Legal Alerts and Articles

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

Sun, 27 Dec 2009 01:54:22 -0800

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

CPNI Consent Decrees Released

Sun, 27 Dec 2009 07:19:34 -0800

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

Renewed Focus on FCC 214 Licensing

Sun, 27 Dec 2009 01:43:13 -0800

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.

Broadband Grants Notice of Funds Availability Issued

Sun, 27 Dec 2009 01:37:33 -0800

The Federal Communications Commission (“FCC”) recently released a Public Notice requesting comment on a variety of requests for policy guidance from the Universal Service Administrative Company (“USAC”). The FCC’s request for comment encompasses a variety of issues, including Eligible Telecommunications Carrier service reporting, and Universal Service Fund contribution methodology and classification for Asynchronous Transfer Mode and Frame Relay revenue, Virtual Private Network services, and, significantly, prepaid calling card revenue.

Background

The FCC Form 499-A instructions require prepaid calling card revenue to be reported at “the amounts actually paid by end user customers and not the amounts paid by distributors or retailers” and additionally specify that these revenues should not be reduced based on discounts to distributors or retailers. Line 411 of the FCC Form 499-A, however, requests prepaid calling card revenue “reported at face value of cards.” USAC has requested guidance on the apparently conflicting requirements. In addition, USAC has requested clarified reporting requirements in order to assist carriers with an alternative contribution methodology, given that some carriers are not aware of what end-users pay for their cards.

USAC has also requested guidance on the treatment of revenue related to prepaid calling cards which are measured in number of minutes only (not dollar amounts), as well as the question of when revenue should be reported if the carrier cannot determine when a card is sold to an end-user customer.

FCC Request for Comment

The FCC is requesting comment on all of USAC’s requests for guidance. Prepaid calling card providers and other interested parties are invited to submit comments to the FCC by October 28, 2009. If you would like assistance with preparing or filing comments with the FCC on one of the issues listed above, please let us know.

For additional information, the Public Notice can be viewed at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-09-2117A1.pdf.

October 2009

Ensuring Compliance with FCC Privacy (CPNI) Rules

Sun, 27 Dec 2009 01:59:16 -0800

Proposed Rulemaking on Network Neutrality

Sun, 27 Dec 2009 07:17:08 -0800

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

FCC USF Order Denies Review of USAC Findings

Sun, 27 Dec 2009 07:19:21 -0800

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/usf_exemption_certificates.html.

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

FCC 214 Licensing in the Post-9/11 Environment

Tue, 29 Dec 2009 22:39:24 -0800

Sometimes taken for granted by telecommunications providers, Section 214 licenses or authorizations issued by the Federal Communications Commission (“FCC”) are anything but simple. One reason is that today they are harder to obtain. In recent years, the Executive Branch has more closely scrutinized selected applications involving foreign ownership, requiring significant additional information from these companies and delaying what otherwise would be a quick entry process. Another reason that they should not be underestimated is that they entail important, ongoing federal regulatory requirements.

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”). 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”.

It is unlawful to offer or advertise services allowing international calling without a 214 license. The FCC is authorized to fine providers which operate without a required 214 license up to $130,000 for each day of a continuing violation, subject to an aggregate cap of $1,325,000 (although typically penalties are much lower).

The 214 license is one of the core regulatory hurdles a new provider must overcome before entering the telecommunications marketplace. It is therefore important that providers which seek this authority fully understand the application process and the regulatory burdens it will impose upon their business.

The Application Process

New FCC rules will soon take effect which require that all 214 applications be filed electronically. The FCC’s new rules will no longer accept “paper” filed 214 applications as the agency found the old method too costly and inefficient. By contrast, the FCC found that electronically-filed applications can be received almost immediately, expediting the process of placing applications on Public Notice. The FCC also found that filing fee payments can be expedited with electronically-filed applications. The current filing fee for Section 214 applications is $895.

When filed electronically, the application should appear on Public Notice as accepted for streamlined 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). Many applications qualify for streamlined processing. 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, if they will be granted at all. 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, and most noteworthy for the purposes of this article, 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 tragic events of 9/11, 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 (i.e., the Federal Bureau of Investigation, the Department of Justice, and/or the Department of Homeland Security), 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 offering interstate service are required to obtain separate authorization to provide such service by submitting selected portions of an FCC Form 499A. Once this information is submitted, the provider is “registered” and thus authorized to offer interstate services. Doing this, however, also effectively registers the company with the USF program under which most providers are assessed for USF at 10.2% (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. Services offered by the Law Offices of Thomas K. Crowe, P.C. include preparing and filing FCC 214 applications and FCC Form 499A registrations at highly competitive flat fees. Our professionals and attorneys have filed and prosecuted dozens of FCC Section 214 applications in recent years, including some for foreign owned companies which have been subjected to Executive Branch investigation. Our attorneys have specialized experience before the FCC and each of the Executive Branch agencies which participate in such investigations and are well positioned to effectively handle these contingencies, or others, should they arise. For a price quote or more information about how we can assist your business with its FCC licensing needs, please email us at officemanager@tkcrowe.com, or contact Tom Crowe at 202.263.3640. If you email us, please be sure to include your name, title, company and address. July 2005

Annual USF Exemption Certificates

Thu, 31 Dec 2009 04:33:33 -0800

Content

FCC Conference Calling Order

Thu, 31 Dec 2009 04:38:05 -0800

More FCC USF Enforcement

Thu, 31 Dec 2009 04:38:55 -0800

FCC Cracks Down on Informal Complaints

Thu, 31 Dec 2009 04:39:47 -0800

New State USF Programs

Thu, 31 Dec 2009 04:40:47 -0800

IDT Suit Against Prepaid Providers

Thu, 07 Jan 2010 14:25:44 -0800

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

FCC Wholesale Ruling

Thu, 07 Jan 2010 14:19:17 -0800

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

FCC DAC Enforcement Action

Thu, 07 Jan 2010 14:12:42 -0800

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

New VoIP Reporting Deadlines

Thu, 07 Jan 2010 14:02:39 -0800

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

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

Thu, 07 Jan 2010 13:58:08 -0800

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

FCC Regulates Prepaid Card Providers

Thu, 07 Jan 2010 13:54:08 -0800

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

Access Reform

Thu, 07 Jan 2010 11:59:26 -0800

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

Agent Agreements

Thu, 07 Jan 2010 11:47:23 -0800

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

Survive Slamming

Thu, 07 Jan 2010 11:42:42 -0800

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

FCC Modifies Payphone Compensation

Thu, 07 Jan 2010 11:35:23 -0800

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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