Legal Alerts and Articles
More FCC USF Enforcement
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.
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April 2008