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LEGAL LINE
By Ed Maldonado, Esq. |
Dear Legal Line,
I have begun selling prepaid cards under a deal with a service provider
who supplies me with branded cards. What approvals, registrations
and licenses do I need? Do I have to do this for each and every
state I sell cards in or does the 214 really cover it all?
-- Branding Brandon
Dear BB,
What do you mean by “branded cards” in your question?
The term “branded” is used very loosely in the industry
and has different implications based upon who may be using it and
how your services actually operate. Can you spell out the logistics
of the way you and the service provider are working? I can’t
tell if you are simply a distributor of their services or, if in
fact, whether you may be a prepaid calling provider based upon what
you do. Also, are there any contractual restrictions with the provider
as to where you can sell the cards?
-- Legal Line
Dear Legal Line,
The way my provider and I work is like this: they provide the network
services and all long distance services for me at a discounted price.
They also handle the access numbers, and customer service end, and
PINs to access the services. I can charge whatever I want above
the provider’s rate (fees and surcharges) to particular destinations
or for use of the cards. The PINs are automatically set with that
rate and user charges. I then print the cards with graphic, the
access numbers, and PINs and then distribute the cards anywhere
I want in the US. My cards are printed with network service provided
by “the service provider’s name” along with their
customer service number. That is about it.
-- Branding Brandon
Dear BB,
From the current arrangement you have with your provider, it appears
that your regulatory liability is relatively limited at the moment.
It appears that your service provider is undertaking the responsibility
of being the disclosed prepaid provider on the cards for state and
federal regulatory purposes. This is by virtue of them allowing
you to print the disclosure that they are the carrier, or “network
service provider,” on the cards and thereafter allowing you
to sell freely throughout the US. They, therefore, operate openly
as the carrier of the LD services throughout the US for your branded
cards. This point is also strengthened by the fact that they maintain
a customer service department to support their carrier services
on the cards.
In this type of branded prepaid calling card arrangement, it is
generally incumbent upon your provider to have all applicable licensure
and registrations to provide prepaid calling services to the public
in whatever jurisdiction the cards are sold. There are ten critical
states related to this – AL, AK, CA, CT, FL, IL, LA, MO, NY,
TX, and WA (state). These states have specific provisions for prepaid
calling cards and consumer disclosures of the provider who controls
the rates and charges. What seems problematic in your situation
are two points: (1) you actually set the final rates, fees, and
surcharges that the consumer must pay; and (2) should you have a
falling out with your service provider you are not in a position,
from a regulatory perspective, to replace them as a carrier and
still continue on with your cards.
First, let’s address your “rate control” issue
first because it is more of a state regulatory issue related to
consumer protection. Let us say, purely for the sake of argument,
that for some reason your current service provider is actually not
licensed or certified to provide prepaid LD services in a particular
state, even though they say they are. By virtue of your activity
in setting the final rates and fees charged and controlling this
process, as well as selling cards into that state, you may just
be the responsible party for regulatory purposes as far as state
Public Utility Commissions are concerned. That is because you “in
fact” control the card. Many state regulatory definitions
of prepaid providers look to the actual activity of the provider
to determine whether or not regulation should apply. The newly enacted
Illinois law is a prime example of this regime. This may be a critical
factor in the event your branded cards are investigated or audited
by state regulators as to rates and fees charged to the consumer.
It may become apparent that you are the one exercising final control
over the cards and that you have not been qualified or certified
to do so in their jurisdiction. Here is where there would be liability
on your part. This could mean anything from being shut down to being
fined dependent upon the state.
Another possible scenario along these lines could be a little more
mundane, let’s say that state regulators have a complaint
from a consumer and are investigating the rate or charges of your
“branded” card. They will first inquire to your service
provider who is listed on the card. Let’s say that your service
provider has no idea why you charged that rate, or surcharge, and
discloses that you are the one actually in control of the card in
order to avoid the regulatory consequences. You are now in the frontline
of their investigation, unlicensed and uncertified, selling cards
in their jurisdiction. Again, this would be a point where there
would be liability on your part. In order to void such uncomfortable,
and costly, situations is to acquire state certification as a back
up. It is a preventive move that can save you in the long run. This
is particularly true for those ten critical states where prepaid
calling is specifically addressed.
It is also important to verify that your provider is actually licensed
nationally, since they are obviously giving a regulatory “face”
to the network services disclosed on your cards. Simply having 214
Authority is not enough in this instance. Federal regulation is
relatively broad and supplemented primarily by the state consumer
protection and public necessity laws. Complying with these laws
is why there is state certification in the first place. It is therefore
critical that your service provider has state certification in each
and every state in which you sell to defend against consumer complaints
as to services on the cards.
To obtain state certification, is relatively simple — a provider
must register to do business in each state under a Certificate of
Authority (C of A) and be granted authority to provide such services
by that state’s Public Utility Commission. However, if your
provider is missing state certifications, or certification of a
particular state, and you are selling into that jurisdiction, scenarios
like the above can occur leaving you on the hook. My opinion is
that these are scenarios best to be avoided.
Now let’s talk about consequences that could arise out of
you having a falling out with your service provider. This scenario
is relatively simple — a dispute arises between you and the
service provider over a billing or service issue and the service
provider terminates your agreement. In these instances, the branded
card “owner” is usually in the losing position because
the service provider simply turns-off services to cards or PINs.
Since the service provider controls the provisioning side of the
service (access numbers, PINs and facilities), replacement of the
service provider by the “branded card” owner with another
carrier for your cards on the street is almost impossible. The problem
stems from the fact that the “branded card” owner was
never really in a place to change carriers from day one. They were
always dependent on the service provider.
Having your own state certifications and 214 Authority can change
that dependency. It allows the branded card owner to qualify himself
to own his own Access Numbers or allow for the transfer of PINs
to recover cards. It also allows the branded card owner to do this
seamlessly by having their name as the carrier or service provider
on the card itself. While state certification and 214 Authority
do have regulatory reporting, tax and fee requirements, the ability
to solidly shield yourself from consumer protection inquiries and
the ability to recover if you switch carriers may be the trade-offs
to consider.
Under the current arrangement with your service provider it appears
that they are the ones bearing the regulatory responsibility of
the carrier services of your “branded cards.” This alleviates
the need for you to be licensed for such purposes. However, you
need to verify that they are indeed licensed and certified to provide
those services – just for the sake of protecting yourself.
My recommendation is to ask them for copies of their certificates
or certificate/registration numbers from the PUCs of the states
that you sell your cards into. Also you should consider certifying
yourself in the near future for purposes of shielding yourself from
consumer protection inquires by state regulators and giving yourself
room to recover in the event that you and your current service provider
have a falling out. Should you wish to explore these points further,
definitely seek the opinion of a regulatory attorney with whom you
can give more detail as to the logistics of your “branded”
card services. Believe it or not, the devil is in the detail when
it comes to these matters. There are many service providers out
there that offer “branded” cards in a completely different
way that requires you to license and certify yourself in all the
states in which you sell. This is often a cleaner method for the
“branded” card owner. The bottom line is it just depends
on the logistics of your arrangement with the service provider.
Good Luck & Success in the Industry!
•• Ed Maldonado is a Partner of Maldonado & Glenn.
He can be reached at emaldonado@4counsel.net.
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