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Jun 18, 2004

LEGAL LINE

Ed Maldonado, Esq., Maldonado &

Dear Legal Line,



Do I have a news flash for you! I just read news reports about the consumer “Bill of Rights” (see page 16 for details) for wireless carriers recently enacted in California. Apparently it places a lot of new obligations on the wireless carriers on disclosures and billing. I provide my own prepaid cards, long distance services (mostly ANI recognition) and distribute cellular in California for a national provider. It’s a big market for me. It looked very ominous in the way the CPUC passed this on a mere 3-2 vote, so I was wondering why now. The issue has been hanging around the CPUC for years and we didn’t anticipate that they would move on it. Can they do this or can prepaid cell providers fight this still? Better yet, tell me how this may affect my cost in doing business because I can’t afford to lose the business.



-- Need2know & Need2grow





Dear Need2grow,




Well… you may want to sit down because I also have a news flash. The May 27th 2004 California Consumer Bill of Rights is not limited to just wireless companies. It applies to all telecom service providers operating in California, including prepaid calling cards. If you read the full Order, you can see the CPUC was crystal clear on the issue: “The rules approved today apply to all forms of telecommunications service: local and long-distance, wire line and wireless, and prepaid phone cards and services” (CPUC Docket#R-00-02-004). So as far as its effect in California, the Consumer Bill of Rights, and its new rules on providers, will definitely touch upon prepaid local, prepaid long distance, and prepaid cellular. Exactly how the CPUC will apply the Bill and to whom are currently the pressing questions, and, the source of some confusion.

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Issues surrounding the enactment of the Consumer Bill of Rights have been somewhat blurred by media attention to a lawsuit filed by two CA consumers against AT&T Wireless. The gist of that lawsuit is that AT&T oversold their network capacity to the extent that user service was horrible, and then charged an exorbitant early termination fee (up to $175USD) under their service agreements when consumers bailed because of the bad service. The suit is based on California “citizen attorney general” type of claim wherein private citizens can initiate litigation on behalf of California consumers similar to the attorney general. While the lawsuit and the Bill are separate events, both went public on the same day and literally fed-off one another like a California brushfire. For this reason, most media commentary on the Bill has focused on cellular consumers aspects of the Bill. However, the language of the order enacting the Bill of Rights concerns “all forms of telecommunications services” and specifically mentions prepaid.



In a nutshell, the California Consumer Bill of Rights addresses five basic areas that carriers must adhere to for consumer protection purposes within the next six months. By carriers, the CPUC refers to prior CPUC orders that define most providers of telecom services in California as IXC carriers or resold service carriers. Specifically, the Bill addresses: Carrier Disclosure Requirements on Service Agreements; Prohibition on certain Marketing Practices; Protocol and Prohibitions on Billing; Late-Payment Penalties; Rules on Back Billing, and Prorating; and Procedures for Tariff Changes, Contract Changes, Transfers, Withdrawals and Notices. Obviously, not all of these requirements touch upon the prepaid services offered by most prepaid providers. However, there are a few requirements that should be paid close attention because of their likelihood of impacting prepaid: Carrier Disclosures, Marketing Practices, and Billing of Regulatory Fees and Taxes.



Let’s begin with Carrier Disclosures on Service Agreements. The Bill of Rights Order generally places a prohibition on consumer “service” agreements wherein carriers may not incorporate any other information (rates and surcharges) by reference, except for the terms and conditions from a CPUC-approved tariff, information contained brochures (written in a minimum of 10-point type) when provided simultaneously with the service agreement or contract, and information that is used with formulae identified in the agreement in order for the consumer to calculate the applicable rate or charge. The use of “service” agreement is open ended enough to apply to contracts for prepaid services, either local or long distance prepaid services, where and when you use a written agreement with your California consumer. The key point for compliance here is that rate disclosures must be made in a single unified manner on the service agreements. If you are not doing this, you need to re-evaluate your practices, contracts or policies.



Also related to Disclosures and your practices as a carrier, you must now post your current tariffs, any pending changes, and key rates, terms and conditions on the Internet to keep consumers updated. While the Bill specifically refers to an Internet posting, it is not entirely clear where that Internet posting will be. Will it be a CPUC site or the carrier’s site? Currently, most California carriers opt to be de-tariffed, with only a few tariffs filed with the CPUC, so this is a potential and significant regulatory change for the CPUC. Since the rules were just passed, I expect that more clarification on this will be available after July 1, 2004. Keep your eye out for this.



Also under the Bill’s Disclosure requirements, this posting must include all service offerings for which there are current customers, and those which are no longer available to others must be clearly indicated as such. You also must now provide the address and toll-free telephone number of the CPUC's Consumer Affairs Branch and a toll-free number and address for the carrier that the consumer can call or write to reach the carrier regarding inquiries, disputes, and complaints. Additionally, you must provide a description of customers' privacy rights and how you handle confidential consumer information, and provide information regarding state and federal laws that protect the privacy rights of residential telephone consumers with respect to telephone solicitations. Again, if you are not doing this, you need to re-evaluate your practices and make some business decisions.



Now let’s talk about the Bill’s prohibitions and requirements on Marketing Practices because I believe that these requirements will have a greater impact on your prepaid businesses. Related to general marketing of telecom services, the Bill prohibits any solicitation offer by a carrier that is deceptive, untrue, or misleading, and statements, in any form, about rates and services. What constitutes the substance of this is open for interpretation. What is clear though is that the Bill applies CPUC regulation over licensed carriers for misleading and untrue statements in solicitation. Two possible consequences of this could be that the CPUC will more actively regulate this type of activity or that it may be used in private causes of action to show a breach of regulatory responsibility (probably in California “citizen attorney general” types of claims).



Also contained in the Marketing Practices section of the Consumer Bill of Rights is a mandate that any written authorization for service must be a separate document from any solicitation materials, and may not constitute entry forms for sweepstakes, contests, or any other program that offers prizes or gifts. Many Prepaid Providers in the industry have used contests with promotional prizes and gifts as a part of their cards as a means of generating business, or, keeping ongoing customers. While the Bill does not eliminate such promotions, the requirements now mandate that contests with prizes must be separate from the solicitation and written authorizations for service.



Not many prepaid service providers offer their customers with actual bills or service statements. There are, however, instances where a prepaid provider may give a statement or a bill to a consumer. The online sale of PINs paid with a credit card is a good example of a statement that is arguably a bill. Likewise, certain services such as POS and POSA give receipts that itemize prepaid services, charges, fees and taxes, and are arguably much like a bill for a prepaid service. This leaves application of the Bill elements of the CPUC rules open for application to the prepaid industry.



In relation to Billing, the California Bill of Rights requires that bills must be clearly organized and may only contain charges for products and services authorized by the consumer. All mandated government taxes, surcharges, and fees required to be collected from consumers and to be remitted to federal, state, or local governments must be listed in a separate section of the telephone bill entitled "Government Fees and Taxes," and all such charges must be separately itemized. This section of the bill must not include any charges for which the carrier is not required to remit to the government the entire amount collected from customers. Carriers must not label or describe non-government fees or charges in a way that could mislead consumers to believe those charges are remitted to the government.



Now that I’ve discussed some of the possible ways the CPUC Consumer Bill of Rights may affect your prepaid business, let’s talk about challenges from the industry against the Bill. Unlike the state legislature enacting a new law governing the topic, the CPUC is introducing the Bill under its rulemaking powers to regulate Disclosure. This is a topic within the scope of the CPUC’s authority primarily because it is not regulating charged rate or quality of interstate service, it is regulating what is disclosure by carriers to California consumers. States are not preempted from regulating the consumer disclosure and fraud issues of prepaid phone cards or services. In this case, the California Consumer Bill of Rights does not regulate the reasonableness or lawfulness of phone card rates or charges. It merely regulates disclosures to consumers when services are sold in their jurisdiction.



In this case, the Consumer Bill of Rights seems likely to pass constitutional muster if challenged in court. There is no conflict with this Bill and IXC disclosure requirements of the FCC under 47 CFR Sec. 63.21 or 47 CFR Sec. 42.10(a) for non-dominant reseller, a category which the majority of Prepaid Phone Card companies fall into. In fact, the Internet posting elements seem to reinforce the spirit of these federal regulations. It also appears that when it comes to disclosures and fraud, the FCC seems to avoid the responsibility of policing prepaid calling cards and consumer issues. Test it out: Try contacting the FCC 1-800 consumer line with a complaint about a prepaid card’s disclosures or misleading sales. The FCC actually refers the consumer back to their local State Attorney General and Public Utility Commission. While a consumer can make a complaint against a common carrier (a 214 holder) that can result in fines levied by the FCC, there are few documented cases of FCC forfeiture fines against prepaid phone card companies. So the Disclosure elements of the Consumer Bill of Rights seem to balance with the scope of authority of the CPUC, and subject matter consumer disclosures under supplemental jurisdiction. Therefore, legal constitutional challenges in the courts may not be the way for the industry to address the whole matter. This, however, does not leave out lobbying efforts.



Since the Bill is basically rulemaking by the CPUC, as opposed to a new law, there are two methods of lobbying that could be initiated to curb or limit the application to the prepaid industry. One is lobbying the CPUC directly. Since much of the Bill is open-ended, the exact interpretation and application of the Bill into the prepaid industry is still yet to be defined. Active participation in Public Comment can be quite important for participants in the prepaid industry. The second method is to lobby the California legislature to carve out some distinctions via a law specifically geared to prepaid phone card disclosures. The caveat with this type of activity is that the consumer interest lobby is relatively strong in California and this could result in more problems than advantages for prepaid businesses. The Bill, as written, does provide for many protections in required disclosures that consumers have been demanding for years. This, in itself, will be hard to beat. However, an industry driven initiative would definitely place the issue in the minds of legislators and the regulators in California as something worth more debate and consideration. In any event, I think that if the prepaid cellular industry and the prepaid calling card industry where to join forces to lobby, now would be the time and California would be the place. So it is not too late to organize and respond, Need2grow, the question is simply - who will take the first step, if anyone?



Good Luck & Success in the Industry!



•• Ed Maldonado is a Partner of Maldonado & Glenn. He can be reached atemaldonado@4counsel.net.

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