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Regulatory Rundown

March 2010

Edition: March 15, 2010
Allison D. Rule

1. District Court Rules That TCPA Applies to Text Messages Where Recipient is Not Charged for Receipt of the Message

CHICAGO, ILLINOIS (December 2009) An Illinois District Court allowed a case to proceed under the Telephone Consumer Protection Act of 1991 (“TCPA”) for damages sustained as a result of receipt of unsolicited text messages, even if the plaintiff did not incur charges for the messages.  The TCPA prohibits the use of automatic dialing systems or prerecorded voice messages to deliver calls, other than calls made for emergency purposes or with the prior express consent of the recipient, to a paging service, cellular telephone service, or any service where the called party is charged for the call. 

The defendant moved to dismiss the complaint for failure to state a viable claim.  First, the defendant challenged the statute as inapplicable to text messages.  Although the Federal Communications Commission (“FCC” or “Commission”) has repeatedly held that the TCPA applies to both text messages and traditional phone calls, the court declined to defer to the Commission’s interpretation.  Instead, the court relied upon its own independent examination, but ultimately agreed with the FCC, finding that Congress intended to prevent invasive communications by telephonic means, including text messages.  Second, the defendant urged the court to dismiss the case because the plaintiff failed to allege that he was charged for the messages.  The court, however, found that the TCPA does not require that a wireless customer be charged for the call in order for the plaintiff to bring suit under the statute. 

The court likewise rejected the defendant’s constitutional challenge, finding the statute consistent with the First Amendment’s free speech protections.  Further, the court dismissed the defendant’s claim that the statute’s vagueness precluded him from complying.  The court pointed to several FCC decisions and court rulings consistently interpreting the TCPA to apply to text messages.  Due to the plaintiff’s failure to meet federal pleading requirements, the court dismissed the complaint but granted the plaintiff leave to re-plead its complaint consistent with the court’s opinion. 



2. FCC Denies Level 3’s Request for Review of USAC Decision

WASHINGTON, D.C. (January 29, 2010) The FCC’s Wireline Competition Bureau (“Bureau”) issued an Order denying Level 3 Communications, LLC and several other providers’ (collectively “Level 3”) joint request for review of a Universal Service Administrative Company  (“USAC”) decision.  Level 3 sought reversal of USAC’s computation of its USF liability based upon erroneous calculations in its original 2008 Form 499-A and waiver of interest and penalties applied due to the company’s failure to pay invoices based upon inaccurately reported revenues.

 In April of 2008, Level 3 timely submitted its 2008 Form 499-A.  Thereafter, Level 3 discovered errors in its original submission and filed a revised 2008 Form 499-A that significantly reduced its Universal Service Fund (“USF”) contribution liability.  USAC issued invoices to Level 3 in 2008 which reflected USF fees calculated according to its original 2008 Form 499-A.  Level 3 engaged in “self help” to avoid paying the full amount of the invoiced USAC charges and remitted reduced USF payments based upon its revised calculations. 

Although USAC ultimately issued credits based upon its annual true-up of Level 3’s revenues, it nonetheless assessed interest and penalties for the company’s failure to pay the full amount originally invoiced.  USAC relied upon its “pay and dispute” policy, which requires USF contributors to timely remit all invoiced USF fees before seeking recovery for any disputed amount.  Because Level 3 failed to submit full payments, USAC assessed interest fees and penalties.  The Bureau denied Level 3’s request for review of USAC’s decision to issue invoices based upon its original 2008 Form 499-A and USAC’s refusal to consider the company’s revisions on an expedited basis.  The Bureau further refused Level 3’s request for waiver of interest and penalties finding a lack of good cause to issue such a waiver, especially in light of the company’s four-month delay in submitting revised figures.



3. Nebraska High Court Ruling Subjects TracFone Wireless to E911 Collection Requirements

LINCOLN, NEBRASKA (February 12, 2010) The Nebraska Supreme Court affirmed a district court decision rejecting TracFone Wireless, Inc.’s (“TracFone”) proposed method of collection of state enhanced 911 (“E911”) surcharges from its wireless customers.  The decision affirmed an order of the Nebraska Public Service Commission (“PSC”) which directed TracFone to use one of three preapproved methods of collection. 

In accordance with Nebraska law, the PSC set three preapproved E911 surcharge collection methods for prepaid providers, including TracFone.  The PSC further allowed prepaid carriers to propose an alternative method.  On two separate occasions, TracFone submitted alternative proposals to the PSC.  The PSC rejected both proposals.  The PSC failed to approve the first proposal because it proposed to collect a surcharge only from each customer to whom TracFone directly sold service, which accounted for only 10-15% of TracFone’s total sales.  TracFone’s second proposal mirrored the first, but also required retail outlets to which it sold services to collect surcharges and remit them to TracFone.  The PSC rejected this proposal because it did not maintain jurisdiction over retail vendors that were not themselves telecommunications carriers.  Thereafter, the PSC ordered TracFone to use one of the three preapproved methods of collection or to submit a revised proposal.  TracFone challenged the PSC’s order, but a state district court affirmed the decision.

On appeal to the state Supreme Court, TracFone argued that under the statute, if it could not collect a surcharge directly from customers, it was not required to remit the surcharge.  The court rejected the contention, finding that TracFone improperly relied upon statutory language directed at post-paid services.  TracFone next challenged the PSC’s rejection of its proposals.  The court again sided with the PSC, first finding no limitation on TracFone’s responsibility to collect the surcharge only from direct customers, and second agreeing that the PSC has no authority over the retail industry to collect telecommunications surcharges.

The court also rejected TracFone’s assertion that the district court erred in its interpretation of the statute’s legislative history.  Further, the court found no requirement for the PSC to await an acceptable alternative proposal from TracFone before ordering it to select one of the three preapproved collection methods.  Finally, the court rejected TracFone’s claim that the PSC’s order effectively prohibited its provisioning of telecommunications service, thereby violating the Federal Communications Act which proscribes state regulations that prohibit the ability of any entity to provide telecommunications service.  It held that nothing prevented TracFone from recouping the surcharge from its customers, and a customer’s option to purchase from competitors did not qualify as a prohibition of TracFone’s ability to provide service.



4. States Seek to Impose Taxes on Out of State Service Providers

UNITED STATES (February 2010) Due to a shift from a traditional brick and mortar based economy to e-commerce, states have grappled in recent years with substantial losses in sales and use tax revenues.  Unable to assert jurisdiction over “remote” or out of state companies, legislatures have creatively interpreted and expanded the concept of “nexus” in order to collect taxes from such entities.  Nexus refers to a company’s connection with, or presence in, the taxing state that is substantial enough to allow the taxing authority to collect taxes from that business.  Absent nexus, a state cannot assert jurisdiction over a company and require it to collect sales and use taxes from its end-user customers.

Traditionally, nexus has implied a company’s physical presence in a taxing state.  However, the law has evolved, and current precedent outlines two independent nexus tests.  The first, established under the Due Process Clause of the Constitution, requires that a taxpayer purposely avail itself of the benefits of an economic market in the state in order to establish nexus for taxation.  Under the second test, derived from the Constitution’s Commerce Clause, minimum contacts with the state, generally interpreted as some physical presence, are required.  In order for a taxing authority to assert jurisdiction over a business, both tests must be satisfied. 

In recent years, state legislatures have liberally construed the nexus requirements in an effort to expand their tax bases.  For example, in 2008 New York enacted controversial legislation requiring out of state retailers to collect and remit sales and use taxes if they maintained commission agreements based upon referrals (including web-based referrals) with in-state residents.  Amazon.com challenged the law on nexus grounds.  The New York State Supreme Court upheld the law in 2009.  In the wake of the so-called “Amazon Law,” several states have crafted liberal legislation designed to establish nexus with out of state retailers.

For example, following New York’s lead, California, Connecticut, Hawaii, Minnesota, North Carolina and Rhode Island have all considered Amazon-type legislation.  On February 5th, Tax Analysts, a non-profit organization providing international tax information, held a roundtable discussion debating the merits of “Amazon Laws” versus a multi-state initiative for tax reform.  Various experts have failed to reach a consensus on the issue. 

Meanwhile, states continue to propose legislation aimed at the issue.  Most recently, a draft bill circulating in Washington state outlines certain economic factors to be evaluated in determining whether nexus has been established.  Notably, under the draft legislation, economic nexus with the state could be established if an entity has a threshold percentage or dollar amount of property or payroll in the state or derives a threshold percentage or minimum dollar amount of its sales receipts from the state.  Washington is not alone, as other states continue to consider legislation aimed at expanding their tax bases and increasing tax revenues.  States, such as New York, have relied upon similar principles in enforcing telecommunications and VoIP-specific tax laws. 



5. IDT Seeks Stay in Suit Filed by AT&T to Recover Access Charges for Locally Dialed Prepaid Calling Card Calls

DALLAS, TEXAS (December 2009) On July 2, 2009, AT&T, through several of its affiliated incumbent local exchange carriers (“LECs”), filed a lawsuit in the United States District Court for the Northern District of Texas against numerous prepaid calling card companies, including IDT Telecom, Inc. (collectively “IDT”).  AT&T alleged that IDT improperly attempted to avoid paying AT&T for the use of its network facilities to make long-distance calls.  Specifically, in its lawsuit, AT&T alleged that IDT sells calling cards that use “local” numbers to originate interstate calls to its calling card platforms. 

Recently, IDT filed a Motion to Stay AT&T’s complaint until the FCC resolves the regulatory questions at issue.  Alternatively, IDT requests that the court dismiss AT&T’s action for failure to state a viable claim.  In response, AT&T claims that the FCC’s 2006 Prepaid Calling Card Order unequivocally required all prepaid calling card providers to pay access charges.  And, AT&T reasons that because it “originates” IDT’s calls and delivers them to its switch for routing to IDT’s networks, access charges are due on these calls.

If the court grants IDT’s motion, AT&T may be forced to seek redress with the FCC.  In the alternative, AT&T could resort to seeking access charges from CLECs that own the local numbers sold to prepaid calling card providers. 



Allison D. Rule is a Senior Attorney at Helein & Marashlian, LLC, The CommLaw Group, a Washington, D.C.-area law firm specializing in federal and state telecom & technology matters, with a concentration in stored value/prepaid.  Robert J. Gastner, an associate at the firm, assisted in the preparation of this article.  Allison can be reached at adr@commlawgroup.com.

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