Because the contribution factor is greater than 12%, the FCC has noted the potential for some USF contributors who would not normally qualify for the limited international revenues exception (“LIRE”) (normally applicable to contributors for whom interstate revenues make up 12% or less of combined interstate and international revenues) to have a USF contribution amount in excess of total interstate revenues.  Contributors facing these circumstances may petition the FCC for a waiver of the usual LIRE threshold of 12%.

The FCC’s Public Notice reminds carriers that marking up federal universal service line-item amounts above the 17.9% contribution factor is unlawful.

For further information regarding the contribution factor change, please see the FCC Public Notice at the following link: http://fcc.us/tCAdju.

In a Public Notice released on December 13, 2011, the FCC announced that comments on MeetingOne’s application for review are due by January 12, 2012 and reply comments are due by January 27, 2012.

MeetingOne’s application for review seeks reversal of the Bureau’s Order and raises the following arguments.

1. The services in question are enhanced services, not telecommunications services, and thus not subject to USF contributions;
2. MeetingOne’s services are exclusively IP, rather than “IP-in-the-Middle”;
3. The Bureau’s Order causes disparate treatment for similarly situated service providers;
4. Retroactive obligations for MeetingOne are discriminatory and a manifest injustice;
5. The Bureau’s Order was both procedurally and substantively prejudicial because it did not respond to many of the arguments raised by MeetingOne and other commenters.

How the FCC addresses MeetingOne’s arguments and the eventual outcome of the proceeding will be of significant importance to the conferencing industry, especially for companies providing similar IP audio bridging services.

Contribution Failures

The FCC found that Kajeet had failed to pay, or only partially paid, monthly USF invoices from May 2009 through June 2011.  Likewise, Kajeet/Airlink was found to have failed to make required monthly USF invoice payments for the months August 2010 through May 2011.  Monthly USF invoice amounts are determined by the revenue reported on Quarterly Telecommunications Reporting Worksheet (“499-Q”), which providers of telecommunications services are required to complete and submit (if not qualifying for the “de minimis” exemption).

In addition, both Kajeet and Kajeet/Airlink were also determined to have failed to make required TRS Fund contributions in 2010.  Providers are required to make TRS contributions annually and the FCC found that the companies had “willfully and repeatedly” failed to make such contributions in 2010.

The companies were also required to contribute to the LNP cost recovery mechanism, and were found by the FCC to have failed to make such contributions in full or on time.  Kajeet had failed to make any payments towards its 2010 or 2011 LNP obligations.  Kajeet/Airlink made late payment on its 2010 obligations and did not make payment towards its 2011 LNP obligations.

International Section 214 Violations

Section 214 of the Communications Act of 1934, as amended, and Section 63.24 of the FCC’s rules require any assignment of an international Section 214 authorization to receive prior approval before completion of such a transaction.  The FCC found that Kajeet/Airlink had apparently violated these rules.  Companies with Section 214 authorization must also keep the FCC updated as to any substantial changes in ownership or other changes in the regulatory status of the license.

Proposed Forfeitures

For failures to make required monthly USF contributions, the FCC has established a base forfeiture amount of $10,000 for each month that a company fails to fully meet its contribution requirement and $20,000 for each month that a company fails to make even partial payment towards the USF invoice.  In addition to these penalties, the FCC may assess an upward adjustment of one-half of the total unpaid USF contributions.  Using these base forfeitures, the FCC found Kajeet liable for $426,966 and Kajeet/Airlink liable for $455,185 for the companies’ “apparent willfully and repeated failures to contribute fully and timely to the USF.”

The FCC’s general base forfeiture for failures to make TRS contributions is $10,000 and also includes an upward adjustment of one-half the unpaid contributions.  The FCC used these base forfeitures to find Kajeet liable for $13,220 and Kajeet/Airlink liable for $11,457 for the companies’ contribution failures with respect to the TRS Fund.

Failing to make LNP contributions brings a base forfeiture of $10,000.  Due to the companies’ absent or late payment on their 2010 and 2011 LNP obligations, the FCC found both companies liable in the proposed amount of $20,000.

The FCC’s rules set the base forfeiture for failure to obtain prior approval before completing the assignment of a Section 214 authorization at $8,000, which may be adjusted upwards or downwards given aggravating and mitigating circumstances.  Taking into consideration that it took the company two years to file corrective forms, the FCC determined that Kajeet/Airlink was liable for a proposed forfeiture of $16,000.

The large forfeitures levied against these telecommunications providers should serve as a warning for telecommunications providers of all types of the need to ensure compliance with USF and other federal contribution obligations.  This NAL should also serve as a reminder for companies that hold international Section 214 authorization of their obligation to receive prior approval before completing any transactions involving a substantial assignment of the Section 214 authorization.

Sections 54.401(a)(1) and 54.405 of the FCC’s rules state ETCs are only allowed to offer Lifeline services to consumers that are not already receiving Lifeline service.  Furthermore, ETCs are required to explain to consumers in “plain, easily comprehensible language” that they are not allowed to receive more than one Lifeline service.  Violation of Lifeline rules can potentially lead to a maximum penalty of $1,500,000, loss of ETC status, and/or repeal of the company’s Section 214 authorization.

A copy of the Advisory may be accessed here: http://fcc.us/vskTJ7.

As with the previous NALs, this recent NAL found that Simple Network, Inc. had marketed its cards as being able to make hundreds of minutes worth of calls while actually only being able to make a fraction of that due to fees and surcharges.  The FCC found, once again, the disclosure of fees and surcharges on marketing materials and callings cards to be inadequate due to the small font size used and the inability of consumers to determine what fees may apply,  the amount of those fees, and how those fees would impact the number of minutes remaining.  The FCC reaffirmed that these disclosures need to be in “clear and unambiguous language” and not include complicated steps in order for customers to calculate fees or calling time.

This recent NAL illustrates the FCC commitment to aggressive action against prepaid calling card providers that are engaged in unfair and deceptive advertising and that further enforcement activity is possible.

Both “fixed” and “nomadic” interconnected VoIP service providers with end-users whose “primary place of use” is in California will now be required to collect and remit surcharges in support of these Funds.  To determine intrastate revenues, providers will be able to use one of three options, though the option chosen must be consistent with the provider’s federal Universal Service Fund allocation:

• The inverse of the Federal Communications Commission’s federal interconnected VoIP safe harbor percentage of 64.9% (the inverse would be 35.1%);
• A traffic study to estimate intrastate revenues;
• Another accurate way of dividing interconnected VoIP services between federal and state jurisdictions.

To register with the CPUC, service providers will need to complete and submit a registration form, after which an identification number will be assigned.  The CPUC plans to provide further instructions on the reporting and remitting of surcharges after a provider has registered.

Background

On June 30, 2008, the FCC released an order (“InterCall Order”) which found that InterCall, Inc.’s voice conferencing services were “telecommunications services” subject to USF contributions.  The FCC rejected InterCall’s assertion that conference calling providers were “end-users” rather than telecommunications providers subject to USF obligations.  Furthermore, the FCC rejected the company’s assertion that its audio bridging services were “information services” and not “telecommunication services.”

In 2009, MeetingOne asked USAC to confirm that it was not required to make direct USF contributions or file FCC Forms 499.  The company argued that the InterCall Order did not apply to MeetingOne because its IP audio bridging services were different than the audio bridging services provided by InterCall.  USAC rejected this claim and required MeetingOne to contribute to USF beginning with the last quarter of 2008 (when the InterCall order took effect).

MeetingOne Order

The FCC found that MeetingOne’s services were “functionally identical” to the audio bridging services at issues in the InterCall Order.  Specifically, both services allow end users to call into a conference call by dialing a number and accessing the provider’s platform.  The use of IP technology by MeetingOne did not change the FCC’s finding that the service was indeed a “telecommunications service” and subject to direct USF contributions.  The FCC highlighted its previous “IP-in-the-middle Order,” which concluded the use of IP technology in the middle of a service does not change its classification as a telecommunications service.  Additionally, the FCC ruled that added functionality (such as the option to record a conference call and retrieve it at a later date) did not transform MeetingOne’s audio bridging service into an “information service.”

MeetingOne argued it “reasonably determined in good faith” that it was not subject to the InterCall Order and thus should not have to make retroactive contributions to the USF.  The FCC, however, found that the InterCall Order put the industry “on notice” and confirmed USAC’s determination that MeetingOne would be required to contribute to the USF starting with fourth quarter 2008 revenues.

The Commission waived the requirement to contribute to the TRS Fund if interstate end-user revenues are earned from non-interconnected VoIP services which are offered with other (non-VoIP) services. Though the Commission ruled that this exception would not apply if:

1. The service provider also offered the non-interconnected VoIP service as a separate “stand-alone” service for a fee; or
2. The other (non-VoIP) services were offered without the non-interconnected VoIP services for a different or discounted price.

The Order requires that by December 31, 2011 non-interconnected VoIP service providers that are required to contribute to the TRS Fund must register with the FCC and designate an agent for service of process in Washington, DC by using FCC Form 499-A.

By April 1, 2012, these non-interconnected VoIP service providers are also required by the Commission to complete and submit FCC Form 499-A, reporting interstate end-user revenue for the forth-quarter 2011.  The revenue information reported will be used to assess TRS Fund contributions for the 2012-2013 funding period.

A copy of the FCC’s Report and Order is available at http://fcc.us/oVrKda.

Marketing Materials

The FCC examined the posters and marketing materials of the companies and took particular issue with language in the posters indicating that buyers of cards could use hundreds or thousands of minutes to make calls for a few dollars.  Particularly, the FCC noted in each of the four cases that advertised minutes were displayed in a large font-size with bright colors (such as “2500 minutes $5; 1000 minutes $2”).  This express advertisement was in contrast to fees and surcharges, which were typically difficult to read, not conspicuous, in small-font and displayed at the bottom of the advertising material.  The FCC held that because fees and surcharges will quickly deplete an available balance on the card, the express provisions, displayed in large-font and in bright colors, were misleading.  For example, the four companies sold a $2 calling card that provided 500 to 1000 minutes.  Typically, once a customer made a first call using the card, assessed fees and surcharges would be greater than then the $2 it cost to buy the card.  The customer would then be left with a card with no value even though the express provisions in the advertising material indicated that the card would still have hundreds, if not thousands, of minutes remaining.  The FCC noted that the only way a customer could utilize the 500 to 1000 minutes would be to make a continuous phone call which, depending on the company, would last 6-16 hours.  The FCC found such advertising practices to be unreasonable and unlawful.  Finally, voice prompts that disclose minutes per call are inadequate because the information is not available at the point of sale.

Fees and Surcharges

The FCC also held that fees and surcharges must not be difficult to calculate.  The FCC held that it is deceptive to have a maximum charge per phone call without having a clear explanation of how and when that charge will be applied.  Further, companies must be clear on which fees will be applied and how the fees will affect the number of calling minutes.  If a customer cannot determine at the point of sale what fees apply to each destination, or if the customer is only given a range of fees that will apply, then the language will be deemed unclear and ambiguous.

Toll-Free Access Numbers

The FCC also addressed applying higher rates for using non toll-free 800 access numbers.  The four companies each advertised on the prepaid calling cards that customers could utilize local and toll-free access numbers.  The companies then bolded an 800 number on the card for customers to dial.  However, the 800 number, unlike most 800 numbers, was not toll-free, which reduced customer’s minutes at a higher rate than a local access number or a toll-free 800 number.  The FCC held that the companies were misleading customers because the companies did not disclose the rates for using the non toll-free 800 access number on the cards as compared to the local access number.

Unprecedented Penalties    

The FCC’s aggregate fine of $20 million against the four prepaid card companies marks a shift in how the Commission assesses fines in such cases.  The FCC can fine companies a base amount of $40,000 for each instance of an unjust and unreasonable telemarketing practice.  In the past, the FCC has refrained from fining companies for each such instance, and instead assessed a single and often more modest penalty for unreasonable behavior.  In the four recent NALs, the FCC stated that it would fine companies for each instance of unjust behavior, which would mean that every individual prepaid calling card in the market associated with unjust or unreasonable disclosures carried a potential $40,000 base fine.  Although this would amount to tens of millions of dollars in penalties, the FCC decided upon a $5 million penalty for each of the four companies.  In reaching the $5 million penalty, the FCC also factored in the revenue of the company, extent and gravity of the conduct, and the need to deter future behavior to guarantee that “forfeitures issued against large or highly profitable entities are not considered merely an affordable cost of doing business.”  Clearly, this approach will allow the FCC to impose more severe penalties in the future.

The FCC also concurrently issued an Enforcement Advisory which warns prepaid calling card companies: “[w]e are issuing this Enforcement Advisory to alert companies that we are monitoring prepaid calling card practices, and will continue to take aggressive action against companies engaged in unfair and deceptive advertising to consumers.”  Prepaid calling card companies are well advised to heed the Advisory, as further enforcement activity is possible.

Section 214 authorized companies are required to obtain authorization from the FCC prior to closing on any transaction in which control over the 214 authorization is affected (e.g., a sale of the company or the company’s stock).  Prior FCC approval is also required in many instances involving the purchase and sale of assets, including the purchase and sale of customer accounts.  FCC notification is required for more minor transactions, including corporate reorganizations and license assignments to a corporate subsidiary.

The FCC concluded that the subsidiaries of ATMS did not seek approval until after each transaction had been consummated.  In addition, four of the eight transactions were not disclosed until after the Enforcement Bureau began investigating.  The Commission has proposed a forfeiture of $8,000 against each of the subsidiaries, totaling $64,000.