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Aug 11, 2003

The Legal Line

Ed Maldonado, Esq.



Dear Legal Line,

I have been distributing cards for about five years and am now looking into working with a prepaid service bureau. I am confused as to what I am responsible for on the regulatory front. If I don’t physically own a switch, do I need to get certified in all 50 states? Is this very expensive?

Signed,

Looking Before I Leap



Dear Looking,

Please don’t be confused — there are only some key points

to remember before you make your final decision:

First, owning a switch is not the litmus test for regulatory or licensure obligations. Rather, it is the services you offer, to whom, and how they are offered that really define what regulatory obligations you may have at hand. If you offer telecommunications services for profit to the general public, some form of licensure will be involved, both at the federal and state levels. The key word here is “public” because it usually involves its equally important counter-part “consumer” and how your “consumers” are handled after they purchase your cards. Most regulatory requirements for switchless prepaid providers are targeted to consumer issues: charges, disclosures, advertising, and credits for non-operational cards.

Second, it is important to understand who regulates what – in the prepaid industry that usually means the FCC and state utility or service commission. The FCC requires companies that hold themselves out to the public as offering public telephony or telecom services for profit, to apply for authorization under Title 47 of the US Code at section 214, regardless if they are prepaid or post paid. This class of provider is generally referred to as “common carrier”. While 214 authority is required for all providers (common carriers), the actual regulatory power of the FCC over switchless providers is relatively broad.

State utility commissions are the agencies that really define licensure and regulatory requirements for switchless providers in the prepaid industry. This is generally done through a class of license that governs all interstate and international telecom services, called Inter-Exchange Service Carriers (IXC for short). The state regulatory term “carrier” in the IXC class of license often confuses many switchless providers because they immediately assume that it refers to licensure as a facility (or equipment and plant) based provider. This is not the case. It refers to companies that hold themselves out to the public as offering telecom for profit – common carriers. Something of particular interest to switchless providers who use prepaid service bureaus are a few sub-classes of Inter-Exchange Providers regulated at the state level, called Switchless Rebillers, and prepaid calling card providers. In a nutshell, switchless rebillers are IXC providers who have no switch or transmission facilities but may have a billing computer, or control of a billing system, and take their services from underlying carriers, mark it up and rebill end users, in this case, through the rates built in the calling card. Similarly, Prepaid Calling Card Providers are IXC providers that purchase 800 accesses from an underlying carrier or unaffiliated entity for use with prepaid debit card service, and/or encodes the cards with personal identification numbers. Both of these sub-classes require IXC licensure in most states — primarily for consumer interests.

This all being said, we can now dig into your question. What are you required to do and with whom must you license, certify, or register? If you work with a prepaid service bureau that takes on the obligation of providing carrier services, or at least stands as the carrier by allowing you to print carrier services by “their name”, the immediate need for filing may not be required. It depends on how rates, customer service, and policies related to the card are handled. If you are in control and manage all of the above, then you are a common carrier and should be authorized by the FCC, as well as the states in which you will be selling your cards. If you outsource your customer service to the service bureau, look to how consumers are handled. If customer service calls are answered with you company name, and policies governing credits are in your control, you still may be holding yourself out to the public as a common carrier. Depending on how you operate your cards, you may either be a switchless rebiller or a prepaid calling card provider. It would be wise to have your legal counsel check on the differences just to back yourself up.

Other considerations are purely legal. Should the relationship between you and your prepaid service bureau go sour (due to some of the traditional carrier to carrier problems like poor quality, over-billing, etc.) what will happen to your cards? If you are licensed and are identified as the carrier on the cards, you may switch underlying carriers on the cards, in this case the prepaid service bureau, with fewer logistical complications. Consumers and consumer problems will still be under your control and under your company name. A few months ago I wrote about these scenarios in 911 Carrier Down (The Prepaid Press V2-2, February 14, 2003) it would be wise to read that article again, just in case. Also, should a major lawsuit arise where you are caught up in the chain of events, licensure and regulatory considerations can be evidence recourses, defenses, and sources of liability. This would be a good question to ask your legal or regulatory counsel to see how they have used such regulatory requirements in their past cases and litigation in telecom.

Finally, is it costly? It can be if you try to swallow more than you can chew. You mentioned licensing all fifty states, that’s a lot. Ask yourself first if you really need all those states before you ink a commitment. Start by going back to your original business plan, and then look at your current distribution into various states over the breadth of your business. If you see that you are penetrating the numerous state markets quickly with a significant level of product, then legal authority in all fifty states may be necessary. If not, keep it real. It is better to talk about five, ten, or twenty states where you have product than all fifty. The reason behind my point here is the back-end of licensure – regulatory compliance. Although recent developments in regulatory compliance (online services and more streamlined procedures from the utility commissions) have simplified many once complex paper filings, there are still actual costs involved in compliance. This means continuing expenditures going forward. If you overextend yourself from the get-go by licensing states where you really have no business, the costs related to large-scale compliance will eat into your margins and cash flow. Again, review of your traffic reports alone with your business plan and budget to hone in on the right number of states to license.

Good Luck and Success in the Industry.

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•• Ed Maldonado is a principal of Maldonado & Glenn, a telecom legal firm. He can be reached at info@4counsel.net. Send all of your Legal Line questions tolegalline@prepaidpress.com.

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