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WASHINGTON (March 3, 2005) – Following an FCC ruling that “enhanced” prepaid calling cards issued by AT&T Corp. provide basic telecommunications services, telecom companies and retailers that sell prepaid long distance cards should be aware of potential liability for unpaid Universal Service fees and network access charges, according to Frederick Joyce, Chair of Venable LLP’s Telecommunications Practice Group.

“In light of this ruling, anyone selling prepaid calling cards should carefully investigate whether they or their underlying carriers are in compliance with the FCC’s Universal Service payment obligations,” said Mr. Joyce, who has represented some of the biggest telecom providers in his 20 years of practice in the telecommunications field. “This ruling and the FCC’s further rulemaking proceeding may well cause a number of prepaid long distance card marketers to rethink how they conduct their businesses; billions of dollars in regulatory costs could be at stake.”

AT&T had sought an FCC ruling that, as the provider of purportedly “interstate information services” it was not required to pay intrastate access charges for calls made using the “enhanced” calling cards; it had also not reported revenues from the cards for purposes of contributing to the Universal Service Fund (“USF”). The FCC rejected AT&T’s arguments, and will require back-payment of contributions to the USF. Based upon AT&T securities filings cited in the Order, those withheld contributions could exceed $100 million. AT&T may also be liable for hundreds of millions in withheld access charge costs, which it would owe to local telephone companies.

The decision concerns one of the most high-profile questions facing the FCC: the distinction between “telecommunications services” – most notably, voice telephony – and “information services” – that is, purely Internet-based services. The FCC has been grappling with these issues, especially with the growth of Voice Over the Internet (VOIP) services, for several years.

“With the growth of the Internet, broadband and wireless connections, communications services have undergone a sea change in the past few years,” added Venable Counsel Christine McLaughlin, a member of the firm’s Telecommunications Practice Group. “The prepaid calling card industry is a prime example of a service that has had to rapidly evolve in the face of competition from wireless phones and VOIP. This FCC decision, and the opening of a new rulemaking proceeding, show that the FCC is still struggling to resolve the dilemma of how new or advanced services should be regulated.”

The prepaid calling card market remains a significant niche of the larger long distance market in the U.S. Industry sources have estimated that the prepaid calling card market in the U.S. generated some $3 billion in revenues in 2003. While other sectors of the long distance industry have been under competitive pressure of late, the prepaid calling card sector remains relatively strong due to its unique demographics. Typical customers for prepaid calling cards and similar reduced-cost long distance offerings (such as dial-around or “10-10” services) are frequently immigrants or ethnic communities wishing to keep in touch with family and friends in their home countries; U.S. providers of these services often target the growing Hispanic community with favorable rates for calls to Latin American countries. Members of the U.S. armed forces and college students are also significant users of calling cards.

In the recent Order, the FCC found that AT&T’s “enhanced” calling cards were unmistakably a telecommunications service. The calling cards in question were used by customers to dial into a centralized switching platform; the customer would hear an advertisement, and was only permitted to enter the telephone number of the party he or she wanted to call after the advertisement had run.

Other than the playing of an advertisement not solicited by the customer, AT&T’s calling cards worked in the same way that calling cards generally do, and were purchased and used by customers for the same reason people typically purchase phone cards: to make telephone calls. There was no evidence that the cards were marketed by AT&T, or purchased by customers, as a means to hear advertising, and the customers could not interact with the advertisement in any way; they simply had to wait until it ended to finish placing a call. The FCC therefore found that AT&T was not “offering” customers the capability to do anything other than make a phone call – the prototypical “telecommunications service.”

In an SEC filing, AT&T stated that it had saved some $160 million in USF contributions, since it was treating revenues from its “enhanced” calling cards as information services revenues, which are not subject to assessment for the USF. AT&T has been given 30 days to file revised USF reports, and has been ordered to pay the amounts assessed on the previously omitted revenue, including any late fees assessed. The FCC further ordered that any similarly situated companies who have been treating calling card revenues as “information services” revenues must also file revised USF worksheets within the 30-day period. Implicit in this FCC statement is the regulatory presumption that the “billing entity” – the entity directly providing “service” to the customers – is responsible for USF payments. AT&T will have an opportunity to request reconsideration of the FCC’s decision, or, to appeal the FCC’s Order to the federal courts of appeal.

AT&T had also asked the FCC for a declaratory ruling on two variations of its “enhanced” calling card. Under one offering, the customer was given the option to request additional information or perform additional functions before listening to the advertisement. Under the other, calls made using the calling card would be routed over AT&T’s Internet backbone. Rather than rule on those offerings at this time, the FCC decided to initiate a rulemaking proceeding regarding how various types of calling card offerings should be regulated. The FCC is asking for public comments concerning the kinds of services and functionalities that entities offer, or plan to offer, through prepaid calling cards.

To speak with Mr. Joyce or Ms. McLaughlin about any issues in this advisory, please contact Mr. Joyce at 202-344-4653 or rjoyce@venable.com, or Ms. McLaughlin at 202-344-4679 or cmclaughlin@venable.com.

One of the American Lawyer’s top 100 law firms, Venable LLP has attorneys practicing in all areas of corporate and business law, complex litigation, intellectual property and government affairs. Venable serves corporate, institutional, governmental, nonprofit and individual clients throughout the U.S. and around the world from its headquarters in Washington, D.C. and offices in California, Maryland, New York and Virginia.