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“You’ve Come a Long Way, Baby”
Prepaid Calling Card Industry Gets Wake Up Call From Capitol Hill
By Jonathan Marashlian |
You may recognize the title of this article as the signature slogan of a 1984 Virginia Slims advertising campaign targeting professional women emerging from the women’s liberation movement of the 70s. It was a savvy, albeit crude, marketing ploy. Along with the likes of Joe Camel and the Marlboro man, the tobacco industry is synonymous with its less than sincere advertising tactics, to put it mildly. Could it be that the prepaid calling card industry is destined for a similar fate?
The prepaid calling industry certainly has come a long way, baby. In arguably only its second decade in existence, the prepaid calling card industry is already about to achieve what took the tobacco industry well over a century to do. Right now you’re scratching your head, thinking to yourself, ‘what success story is he referring to?’ Sadly, the answer is probably not what you were expecting, because the “accomplishment” is nothing to be proud of.
In 1994, the CEOs of the Big 7 tobacco companies, the so-called the ‘Seven Dwarves,’ were called upon to defend their products and industry practices, and to avoid regulation by the Food and Drug Administration in Senate hearings. Today, the prepaid calling card industry is on the verge of having its top executives hauled in front of the U.S. Congress to defend the industry’s dicey marketing practices to ward off burdensome government regulation, this time by the Federal Trade Commission (FTC).
After years of tempting fate, the prepaid calling card industry finally captured the attention of Congressional lawmakers. On August 3, 2007, Congressman Eliot Engel (D-NY) proposed H.R. 3402, the “Calling Card Consumer Protection Act”; a bill aimed squarely at curtailing the perceived fraudulent and deceptive marketing practices that abound in the highly competitive prepaid calling card industry. Although the odds of H.R. 3402 becoming the law of the land are extremely slim, the proposed legislation nonetheless marks an important turning point for an industry that has desperately attempted to avoid the radar guns of lawmakers and regulators over the years.
H.R. 3402 was introduced after a tumultuous half year in the prepaid calling card industry that started with industry leader, IDT Telecom’s settlement of a class action lawsuit in January. Then, IDT’s brash attempt to impose the terms of its settlement on several competitors through a lawsuit of its own. And, most recently, the announcement in early August that the Florida Attorney General is investigating the business and marketing practices of six prepaid calling card providers, including IDT. The introduction of H.R. 3402 is a clear indication that these developments, all involving prepaid calling card marketing practices, have not gone unnoticed. It also indicates that Congress views the issue to be serious enough to at least hang the threat of increased federal regulation over the industry.
Calling Card Consumer Protection Act
The primary objective of H.R. 3402 is to stem the tide of what is viewed as widespread deceptive marketing practices by the prepaid calling card industry. In particular, the “international bodega” segment that caters to immigrant Americans. Under the proposed federal law, many practices that have become commonplace in recent years – such as deducting from card balances, undisclosed or ambiguous service fees and advertising minutes of use that are never delivered – would be strictly prohibited. Some of the requirements are very similar to existing consumer protection laws and regulations already imposed in dozens of states. If H.R. 3402 becomes law, the Federal Trade Commission (FTC) would be granted oversight and enforcement authority. The Act would also grant State Attorneys General shared powers to carry out enforcement proceedings against prepaid calling card providers and distributors in their state.
How Did We Come This Far, Baby?
Prepaid calling cards, first introduced to the retail market two decades ago, have undergone explosive growth over the last ten years thanks to globalization of the U.S. workforce and declining international long distance costs. This combination enabled the U.S. prepaid industry to generate annual revenues estimated at well over four billion dollars. The money has drawn a crowd of participants, resulting in hyper-intense competition and ever-increasing pressure to deliver cheaper rates and more minutes to an expanding audience of ethnic and immigrant consumers. Beginning as early as 2000, this competitive pressure to “deliver” more minutes for less money may have led some industry participants to offer more than they could deliver.
Market leader IDT was eventually the target of a consumer class action lawsuit which alleged that it failed to fully disclose all applicable rates and charges for its prepaid and rechargeable calling cards. The company eventually settled the lawsuit for $20 million without admitting fault.
As the ink was drying on its class action settlement, IDT took a surprising and aggressive step aimed at ensuring its largest competitors shared in its pain. IDT filed a lawsuit against nine rival calling card providers, alleging that the defendants engaged in a “massive and systematic” scheme to defraud consumers in violation of the Lanham Act and other state consumer protection laws. As a result, IDT asserted this fraud cost the company a loss of over a million dollars per day and a significant loss in market share. The company sought both monetary damages, including treble damages, and a bar on all defendants from continuing fraudulent activities.
Within weeks of its lawsuit, without admitting liability, three of the named defendants agreed to settle with IDT. The settlements did not result in any money exchanging hands and instead required the defendants to modify their marketing practices in a manner consistent with the settlement IDT reached in its class action suit. The other six IDT competitors named in IDT’s lawsuit are reportedly fighting back. In an open letter to the industry, CVT Prepaid said: “IDT’s lawsuit is nothing but an underhanded ploy to regain lost market share by intimidation.” In addition to the legal battles being waged among competitors, several state Attorneys General also began to take notice of rogue marketing practices in the prepaid calling card industry. Most prominently, on July 23, 2007, the Attorney General for the state of Florida, Bill McCollum, launched an investigation into four Florida based prepaid calling card companies. The Florida AG also indicated that at least six other out-of-state providers are under investigation.
Although no formal charges have been brought against any of the identified providers, the AG’s informational request specifically examines whether prepaid calling card practices are fraudulent or deceptive. Many of these practices under investigation by the State of Florida, such as failure to fully disclose all rates and charges and failure to provide terms in the native language of the user, are the same practices highlighted in H.R. 3402.
Now That We’re Here, Where Do We Go?
All the attention directed at marketing practices this past half year has set the stage for a massive overhaul of the prepaid calling card business. Indeed, there are signs of change already on the street – or should I say, at the corner bodega – as the largest industry participants are reportedly distributing “clean” cards to the market. Now that the industry has captured the attention of the U.S. Congress, the pace of the overhaul is sure to hasten.Whether or not H.R. 3402 ever makes it to the floors of Congress for a vote may be irrelevant, as its introduction and the events set in motion earlier this year are already having their intended effect by forcing the industry out of the shadows and into the headlines. Positive change is occurring – much to the relief of consumers and, indeed, the prepaid provider community itself. However, if the scope of the changes is too narrow and the impact short-lived, the Calling Card Consumer Protection Act, or something more onerous, will one day become the law of the land.
To avoid such an outcome, an industry known for tearing itself apart from the inside must pause, take a step back to weigh the options, and conclude that it must come together in an effort to regulate and police itself. Anything less could result in the imposition of burdensome federal laws and regulations enforceable by each of the 50 state Attorneys General.
Jonathan S. Marashlian is partner at Helein & Marashlian, LLC, The CommLaw Group, a Washington, D.C.-area law firm specializing in federal and state telecommunications and technology matters. Christopher A. Canter, an associate at the firm, assisted in the preparation of this article. Mr. Marashlian can be reached at jsm@commlawgroup.com.
Editor's Note:
CORRECTION
A story in the September 15, 2007 issue of The Prepaid Press, entitled “You’ve Come a Long Way, Baby,” contained a reference to alleged improper market behavior on the part of IDT. Our editorial guidelines preclude this type of inappropriate reference, and it should not have been included in the article. The author of this article and The Prepaid Press disavow any personal knowledge that IDT engaged in any improper market behavior as implied by that article. We apologize to IDT, and our readers, for this error.
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