no enhanced functionality; b) originates and terminates on the public switched telephone network; and c) undergoes no net protocol conversion and provides no enhanced functionality to end users due to the provider's use of IP technology is a telecommunications service. Here the FCC concludes that, except for the use of 8YY dialing instead of 1+ dialing, prepaid calling cards that use IP transport are identical to the services considered in its 2004 decision and thus are telecommunications services.

Since they are classified as offering telecommunications services, the FCC's ruling determines that all PCCPs must contribute to the federal USF (based on interstate and international telecommunications revenues) and pay interstate or intrastate access charges based on the location of the called and calling parties.

USF Contributions

Many prepaid calling card offerings today combine enhanced non-telecommunications capabilities with telecommunications services, thereby making the task of allocating the telecommunications portion of interstate and international revenue for USF contribution purposes difficult. The ruling indicates that the FCC has already established two USF "safe harbors" for use by providers that offer retail packages that bundle enhanced and telecommunications services, and that PCCPs may avail themselves of these safe harbor approaches. Use of the safe harbors are afforded a presumption of reasonableness for enforcement purposes. The decision also concludes that calling cards sold by, to, or pursuant to a contract with, the Department of Defense ("DoD") or a DoD entity should be exempt from the USF contribution requirement.

Access Charges

As with other services that require the caller to dial an access number, the assessment of interstate and intrastate access charges based on the location of the called and calling parties can be complicated with respect to prepaid calling card traffic because the caller initially dials a 8YY number associated with the calling card platform and only later dials the number of the called party. As a result, the originating carrier will not be able to determine the appropriate jurisdiction of the call based on a comparison of the calling and called numbers because it will only know the 8YY number associated with the platform, not the telephone number of the called party. Unless the CPN is passed, the terminating carrier will face a similar problem.

The FCC concludes that these complications can be best addressed in the following manner: a) clarifying that PCCPs must transmit the CPN; b) requiring PCCPs to report the Percentage of Interstate Usage ("PIU") to underlying transport providers; and c) requiring PCCPs to file quarterly certifications with the FCC as to compliance with the PIU reporting requirements and use of such PIU data for USF contribution purposes. The FCC's decision clarifies that "if prepaid calling card providers do not comply with these rules they will be subject to the Commission's enforcement authority, including complaints and forfeitures."

Transmitting CPN-The FCC's decision clarifies that PCCPs, if SS7 technology is used, are required to transmit to interconnecting carriers the CPN of the calling party (i.e., the number associated with the telephone used by the cardholder) and not replace that number with the number associated with the platform. To address similar concerns, the FCC also prohibits carriers that provide underlying service to PCCPs from passing the telephone number associated with the platform in the charge number (CN) parameter of the SS7 stream.

Reporting PIU-The decision requires PCCPs to report PIU data to those carriers from which they purchase underlying transport services. This requirement is intended to address situations where CPN information is not available. Specifically, a PCCP must report prepaid calling card PIU factors, and call volumes on which these factors were calculated, based on not less than a one-day representative sample. The data must be computed separately for originating and terminating traffic on a state-specific basis. This information must be provided to the transport provider no later than the 45^th day of each calendar quarter. If the PCCP fails to provide the appropriate PIU information to the transport provider in a timely manner, the transport provider may treat the PCCP's traffic as subject to a 50% default PIU. In addition, the transport provider may audit the PIU reports it receives from a PCCP "if it has a reasonable basis to believe that such reports contain inaccurate or misleading data."

FCC Certification-To further ensure accurate reporting, the FCC's decision requires PCCPs to file certifications with the FCC, on a quarterly basis, signed by an officer of the company under penalty of perjury, stating that they are in compliance with the reporting requirements described above. The certification should also include the percentage of interstate, intrastate, and international calling card minutes for that reporting period. To facilitate USF contributions and in addition to required FCC Form 499A and Form 499Q submissions, PCCPs must also certify the percentages of total prepaid calling card service revenues that are interstate and international and therefore subject to federal USF assessments for the reporting period. Lastly, the certification must include a statement that the company is making the required contribution based on the reported information. These certifications will be due on a quarterly basis, beginning with the last day of the first full calendar quarter after OMB approval of this new requirement.

Retroactive Effect

The FCC determined that the new reporting and certification requirements applicable to PCCPs as well as its decision to classify menu-driven prepaid calling cards as telecommunications services will apply on a prospective basis. On the other hand, its decision to classify prepaid calling cards that utilize IP transport as telecommunications will be applied retroactively. While the FCC found that its prior decisions did not clearly point in the direction of treating providers of menu-driven prepaid calling cards as telecommunications carriers, its prior rulings applicable to IP transport did.

Effective Date

The FCC's decision will take effect 90 days after publication in the Federal Register (or sometime after October 1, 2006). The new certification and reporting regime will commence beginning with the last day of the first full calendar quarter after OMB approval of this new requirement. We will be tracking both of these implementation dates.

The new regulatory compliance obligations applicable to PCCPs and their underlying providers will necessitate modifications in the ways these providers conduct business. Providers should begin to implement changes now to ensure they are in compliance by applicable deadlines.

July 2006

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New CALEA Order

Thu, 21 Jan 2010 11:32:39 -0500

On September 23, 2005, the Federal Communications Commission (FCC) released a First Report and Order applying the Communications Assistance for Law Enforcement Act (CALEA) to interconnected VoIP providers. Interconnected VoIP providers must be in compliance with CALEA's obligations within 18 months of the effective date of the new ruling, or by the Spring of 2007.

Background

Enacted in October 1994, CALEA was intended to preserve the ability of law enforcement agencies to conduct electronic surveillance by requiring that "telecommunications carriers" and manufacturers of such equipment modify and design their equipment, facilities, and services to ensure that they have the required surveillance capabilities. Section 103 of CALEA imposes specific obligations on "telecommunications carriers" (as defined under CALEA) for assisting law enforcement, including with respect to 1) call intercept; 2) accessing call identifying information; 3) delivering intercepted communications and call identifying information to the government; and 4) doing so with a minimum of interference to subscriber service and privacy. The FCC has acknowledged the importance of electronic surveillance in law enforcement's effort to fight terrorism and crime. For more information see: http://www.intelecard.com/legalreg/03legalregs.asp?A_ID=449.

"Telecommunications Carrier" Under CALEA

In its VoIP CALEA Order, the FCC affirms its tentative conclusion that the definition of "telecommunications carrier" under CALEA is more inclusive than the definition of the same term in the Communications Act of 1934 (Communications Act). CALEA is different because, under a concept known as the "Substantial Replacement Provision (SRP)", some information services can be treated as telecommunications services if the service replaces a substantial portion of the local telephone exchange.

Under the SRP in CALEA, entities falling under the definition of "information service" under the Communications Act would be considered "telecommunications carriers" for purposes of CALEA if the entity meets the three components of the SRP. The three components are: 1) the entity must engage in providing wire or electronic communication switching or transmission service; 2) the FCC must find that such service is a replacement for a substantial portion of the local telephone exchange; and 3) the FCC must find that it is in the public interest to deem such entity a telecommunications carrier for purposes of CALEA.

CALEA Extended to Interconnected VoIP

The FCC's VoIP CALEA Order concludes that CALEA applies to interconnected VoIP providers. Interconnected VoIP services are those VoIP services that: 1) enable real-time, two-way voice communications; 2) require a broadband connection; 3) require IP-compatible customer equipment; and 4) permit subscribers to receive calls from and initiate calls over the PSTN. The ruling applies to all VoIP communications that offer such capabilities, not only those that actually involve the PSTN.

The ruling applies the three components of the SRP test to interconnected VoIP providers and finds that such providers are "telecommunications carriers" for purposes of CALEA.

Switching or Transmission: The FCC finds the term "switching" in the SRP to include "routers, softswitches, and other equipment that may provide addressing and intelligence functions for packet-based communications to manage and direct the communications along to their intended destinations." Interconnected VoIP providers use those technologies, and therefore engage in providing wire or electronic communication switching or transmission service.

Substantial Replacement: The ruling determines that interconnected VoIP providers replace a substantial portion of the local telephone exchange service, namely the voice function of the traditional local telephone exchange. Interconnected VoIP service essentially is a substitute for conventional telephone service.

Public Interest: According to the FCC's ruling, it would be in the public interest to apply CALEA to interconnected VoIP providers because: 1) the decision will not have a harmful effect on competition since all interconnected VoIP providers are covered; 2) the decision will not discourage the development of new technologies and services because there has been no such discouragement since the FCC announced its tentative conclusion in the VoIP CALEA rulemaking; and 3) protection of national security and public safety compels application of CALEA to these services.

Issues for Next Order

The VoIP CALEA Order only establishes which entities are subject to CALEA. The VoIP CALEA rulemaking raised other issues, including: 1) the ability of VoIP providers to provide all of the capabilities required by CALEA; 2) identification of future services and entities subject to CALEA; 3) compliance extensions; 4) cost recovery; and 5) enforcement. These issues will be addressed in a future FCC order to be released in the coming months.

Effective Dates

Interconnected VoIP providers must be in full compliance with CALEA requirements within eighteen months of publication of the VoIP CALEA Order in the Federal Register.

The FCC's VoIP CALEA Order is the first step towards applying CALEA to VoIP services. Interconnected VoIP providers must be prepared, within eighteen months, to fully comply with the requirements of Section 103 of CALEA. Although the precise requirements and capabilities that they will be required to provide have yet to be defined, such providers should be aware of CALEA's requirements and take them into consideration when planning and designing their systems.

October 2005

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FCC USF Fines

Mon, 18 Jan 2010 16:08:28 -0500

The FCC recently proposed to levy forfeiture penalties totaling over $3.5 million against various telecommunications providers which failed to remit Universal Service Fund (USF) contributions and other FCC regulatory assessments. The FCC's July 25, 2005 and August 12, 2005 enforcement actions signal a heightened resolve to penalize telecommunications providers which fail to pay USF and other assessments.

The FCC issued five notices of apparent liability (NALs) to several interstate telecommunications providers based on, among other things, either failure to pay USF contributions or pay such contributions on a timely basis. In addition to proposing forfeitures for failure to pay USF, the agency also proposed forfeitures for failure to: a) pay regulatory fees; b) register with the FCC; c) submit Telecommunications Reporting Worksheets (i.e., FCC Form 499-A and 499-Q); d) pay Telecommunications Relay Service (TRS) fund contributions; and e) pay contributions to the North American Numbering Plan Administration (NANPA).

Background

Section 254(d) of the Communications Act of 1934 (the Act) requires the FCC to collect USF contributions from all telecommunications providers offering interstate telecommunications services. The funds collected are used to support telecommunications services in rural and high cost areas as well as the rural health care and schools and libraries (E-rate) programs. The FCC has appointed an administrator of the USF to perform this collection and distribution function, the Universal Service Administrative Company (USAC). Providers of interstate telecommunications services are required to complete and submit FCC Form 499-A to both register with the FCC (in order to begin offering interstate service) and provide annual revenue information to USAC for purposes of determining USF contributions. In addition, providers are required to complete and submit interim reports on a quarterly basis by means of an FCC Form 499-Q. Providers are allowed to recover USF contributions from their end-user customers.

In a February 23, 2005 Order and Notice of Proposed Rulemaking, the FCC made clear in addressing the appropriate regulatory regime for AT&T's "enhanced" prepaid cards, that prepaid calling card providers, to the extent their cards are used to make interstate calls, are covered and required to contribute under the USF program. In that decision, the FCC ruled that AT&T had unlawfully avoided paying over $500 million in USF contributions and intrastate access charges. While none of the recent NALs issued by the FCC involved prepaid calling card providers, the AT&T ruling underscores the FCC's view that prepaid providers are required to remit USF contributions and other regulatory assessments.

Penalties for Failure to Make USF Contributions

Authorized and maximum forfeitures under the Act were adjusted as of September 7, 2004. The Act authorizes, for violations occurring before that date, forfeitures of up to $120,000 per violation or each day of continuing violation, with a statutory maximum of $1.2 million. For violations occurring after September 7, 2004, the Act authorizes forfeitures of up to $130,000 for each violation or each day of continuing violation, with a statutory maximum of $1.325 million.

While there is no base forfeiture established in the FCC's Rules for failure to make USF contributions, the FCC has developed a formula that it now uses consistently to assess these penalties. If the FCC initiates enforcement proceedings against a provider, it can only impose penalties for violations that occurred within one year of the NAL. However, the agency can consider conduct prior to that time for purposes of assessing the total forfeiture amount, including the upward adjustment in the base forfeiture. The FCC will impose a base forfeiture of $20,000 for each month in which the provider has failed to make the required contribution. The base forfeiture is then subject to an upward adjustment of one-half of the provider's unpaid contributions. This formula was applied in each of the five NALs recently issued by the FCC.

In addition to monetary forfeitures, providers failing to make USF contributions can be subject to more serious enforcement actions. Continuing violations can result in higher monetary forfeitures (as authorized by the Act), holds on or dismissal of pending applications before the FCC, or possible revocation of operating authority.

Recent FCC Notices of Apparent Liability

The NALs released on July 25, 2005 and August 12, 2005 signal the FCC's increased enforcement resolve with respect to unpaid USF contributions. Of the approximately $3.5 million total assessed for violations of the Act and FCC Rules, the FCC assessed more than $2.6 million in back payments and penalties (among five providers) for failure to make USF contributions during the previous year. The providers each exhibited a history of either failing to make ! ! any contributions or timely contributions, a fact relied upon in setting the ultimate forfeiture amounts.

Instead of summarizing each of the five NALs, the following addresses the more common deficiency patterns and how they were treated by the FCC in several of the NALs.

Lump Sum Late Payments: Simply paying off outstanding contributions in response to an FCC letter of inquiry (LOI) will not release a provider from liability for penalties based on failure to make USF payments, including the upward adjustment. As an example, the NAL issued to InPhonic, Inc. (InPhonic) (a provider of mobile virtual network operator service, wireless information services, and activation and data services) assessed a forfeiture of $598,626 for failure to make USF contributions for seven out of the previous twelve months (recall that the FCC can only impose forfeitures for the year preceding the NAL). This penalty was issued even though InPhonic made a payment of over $800,000 for USF contributions it owed from 2002 to 2004 in response to an FCC LOI. InPhonic was still subject to an upward adjustment penalty of one-half of the amount it paid for outstanding contributions, even though it had remitted a lump sum late payment. The penalties were imposed despite such late payment because InPhonic had failed to make USF contributions to USAC for a period of over two years after the company began offering interstate service (recall that the FCC can consider conduct prior to the previous year for purposes of determining the appropriate total forfeiture amount).

Partial Payments: Partial payment will result in a penalty of $10,000 for each month of partial payment as well as the upward adjustment of one-half of the violator's unpaid contributions. As an example, OCMC, Inc. (OCMC) (a provider of operator and interexchange carrier services) was assessed a forfeiture of $1.133 million for failure to make USF contributions for nine months in the previous year. However, it made partial payments for seven of those months. The FCC imposed a $10,000 base forfeiture for each month in which OCMC made partial USF contributions to USAC. The upward adjustment formula remained the same, one-half the unpaid contributions. This assessment was made because OCMC had made irregular and unsatisfactory payments to the USF for several years (again recall that the FCC can consider behavior prior to the previous year for purposes of the total forfeiture). The FCC found particularly egregious those months in which OCMC made partial contributions that were not only insufficient to pay off its balance, but insufficient even to cover the company's current monthly charges.

Failure to Register and Provide Revenue Information: Perhaps the most egregious violations, as determined by the FCC, are failure to register with the FCC and failure to provide revenue information to USAC (by filing FCC Forms 499-A and 499-Q), which both include separate forfeitures, but also can increase forfeitures for failure to pay USF contributions. Failure to register and failure to provide revenue information is so egregious because it makes implementation of several FCC programs, including USF, TRS, and NANPA, more difficult or impossible and hampers efficient FCC enforcement of its Rules.

As an example, Teletronics, Inc. (Teletronics) (a long distance reseller) was assessed a forfeiture of $100,000 for failure to register with the FCC, $250,000 for failure to file annual FCC Form 499-A and quarterly FCC Form 499-Q, and $308,000 for failure to make USF contributions for the previous twelve months. Because the company had failed to even register or provide any revenue information, in order to calculate the upward adjustment, the FCC had to use revenue information obtained during its investigation to estimate the amount of its outstanding contributions owed since it began operations. Therefore, failure to register will not only subject a provider to a separate forfeiture penalty, but will also likely lead to higher USF penalties because, in order to assess the USF violation penalty, the FCC must estimate revenue information to determine USF liabilities.

Conclusion

Telecommunications providers of all types should closely examine their USF and federal regulatory fee compliance status in light of the FCC's increasing determination to impose heavy fines and penalties against non-compliant companies.

September 2005

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Access Reform

Thu, 07 Jan 2010 11:59:26 -0500

On March 3, 2005, the FCC launched the second phase of its comprehensive rulemaking proceeding regarding intercarrier compensation. The importance of this proceeding cannot be understated; policies and regulations adopted as a result of it will likely affect all corners of the telecommunications industry.

The FCC's objective in the proceeding is perhaps best summarized by Commissioner Michael J. Copps: "Our intercarrier compensation system is Byzantine and broken. We have in place a scheme under which the direction and amount of payments vary depending on whether carriers route traffic to a local provider, a long distance provider, an Internet provider, a CMRS carrier, or paging provider. In a marketplace defined by convergence and technological change, this hodgepodge of rates looks more like a historical curiosity than a rational system of compensation."

The FCC's Further Notice of Proposed Rulemaking ("Further Notice") is intended to begin the process of replacing the existing myriad intercarrier compensation regimes with a fair and unified regime designed for today's marketplace. In its Further Notice, the FCC seeks comment on a range of proposals to comprehensively reform the existing intercarrier compensation process as well as the impact that they are likely to have upon Universal Service and end user customers.

Under the current intercarrier compensation regime, federal and state access charge rules govern the payments that interexchange carriers ("IXCs") and commercial mobile radio service ("CMRS") providers make to local exchange carriers ("LECs") that originate and terminate long distance calls. By contrast, the reciprocal compensation rules established under Section 251(b)(5) of the Telecommunications Act of 1996, as amended, generally govern compensation between telecommunications providers for the transport and termination of calls not subject to access charges. These rules apply different cost methodologies to similar services in ways that increasingly distort marketplace competition.

Proposals for Reform

Numerous industry groups have submitted proposals to the FCC to comprehensively reform federal and state intercarrier compensation mechanisms. The following major groups have submitted proposals which are referenced in the FCC's Further Notice: Intercarrier Compensation Forum ("ICF"), the Expanded Portland Group, the Alliance for Rational Intercarrier Compensation, the Cost-Based Intercarrier Compensation Coalition, Cellular Telecommunications and Internet Association, National Association of State Utility Consumer Advocates, National Association of Regulatory Utility Commissioners, Western Wireless, Home Telephone Company and PBT Telecom.

While the Further Notice summarizes many of these proposals, it is helpful to review at least one, the proposal of the ICF. The ICF is a diverse group of nine carriers (i.e., AT&T, GCI, Global Crossing, Iowa Telecom, Level 3, MCI, SBC, Sprint and Valor) representing different segments of the telecommunications industry. The ICF has developed a comprehensive plan for reforming the current network interconnection, intercarrier compensation, and Universal Service rules. Among other things, the ICF plan would reduce per-minute termination rates from existing levels to zero over a six-year period. Specifically, the compensation rate for interstate access, intrastate access, and most other types of non-access traffic would be reduced in equal steps over four years to a unified rate of $.000175 per minute-of-use ("MOU"). This rate is further reduced in the fifth year of the transition to $.0000875 per MOU and finally eliminated a year later. Revenue eliminated as a result of the transition to bill-and-keep under the ICF plan would be replaced by a combination of end user charges and a new Universal Service support mechanism. As intercarrier payments decline, the cap on the subscriber line charge ("SLC") would increase in equal steps from the current level of $6.50 to $10.00 in areas served by non-rural carriers and up to $9.00 in areas served by certain rural LECs.

The FCC's Further Notice seeks comment on the various proposals and asks parties whether it would be preferable to adopt a single proposal in its entirety rather than adopting a modified version of any particular proposal or attempting to combine different components from individual plans.

State Jurisdiction

A significant issue on which the Further Notice seeks public comment is the agency's legal authority to reform intrastate access charges as part of its comprehensive intercarrier compensation reform. Access charges for intrastate traffic has historically been an area within the exclusive jurisdiction of state public utilities commissions. Thus, any proposal that includes reform of intrastate access charges has the potential to raise federal-state jurisdictional issues. State public utilities commissions can be expected to seek to constrain FCC efforts to exercise jurisdiction over and reform intrastate access charges.

Cost Recovery

The Further Notice seeks comment on whether carriers will be permitted to offset revenues previously recovered through interstate access charges if, as part of the reform process, the FCC reduces or eliminates the ability of LECs to impose interstate switched access charges on IXCs. While interstate access charges have declined over the years, both Price Cap LECs and Rate-of-Return LECs still generate significant revenue from access charges (and concomitantly IXCs still incur significant costs associated with access charges). Some proposals before the FCC rely upon two mechanisms - the SLC and some form of Universal Service support - for offering Price Cap carriers the opportunity to recover costs previously recovered from IXCs through interstate switched access charges. The Further Notice asks whether the FCC should rely solely on end user charges, or whether it also should rely on Universal Service support mechanisms to offset revenues no longer recovered through interstate access charges.

Since a comprehensive reform effort could entail similarly reducing or eliminating intrastate switched access charges, these same questions are posed with respect to intrastate access charges and whether they can be replaced with additional Universal Service funding and SLC increases. The Further Notice queries whether the FCC should create a federal mechanism to offset any lost intrastate revenues or whether the states should be responsible for establishing alternative cost recovery mechanisms for LECs within the intrastate jurisdiction.

Rate Integration/Averaging

Highlighting an issue that could affect insular areas and specialized regional providers, the FCC seeks public comment on the relationship between the access charge reform proposals and the FCC's rate integration and rate averaging requirements. Section 254(g) of the 1996 Act codifies the FCC's pre-existing rate integration and geographic rate averaging policy. The so called "Rate Integration Rule", as codified in Section 254(g), requires providers of interexchange telecommunications services to charge rates in each state that are no higher than those in any other state. Similarly, the so called "Geographic Rate Averaging Rule", as incorporated in Section 254(g), requires providers of interexchange telecommunications services to charge rates in rural and high-cost areas that are no higher than the rates they charged in urban areas.

According to the Further Notice, the FCC is concerned that, absent access charge reform, the rate integration and rate averaging requirements eventually will have the effect of discouraging IXCs from serving rural areas. The FCC also notes that these requirements may place specialized, regional providers at a competitive disadvantage vis-à-vis providers serving urban markets. Among other things, the Further Notice inquires as to whether there are additional steps the FCC should take to address these concerns or whether there are circumstances where the FCC should forebear from applying the rate integration and rate averaging requirements.

CMRS Issues

Under the FCC's so called "IntraMTA Rule", traffic to or from a CMRS network that originates and terminates within the same Major Trading Area ("MTA") is subject to reciprocal compensation obligations under Section 251(b)(5), rather than interstate or intrastate access charges. Thus, the FCC's rules define telecommunications traffic between a LEC and a CMRS provider that is subject to reciprocal compensation as traffic that, at the beginning of the call, originates and terminates within the same MTA. The purpose of the IntraMTA Rule is to distinguish access traffic from Section 251(b)(5) reciprocal compensation traffic. Many of the proposals being considered by the FCC would eventually eliminate the IntraMTA Rule and treat CMRS traffic the same as all other wireline traffic for compensation purposes. The Further Notice seeks comment on this potential reform.

Implementation Issues

Under the FCC's access charge regime, the rates, terms and conditions under which carriers provide interstate access services are generally contained in tariffs filed with the FCC. By contrast, the exchange of traffic under Section 251(b)(5) is governed by interconnection agreements. The Further Notice seeks comment on how to reconcile these two fundamentally different approaches if the agency moves to a unified rate for all types of traffic. The Further Notice also seeks comment on the type of transition that would be needed to move to a new regime.

Conclusion

The FCC's intercarrier compensation reform proceeding can be expected to touch upon virtually all sectors of the telecommunications industry, spanning wireline, wireless and VoIP service providers, state public utilities commissions, and perhaps most directly, end user customers. Not only does the proceeding have the potential to affect the rates that end users pay (e.g., the SLC and provider charges), but it also can be expected to impact the Universal Service program.

Initial comments in the proceeding are due sixty days after the FCC's Further Notice is published in the Federal Register and reply comments are due ninety days after publication in the Federal Register.

March 2005

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Agent Agreements

Thu, 07 Jan 2010 11:47:23 -0500

Agents often fail to realize that the core of their business model critically depends upon the effectiveness of the contracts they have in place with underlying carriers and other agents. If any of these core contracts are flawed or financially weak, the agent's business model is in serious jeopardy. For this reason, the first and highest priority for any agent or master agent should be negotiating sound agreements that are designed to be "financial winners".

Agents often depend upon a limited number of contractual relationships, whether with one or more underlying carriers or master agents, for their financial viability. Yet, all too often, agents fail to thoroughly understand their core contracts and neglect to invest adequate resources and upfront time into their negotiation and formation. Major carriers, with whom agents often contract, typically employ a team of specialized attorneys who have spent significant time, often years, working with the carrier's template agreement and have carefully crafted every provision and line of that document to solidly favor the carrier. Successful master agents often come to the table with a similar advantage. It is therefore critical that agents look to "level the playing field" and approach forming their core agreements only with expert telecommunications counsel. Every agent should have as part of its "team", qualified telecommunications counsel who is involved in the drafting and negotiating process for all such core agreements.

The balance of this Legal Alert attempts to survey some of the key considerations and pitfalls associated with the typical agent agreement. Keep two points in mind. First, the issues identified below only scratch the surface of what is involved. Typical agreements entail many additional issues and often present unique, "one-of-a-kind" considerations which must be addressed in a customized manner. Second, depending on the situation, sometimes "form" is often more important than "substance." Simply understanding and being able to identify an issue is not enough. Devising a carefully crafted clause or set of clauses (with an understanding of applicable legal principles, industry practice and carrier tendencies) to address the specific concerns and circumstances of a given agent is also required.

Commission Issues

One of the most important concerns is remuneration. Typically, agent agreements require the agent to sell a certain volume of service per month in exchange for a flat rate commission on services sold. However, truly lucrative commission rates commonly require a significant sales volume commitment, or minimum commitment, on the part of the agent. If a minimum commitment is not met, template agreements can sometimes impose a monetary penalty on the agent or allow the underlying carrier to unilaterally terminate the contract.

A carrier account team will often attempt to sign an agent up for as much as possible; often more than the agent can deliver. Therefore, prior to binding itself to an agreement, an agent should conduct a thorough review of its business plans and realistically evaluate how much volume it reasonably would be able to sell in any given month. Overestimation of the amount of volume that could be sold can have significant adverse financial consequences for an agent.

It is also critical that an agreement clearly and plainly spell out the commission structure and its functioning detail. Among other things, the agreement should clearly identify how and when commission payments are made; the applicable commission rate or percentage; the basis upon which commissions are calculated (e.g., billed amounts versus collected revenues); liability for bad debt (i.e., uncollectibles); and audit rights. Circumstances allowing modification of commission rates should also be clearly addressed (such as an increase or decrease in end user rates).

An important goal for every agent is an "evergreen" clause which provides for continuing, ongoing commissions after an agreement terminates. Evergreen provisions - which can be difficult to obtain - can be structured in a variety of different ways, some open-ended and virtually indefinite, while others can be more limited in duration. Nonetheless, the case is strong for an agent seeking some sort of evergreen payment since the agent originated the customer. Typically, whether an evergreen clause will be included in a deal is a function of the agent's "bargaining power", the carrier's or master agent's prevailing attitude with respect to such payments and the creativity of the agent's attorney in devising an acceptable evergreen arrangement.

Termination

Most carrier agreements impose a potentially heavy financial penalty if the agreement is terminated by the agent prior to the end of the contract term. Often, agents fail to adequately understand the potential financial burden that arises from such provisions. As a result, the agent may discover too late (i.e., after the deal is signed) that it is financially chained to an unprofitable deal because terminating the contract early would prove even more costly. Agents should conduct a thorough examination of any contract language involving termination penalties, lest they find themselves on the wrong end of an aggressive collection action.

Many other considerations also come into play here. One is lack of mutuality. Often a carrier template agreement will make it terminable at will by the carrier without any financial penalty, but not by the agent. Of course, this lack of equality or mutuality should not be accepted. An agent should also insist on being provided with "notice and opportunity to cure" any alleged breach before a carrier can either penalize the agent and/or terminate the agreement.

Another way to approach termination is through an agreement's "renewal" provision. To maintain flexibility, an agent may wish to seek a shorter agreement term with the right to renew, for example, under rolling one-year terms. In this manner, an agent can avoid being locked into a long-term deal that may become financially unworkable. The agreement should clearly delineate both the "effective date" and "termination date" of the agreement.

Arbitration

An agent should decide as a matter of general strategy whether it favors dispute resolution through recourse to traditional litigation or alternative dispute resolution means (such as mediation or arbitration). Agent agreements should, and typically do, contain dispute resolution provisions which spell out the recourse that is available to a party.

"Mediation" is the involvement by an independent third party in negotiations to settle a dispute. Mediators assist parties in reaching a settlement but do not have the power to decide an issue. "Arbitration" is the referral of a dispute to a third party empowered to make a decision that normally is binding on the parties. Arbitration is somewhat similar to traditional courtroom determinations in that it results in a resolution imposed by an outside party rather than one chosen by the parties themselves, but it differs from traditional litigation in that there is greater flexibility in choosing the deciding third party and the procedures that will be followed. In today's environment, courts are increasingly encouraging parties to submit cases to arbitration or mediation.

In our experience, agents of all types (but particularly smaller agents) are well served by mediation and arbitration. These alternative dispute resolution techniques can go a long way towards reaching a settlement of issues so that the underlying relationship can be preserved. More importantly, mediation and arbitration can greatly reduce legal fees thereby eliminating the inherent advantage that many larger carriers possess by virtue of their "deep pockets" in a dispute context. We typically recommend that our agent clients consider appropriately customized mediation or arbitration provisions in their agreements.

Agent Responsibilities

Several important portions of the agreement pertain to an agent's responsibilities. These responsibilities need to be clearly expressed. For example, the applicable service territory that applies under the agreement needs to be defined, as do the specific products which the agent will be marketing and for which the agent will receive commission payments. Sometimes commission payments vary by the specific product sold and it is important that an agent understand the commission levels that apply to different products. The "new customer sign-up form" should also be approved by the agent, and included as schedule to the agreement.

Addenda

Since the "devil is in the details", careful attention must be paid to the commission schedule and other addenda which are incorporated into and deemed to be a part of the agreement. This means that these documents and schedules are as binding upon the agent as the agreement is itself. It is not uncommon for many of the key provisions of the commission structure to be spelled out in further detail in the commission schedule. Thus, no less attention should be devoted to these addenda and schedules than the rest of the agreement.

Miscellaneous

Many other provisions and issues can come into play in an agent agreement. Often, which issues arise depends upon whether the agreement is between an agent and master agent or between an agent and a carrier. Some other key points are as follows:

Exclusivity - Carrier/agent contracts commonly include boilerplate "exclusivity clauses" that require the agent to market services only on behalf of that particular carrier. Such clauses severely limit the agent's ability to conduct its business and needlessly tie its fortunes to that of a single carrier. Not surprisingly, such provisions usually do not require the carrier to be exclusive to the agent. An agent should make it a point to strenuously oppose the inclusion of exclusivity provisions that would limit its flexibility to sell for other carriers.

800 Numbers - Agents should also give consideration to the identity of a customer's "RespOrg" or responsible organization under the FCC's toll-free numbers rule. The RespOrg is the entity chosen by a toll-free subscriber to manage and administer the appropriate records in the toll-free Service Management System for that subscriber. While a customer's RespOrg is typically its carrier, the FCC has held that 800 service customers should be able to choose the RespOrg for their 800 service and should be able to designate any entity (including themselves) as RespOrg, subject to certain conditions. An agent may wish to consider itself serving as a RespOrg or having the customer designate an entity other than the carrier as RespOrg in order to diminish the carrier's control over that particular customer.

Mutuality - Many provisions in carrier agreements are designed to favor the carrier only and do not extend comparable rights to the agent. For example, as discussed above under the Termination section, carrier templates typically state that an agreement is terminable at will without penalty by the carrier, but not by the agent. Carrier template agreements are typically riddled with such inequalities. Another common example occurs under the "assignment provision" whereby a carrier template will often state that the carrier can assign the agreement to a third party freely while limiting the agent's assignment rights to first require the consent of the carrier. Similarly, the "force majeure" provision in carrier templates often allows carriers to be excused from performance if unavoidable conditions exist, but do not extend this same right to the agent. All such inequalities should be identified and then aggressively pursued through the negotiation process.

The core agreements that agents must enter into, whether it be with a carrier or another agent, will have an enormous impact on the ultimate financial success of their businesses. For this reason, agents should prioritize giving close and careful consideration to the drafting and negotiation of these critical agreements.

April 2004

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Survive Slamming

Thu, 07 Jan 2010 11:42:42 -0500

Fines and penalties levied by the Federal Communications Commission ("FCC") and state public utilities commissions ("PUCs") against carriers for slamming activity, particularly carriers relying upon telemarketing, can be crippling. Since 2000, the FCC has assessed (either in forfeiture orders or through settlement agreements) carrier fines totaling approximately $14,070,000 while state PUCs have assessed aggregate penalties well in excess of this amount. As a result, it is absolutely crucial that long distance and local carriers as well as resellers have fail-safe anti-slamming programs in place.

The following outlines the minimum components necessary to steer clear of the potentially hefty slamming liability faced by carriers that use outbound telemarketing to reach new customers. While many of the comments below also apply to carriers relying upon letters of agency (LOAs), the focus of this guide is the relatively higher risk use of telemarketing to sell telecommunications services.

The Enforcement Climate

While slamming was under-penalized in the late 1990s, today federal and state law provides for severe economic penalties against slammers. With FCC slamming penalties assessed at $40,000 per slam ($80,000 in extreme cases) and FCC regulations requiring the unauthorized carrier to pay 150 percent of charges improperly collected to the slammed customer's preferred provider, carriers which permit an undue level of slamming, even if accidental, face almost certain financial disaster.

The average fine assessed by the FCC for slamming is over $1 million. The highest slamming penalty assessed by the FCC is a consent decree entered into for $3.5 million, and the lowest is a consent decree entered into for $55,000. In more egregious cases, corporate principals are individually banned from participating in the long distance marketplace.

Fines and penalties on the state level can be even more crippling. For example, in 2002, the Florida Public Service Commission accepted a settlement offer from a major provider in the amount of $3.1 million. In 2001, the California Public Utilities Commission issued an order assessing a $7 million fine against a reseller for slamming and misrepresenting its relationship with local exchange carriers. In recent years, the New York Public Service Commission entered into a settlement agreement with an incumbent local exchange carrier for $1.75 million as a result of slamming. In at least one state, Michigan, the law has been shaped to give consumers a cause of action against providers which can be extremely profitable for the consumer. Under Michigan law, the Public Service Commission can order a slamming carrier to remit between 10 and 50% of any fine directly to the slammed consumer. With fines running up to $70,000 per slam, Michigan consumers have a strong incentive to pursue legal actions against slamming carriers.

Perhaps most troubling is the reality that enforcement action often does not occur in isolation. Typically, a bad telemarketing campaign that leads to slamming will occur across multiple states, leading to simultaneous enforcement actions in a number of jurisdictions, compounding the potential liability of a carrier. A "domino effect" is not uncommon as yet additional regulators, partially responding to political pressure, feel the need to investigate the company's practices. The added prospect of defending multiple slamming enforcement actions, subject to differing state laws, along with multiplying legal fees can be daunting.

It is not difficult to comprehend that slamming liability is the single greatest legal concern in today's regulatory environment for resellers and facilities-based carriers. It is not uncommon for carriers, particularly those with aggressive telemarketing practices or which have not established a comprehensive slamming compliance program, to be severely challenged by slamming enforcement actions. Some do not survive the challenge. More than ever before, long distance and local providers must have fail-safe anti-slamming programs in place.

Avoiding Investigations and Liability

Given the high level of penalties issued by regulators against slamming, slamming has truly become a "zero tolerance" activity. Carriers operating in today's regulatory environment must implement systems that will absolutely eliminate slamming lest they face potentially devastating liability that could jeopardize their financial viability. Our law firm counsels its carriers in slamming avoidance practices. Typically, we recommend the following minimum steps to help eliminate slamming:

Rules Compliance: In order to comply and avoid liability, you must know the applicable law and rules. FCC and state slamming regulations are constantly in a state of change. For example, the FCC's regulations were significantly modified last year and are likely to be changed again this year. Similarly, the slamming regulations of the various states are continually being modified. Moreover, many states have unique requirements that cannot be complied with by following the FCC's rules alone. For example, Iowa law requires carriers to send a written notice to customers within 30 days of any carrier change. Massachusetts' rules state that only those verification companies which register with the Massachusetts Department of Telecommunications and Energy can be used to confirm carrier changes. Ensure that you have a copy of and understand the current slamming regulations both at the federal and state levels.

TPV and Sales Script Compliance Review: The content of Third Party Verification Scripts and Telemarketing Sales Scripts is almost entirely regulated. That is, specific FCC and state PUC regulations dictate a substantial portion of the content and actual wording with respect to these scripts. In the case of the FCC and some states, failure to follow literal TPV language is considered to be a slam even if the customer apparently intended to switch to a new carrier. Scripts should comply not only with FCC and state slamming requirements, but also with applicable federal and state marketing law. All TPV and Telemarketing Sales Scripts, including future updates, should always be reviewed by counsel.

TPV Provider: A legally-conscious TPV company is an important line of defense against slamming. Select a TPV company that demonstrates a high awareness of applicable FCC and state legal requirements. Remember, even in the case of a defective TPV, the carrier or reseller is responsible for the slam, not the TPV company. At a minimum, a TPV company should be able to offer legally-reliable verification scripts and procedures (including the ability to expeditiously supply the verification on CD-ROM or as an electronic file), as well as limited guidance when needed. Negotiate a strong agreement with your TPV partner which includes responsibility for compliant TPV scripts, updates and procedures. Finally, the TPV provider's operations must comply with Section 64.1100 of the FCC's regulations (i.e., not be managed, owned, controlled or directed by the carrier; not have a financial incentive to confirm orders; and operate in a location physically separate from the carrier or the carrier's telemarketing agent).

Telemarketer Training: For many providers, regulatory enforcement actions and investigations flow directly from overly-aggressive marketing practices which fail to make clear that the customer's carrier is being changed. The inevitable result is a slamming complaint. Telemarketers should be thoroughly trained in the legal restrictions surrounding slamming. Both written material and live sessions are strongly encouraged to communicate this. Our attorneys conduct live compliance training sessions for corporate executives and telemarketers.

Create a "Zero Tolerance" Policy for Telemarketers: Carriers which do their own telemarketing should create specific rules for telemarketers designed to avoid misleading statements and slamming as well as establish a "zero tolerance" policy towards slamming. The written policy should provide that the first instance of deceptive marketing or improper slamming will result in the employee's termination. Have telemarketers sign employment contracts agreeing to be bound to the policy. Signs should be posted in telemarketing rooms reminding telemarketers of the carrier's policies, including the "zero tolerance" policy.

Complaint Reponses: The difference between a carefully prepared complaint response and a careless form response can mean the difference between whether a slam is found to exist or not. Pay close attention to a slamming complaint from a regulator and respond specifically to what the complaint is seeking by the applicable deadline. For example, some regulators request a copy of the TPV while some do not. Similarly, ensure that the complaint response is submitted in the proper format and directed to the correct individual. Finally, beware of form complaint responses. Form responses, if carefully prepared, can work in some cases, but in many others can give rise to problems. For example, in complaints where the customer alleges fraud, misrepresentation, or that the person authorizing the sale did not have the authority to do so, a standard form response will likely be deficient and will need to be supplemented with additional responsive information. In short, avoid falling into the trap of routine form responses.

Seek a Drop-Off Exemption if Necessary: In many slamming cases, technical limitations prevent telemarketing agents from properly dropping-off a sales call after transferring it to the TPV agent. When this occurs, the FCC's rules have been violated and the transaction automatically will be deemed a slam. To avoid this, it may be possible in certain cases for carriers to file certifications with the FCC stating that their telemarketing agents are unable to effectively drop-off the sales call after initiating a TPV, thereby securing a legal exemption from the drop-off requirement. Submitting such a certification, a relatively simple step, can give a carrier added insurance against slamming risk.

Conduct Periodic Audits with Regulators: Periodically (annually or semi-annually) contact FCC and state PUC staff to check the status of slamming complaints and foster a positive rapport with staff. Not only does this help ensure that the carrier is aware of existing complaints and gauge the "attitude" of regulators with respect to the carrier's complaint levels, but it also demonstrates a degree of good faith to FCC and PUC staff.

Make Periodic Goodwill Visits to Meet with Regulators: If you are aware of a particular slamming problem that is potentially a concern in a given state or before the FCC, proactive intervention often is the best course. A meeting with staff, typically set up through counsel, should be held to address the problem before it results in a show cause order or issuance of a fine. Such an approach may go a long way in avoiding or mitigating enforcement activity (and the associated "domino effect") for more serious slamming problems.

Avoid Hearings Where Possible: Formal hearings may result in additional fines and most certainly result in expanded legal expense. FCC and PUC staff often seek to avoid hearings as much as carriers do. If a complaint has resulted in a PUC hearing, it is most likely because the carrier has either ignored or not adequately responded to the requests of staff. Extra effort should be taken to avoid show cause hearings and to address matters before they progress to this potentially serious stage.

Compliance Audit: A detailed legal review of all component factors is advisable for resellers and carriers which have encountered a recent spike in regulatory slamming investigations or whose anti-slamming practices have not been thoroughly reviewed by telecommunications counsel. This would generally cover, among other things, assessment of telemarketing practices (often the trigger for slamming complaints), telemarketing and TPV script review and assessment, TPV provider assessment and recommendations, complaint form and process review, and possibly a multi-state compliance audit to identify trouble areas before they progress to the "point of no return." A comprehensive compliance audit is a proactive, preventative step designed to avoid slamming problems before they might arise.

While slamming proves to be an insurmountable problem for some resellers and carriers, in certain cases forcing them out of business, it is surely an avoidable problem. By establishing an anti-slamming plan, composed minimally of the steps outlined above, providers can steer clear of these dangerous risks.

Our law firm is available to assist established and start-up providers in establishing an anti-slamming program.

February 2004

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FCC Modifies Payphone Compensation

Thu, 07 Jan 2010 11:35:23 -0500

On October 3, 2003, the Federal Communications Commission ("FCC") released a Report and Order ("Order") in CC Dkt. No. 96-128 which substantially modifies existing payphone compensation rules to 1) transfer compensation responsibility to switch-based resellers ("SBRs") and 2) expand compensation and call completion tracking requirements. The new rules, expected to take effect on April 1, 2004, place direct responsibility for compensating payphone service providers ("PSPs") and tracking compensable calls upon long distance providers that own or lease a switch (including prepaid calling card providers) and use that switch to complete calls.

In its first payphone compensation order, released in 1996, the FCC determined that "the primary economic beneficiary of payphone calls should compensate the PSPs." The FCC at the time determined that the primary economic beneficiary was the underlying intermediate interexchange carrier (hence, it should be responsible for payphone compensation). In its Second Order on Reconsideration ("Second Order"), the FCC extended the rules to require the first facilities-based long distance carrier to which a local exchange carrier ("LEC") routes a compensable coinless payphone call to: (1) compensate the PSP for completed calls at a mutually agreeable rate; (2) track or arrange for tracking of the call to determine whether it is completed and therefore compensable; and (3) provide to the PSP a statement of the number of coinless calls it receives from each of that PSP's payphones. The FCC's new October 3, 2003 Order, however, recasts much of this regulatory scheme, finding that it does not accurately and efficiently achieve its goals of 1) identifying the party responsible for compensation; and 2) ensuring that PSPs are paid based on accurate data for every completed call.

The new Order finds that the primary economic beneficiary of a dial-around call is the SBR, or the carrier that completes the dial-around call, and, thus, when a dial-around call is completed on an SBR's platform, it is now responsible for payphone compensation. For example, in the case of most prepaid providers, when a consumer uses one of its prepaid cards at a payphone, the provider of the prepaid calling card service is now going to be responsible for compensating the PSP. Previously, the FCC had required the prepaid provider to report the data on completed calls to the intermediate IXC which was then required to compensate the PSP. Based upon data collected from the comment and reply cycle of the Second Order, the FCC also concluded that only SBRs have the ability to accurately track payphone calls completed on their platforms because only SBRs possess all of the relevant call completion data. The FCC found that, under the current rules, SBRs lack incentive to accurately report call completion data to the intermediate IXC and thus, PSPs are not being accurately compensated for all completed calls.

Based upon the above analysis, the FCC has modified its rules with this Order, creating new requirements for both SBRs and underlying carriers in order to achieve its second goal of ensuring that all PSPs are paid based on accurate data for every completed call.

SBRs, or whichever carrier completes the dial-around calls, will be responsible for the following when the new rules take effect:

Establishing a tracking system to accurately track coinless access code or subscriber toll-free payphone calls to completion.
Paying compensation to PSPs on a quarterly basis for every completed call.
Submitting a sworn statement signed by its chief financial officer to PSPs attesting to the accuracy and completeness of payment for that particular quarter.
Submitting at the conclusion of each quarter to PSPs a report including: (a) a list of the toll-free and access numbers dialed from that PSP's payphones and the ANI for each payphone; (b) the volume of calls for each toll-free/access number; (c) the name, address, and phone number of the person(s) responsible for handling payphone compensation; and (d) the carrier identification code ("CIC") of all facilities-based long distance carriers that routed calls listed in the report.
Finally, and perhaps the most significant addition, the FCC's Order adopts a requirement of tracking system audits. All carriers completing calls will be required to file an audit report conducted by an independent third party auditor to determine whether the established call tracking systems accurately track payphone calls to completion. All completing carriers will have to comply with the call tracking requirements detailed in the Order and, by the effective date of the new rules, file an audit report with the FCC Secretary under Dkt. 96-128 and with each PSP and facilities-based long distance carrier from which it receives payphone calls verifying the effectiveness of the system.

Intermediate facilities-based long distance carriers that switch payphone calls to SBRs will be responsible for submitting detailed quarterly reports to the PSPs when the new rules take effect with the following information:

A list of all the facilities-based long distance carriers to which it switched toll-free and access code calls.

For each identified facilities-based carrier, a list of toll-free and access code numbers that all LECs delivered to it and that it switched to the SBRs.

The volume of calls for each toll-free/access code listed that it received from the PSPs payphones and switched to each SBR.

The name, address and phone number and other identifying information of the person(s) who serves as its contact at each identified SBR.

Both SBRs and facilities-based long distance carriers will be responsible for maintaining verification data to support their quarterly reports for 18 months after the conclusion of the quarter. Pursuant to FCC rules, the data must include date and time information for each call and the information must be available to the PSP upon request.

According to the Order, the new rules will take effect on the first day of the first full quarter following Office of Management and Budget ("OMB") approval. Assuming a typical OMB approval cycle of 120-150 days, this is likely to be April 1, 2004. The delayed implementation date is intended to allow carriers and SBRs time to implement the new requirements. During the interim period, the rules contained in the Second Order on Reconsideration will apply.

The FCC's Order is the result of a federal court decision in January 2003 which vacated (or overturned) the FCC's previous payphone compensation regulations on grounds that parties were not afforded proper notice and opportunity for comment.

A copy of the FCC's Report and Order detailing the new rules for payphone compensation is available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-03-235A1.pdf.

October 2003

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