Dear Legal Line:

Most of our industry is by now aware of the Federal Trade Commission’s (FTC) lawsuit against Clifton Telecard Alliance (CTA), for alleged deceptive sales practices in regards to calling card minutes and pricing. As a small distributor of calling cards, the lawsuit raises several questions of major concern to us. Since the prepaid calling card industry is already subject to regulation by the Federal Communications Commission (FCC), what impact will there be if it also comes under FTC oversight?  What additional or different standards will the FTC apply and where can I find these standards? Also, is it possible that FTC and FCC requirements will conflict, making it difficult for companies to know what to do and which agency to obey? And is it true that the FTC’s jurisdiction over telecom is limited?

Concerned



Dear Concerned:

You’re right to be concerned about the FTC’s action. An adverse outcome, one which sets precedent for FTC regulation of telecom pricing practices, could cause the entire telecom industry major problems.

Let me first address your last question, about the FTC’s “limited” jurisdiction over telecom companies. The FTC has general statutory authority over unfair and deceptive business practices. However, there are other federal regulatory agencies with authority over specific industry sectors.  Hence, various statutory grants of authority to the FTC contain exemptions. For instance, telecommunications “common carriers” are explicitly exempted from FTC authority because these entities are subject to the jurisdiction of the Federal Communications Commission. Therefore, the FTC cannot enforce federal unfair and deceptive trade practice laws and regulations against entities considered telecommunications common carriers.

For the telecom industry this means that a “CTA-like” lawsuit by the FTC could not be sustained in any court against the likes of AT&T, Verizon, Sprint, and other entities that fulfill the Telecommunications Act’s definition of a “telecommunication services” provider. The Telecommunications Act defines the term “telecommunications service” as “the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.”  Though thanks to over 100 years of common carrier jurisprudence, this definition is merely a starting point in determining whether any particular entity is or is not a telecommunications common carrier – and thus outside the FTC’s reach.

The FTC has, in fact, lobbied Congress to remove the common carrier exemption for years. Recently, Senators Inouye and Dorgan introduced the FTC Reauthorization Act of 2008, including a provision that would bring wireless telecom carriers under the authority of the FTC. The good news is the bill is not directed at telecom providers in general. Yet, like the CTA lawsuit, the bill is still dangerous. FTC Chairman, William Kovacic, supports expanding his agency’s jurisdiction by saying the exemption is obsolete because telecom “monopolies” are no longer “heavily regulated.” This seems to overlook the fact that Congress and the FCC have spent decades promoting and substituting competition for regulation. Having achieved some degree of success with this policy, the FTC now wants to impose its own regulation in place of the FCC’s deregulation. It is said that bad ideas make bad laws and this would be no exception. And, even though the wireless sector has the laboring oar to defeat this particular piece of legislation, the prepaid industry should also let Congress know this is a bad idea (as is the lawsuit against CTA) because once the snowball starts heading downhill, it’s difficult to slow down.

The common carrier exemption is front and center in the CTA lawsuit.  If CTA can prove its status as a common carrier, it has a strong defense against the lawsuit based on the FTC’s lack of jurisdiction.  Dismissal of the case based on lack of jurisdiction would be the best outcome for the industry considering the alternative, i.e., a case with precedential value that encourages further FTC encroachment into the regulation of telecom pricing practices.

There are other reasons for both carriers and distributors to be concerned about the FTC’s lawsuit against CTA. Foremost is the potential it will lead to the creation of dueling sets of “rules” – FTC rules governing distributor practices that affect and conflict with FCC rules & other regulatory requirements related to the pricing practices of telecom carriers. For even though the prepaid calling card industry is dichotomized into “carriers” and “distributors,” there is the shared knowledge that both must work as a single, cohesive unit in setting rates and pricing structures to successfully bring their services and products to the broadest markets possible, while simultaneously complying with tax and regulatory requirements. Given these considerations, it is curious that the FTC, an agency untrained in the regulation of telecom services, in general, and unfamiliar with the intricacies of the prepaid industry, in particular, might impose “rules” on distributors, without consideration to the decades of FCC history.

The potential for just such an outcome is reflected in the FTC’s Complaint against CTA, which is predicated on alleged violations of Section 5(a) of the FTC Act, prohibiting deceptive and unfair acts and practices injurious to consumers. In its Complaint, the FTC identifies those acts and practices in advertising, marketing and selling prepaid services that it considers to be deceptive and unfair and focuses on acts or practices it believes involve a misrepresentation or omission of a material fact in advertising or selling services or goods. For example, the FTC alleges that prepaid cards that expressly, or by implication, lead consumers to believe they will receive a specified number of minutes of talk time, but deliver less than specified or implied, on its face, makes the marketing false and misleading, thereby constituting a deceptive act or practice in violation of Section 5(a) of the FTC Act. Another example is based on alleged failures to “disclose adequately” that fees and surcharges will reduce the value of the prepaid card, resulting in a reduced number of minutes of talk time. The FTC alleges that information on these fees and surcharges would be a material consideration in a consumer’s decision to purchase a calling card and therefore the failure to disclose them at all, or at least “adequately disclose” them, is deceptive in violation of Section 5(a). And last, the FTC alleges that CTA’s failure to disclose that the value of a card is reduced by calls that do not connect is also a violation of Section 5(a). 

As you no doubt recognize, the troubling part about the FTC’s allegations (which, in turn, can be viewed as a “distributor’s guide” to future compliance with FTC “rules” if the FTC succeeds in establishing dual “authority” over the practices of companies engaged in the telecom business) is that they are somewhat oversimplified.  Such naiveté demonstrates the FTC’s lack of understanding about pricing structures and issues in the prepaid telecom industry. For starters, the FTC’s “rules” are in direct conflict with the rights telecom carriers have under the de-regulated, competitive environment established by the Communications Act. Further, they would penalize companies for engaging in otherwise lawful practices that are necessitated by the nature of prepaid card operations, particularly the use of multiple and disperse distribution channels, as well as the vagaries of international wholesale pricing, over which distributors and even carriers themselves lack control. It is precisely this oversimplified approach that justifies keeping the FTC out of regulating prepaid telecom. 

Card distributors, like you, may not necessarily care to seek carrier status or become “common carriers” to escape the FTC if it means they must subject themselves to the FCC and other utility regulations (more so than they already are). Yet given the FTC’s encroachment, the question must be given serious consideration by the industry; for much like the folkloric tale of Brer Rabbit and Brer Fox, given the alternatives, the industry could find the FCC briar patch a more bearable alternative to being hanged by the FTC.

As Ed would say, Good luck and success to the industry.



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. Questions and comments on this Legal Line may be addressed to jsm@commlawgroup.com.