Disclaimer: This article is intended for informational purposes only and is not for the purpose of providing legal advice. You should not act upon the information in this article without seeking professional counsel.
One of a handful of prepaid calling card companies slapped with a $5 million fine by the Federal Communications Commission (FCC (News - Alert) or Commission) for its allegedly misleading marketing practices, Locus Telecommunications filed a persuasive Petition asking the FCC to reconsider its Forfeiture Order on November 20, 2015.
Locus’s Petition echoes the concerns raised by the two Republican Commissioners, Ajit Pai and Michael O’Rielly, both of whom stridently dissented from the five-person panel’s ruling. Pai and O’Rielly issued separate, scathing dissents chiding both the Commission and its Enforcement Bureau (“Bureau” or “EB”). Locus picks up on the dissenters’ objections and, in its Petition, calls out the Commission for the Enforcement Bureau’s sloppy investigation and gross deprivation of Locus’s Constitutional due process rights. Locus also highlights the Commission’s clear violation of the legal limitations on its forfeiture authority in reaching the $5 million fine. And at the core of the matter, Locus – in lockstep with Commissioners Pai and O’Rielly -- strenuously objects to the FCC’s reliance on tenuous legal authority in its assertion of jurisdiction over the marketing practices of telecommunications providers, in the first instance.
Coincidentally, Locus’s Petition was filed on the very same day several Republican members of Congress sent FCC Chairman Tom Wheeler (News - Alert) a letter questioning the legitimacy of the Commission’s enforcement actions, of late. “[C]oncerns have been raised about the [Enforcement Bureau] aggressively pursuing substantial, unprecedented and seemingly arbitrary fines against licensees and non-licensees alike,” the letter stated. “[M]oreover, it appears that the [Enforcement Bureau] is more concerned with issuing fines and grabbing headlines than it is with ensuring compliant behavior with existing FCC rules.” And in a rather prophetic observation regarding a different matter, the letter from Congress states, “[r]ather than undertake a rulemaking or proceeding to delineate the rules of the road for companies to adhere to… the FCC issued a Notice of Apparent Liability for alleged conduct that does not fall under any existing FCC rules.”
On another ominous note, the final outcome of the Commission’s encroachment into regulating the marketing practices of “common carriers” could result in long-term challenges for providers of Broadband Internet Access Services, as explained below.
Pursuant to its rules, the FCC has ninety (90) days in which to rule on Locus’s Petition.
Background and Procedural History
Among other services, Locus sells prepaid calling cards, primarily through a nationwide network of distribution resellers. In April 2010, the Enforcement Bureau commenced an investigation into Locus’s marketing practices related to its sale of prepaid calling cards. During the course of its investigation, the Enforcement Bureau solicited and reviewed dozens of physical calling cards and associated marketing material, all produced by Locus in response to a Letter of Inquiry.
That investigation concluded when the Bureau issued a Notice of Apparent Liability (NAL) against Locus in September 2011, charging Locus with apparently violating Section 201(b) of the Communications Act (which generally prohibits unjust and unreasonable practices in connection with the sale of communications services). For the alleged violations, the FCC proposed a forfeiture of $5 million, concluding that “each card that Locus marketed using deceptive advertising constitutes an independent unjust and unreasonable practice, and thus a separate apparent violation of section 201(b) of the Act.” The FCC apparently calculated the forfeiture amount in light of the “thousands of cards that Locus appeared to have marketed,” arbitrarily applying a $40,000 penalty to 125 “apparent violations” (sales of infringing cards) that occurred during the twelve months preceding the NAL’s release. This, in spite of the fact that the actual calling cards produced in the investigation were on the market in 2008 and 2009, well beyond the 1-year statutory limitation on the FCC’s forfeiture authority.
The following month, Locus filed a Request for Rescission of the NAL, arguing that the FCC lacks jurisdiction over Locus with respect to its marketing practices and that Locus had violated no laws or validly promulgated FCC regulations.
A full four years later, the Commission issued a final Forfeiture Order affirming the alleged violations and the proposed $5 million forfeiture. Commissioners Pai and O’Rielly issued strongly worded dissents, citing due process and jurisdictional concerns.
Locus’s Petition for Reconsideration
In its Petition for Reconsideration, Locus echoes the dissenting Commissioners, challenging the Commission’s unauthorized intrusion into regulating the marketing practices of common carriers. Locus also admonishes the FCC for its utter failure to conduct the due diligence necessary to identify any specific sale of an alleged infringing card or to link any such sale to actual consumer harm. Indeed, in spite of its massive $5 million fine, the FCC could not identify even a single instance of a Locus calling card leading to a consumer complaint on file at the Commission.
FCC Lacks Authority to Regulate Common Carrier Marketing Practices
The FCC’s unlawful encroachment into regulating marketing practices of Title II common carriers is a foreboding proposition for the entire telecommunications industry, including Internet Service Providers. The Commission reached well beyond the bounds of its legal authority into a realm wherein it lacks Congressional authority to regulate.
As is common industry practice – Locus’s prepaid calling cards carry disclosures that advise consumers of certain fees that have the effect of reducing available minutes on a card. Such disclosures clearly informed customers (in both English and Spanish) about the services being purchased. In particular, the cards described, in plain language, precisely how a customer could secure the maximum number of available minutes on each card. Yet, despite having received not a single customer complaint, the FCC took it upon itself to unilaterally declare Locus’s disclosures to be “deceptive” and “misleading.” Absent evidence of any actual consumer harm, the Commission erroneously substituted its own subjective judgment for that of an informed consumer.
The FCC’s overreaching is even more foreboding for providers of Broadband Internet Access Services, recently declared Title II common carriers by the FCC. One can only imagine what the FCC will do with broadband services marketed and sold in quantities measured in “Megabytes!”
Arguably, it would take a computer scientists or network engineer to truly comprehend a “Megabyte” as a unit of measurement (and how much “data” a consumer actually receives for each advertised Megabyte). If the FCC is given the legal authority to regulate the marketing practices of common carriers, and Broadband Internet Access Service providers are common carriers, will the FCC one day conclude that ISPs may no longer measure data in Megabytes because consumers might get “confused?” The FCC appears to have begun a path down a slippery slope, with no end in sight.
Indeed, in a recent NAL issued against a carrier for alleged slamming rule violations, Commissioner O’Rielly dissented, voicing concerns with the Commission’s reliance on Section 201(b) (rather than the rulemaking process) to make law. Commissioner O’Rielly aptly noted, “The Commission simply wants to
preserve its right to use section 201 at any time and for any reason. Today it is supposed misrepresentation associated with slamming. Tomorrow it could be alleged misrepresentation connected with terms and conditions or privacy and security. I object to this charade and I must dissent.”
FCC Trampled Locus’s Constitutional Due Process Rights
Locus also raises serious due process concerns in its Petition. For starters, the FCC failed to address Locus’s arguments and legal support showing that the FCC lacks the authority under Section 201(b) to regulate Locus’s marketing practices. Instead, the Commission merely referred to its “companion STi Forfeiture Order,” wherein the FCC issued a forfeiture against another provider (STi Prepaid) for violations of Section 201(b) relative to STi’s marketing of prepaid calling cards. In doing so, the Commission failed to consider Locus’s unique arguments. What’s more – Locus did not even have a chance to review STi’s response to the NAL that led to that order. Specifically, the STI response is only available via submission of a FOIA request, which Locus submitted, but was not acted upon before the due date of its response.
Further, the FCC relied upon a mere NAL as adequate precedent authorizing it to exercise jurisdiction over prepaid calling card marketing, concluding that the NAL put Locus “on notice” of such authority. Yet, the cited NAL terminated through a negotiated consent decree, and did not, therefore create binding precedent. The FCC also inexplicably referenced a joint FCC/FTC (News - Alert) Policy Statement as a basis for expanding its authority to regulate marketing practices, which is also non-binding and does not constitute adjudication. Finally, the FCC failed to identify any specific sale of a prepaid calling card that included misleading and deceptive language, preferring leaps in logic and inferences over actual facts. Rather than confirm actual sales of “deceptive” cards, the FCC injected new facts at the forfeiture stage - in determining the forfeiture amount, the FCC “inferred” that at least one card was sold every day in the year preceding the NAL, amounting to 365 violations, which the FCC arbitrarily reduced to 125 for purposes of setting the penalty. Wholly divorced from fact, the Commission failed to justify this forfeiture amount.
In short, the Commission violated basic due process rights afforded to companies operating in the U.S. under the Constitution. The Commission’s Order simply cannot withstand legal scrutiny.
Conclusion and Warning to the Industry
The FCC’s actions in the Locus Forfeiture Order started with a sloppy investigation and concluded in an unlawful assertion of jurisdiction over the company’s prepaid calling card marketing practices and clear due process violations. The entire industry – not only providers of prepaid calling cards – should be concerned by the Commission’s clear extension of its regulatory reach into areas over which it has no authority to govern. The FCC appears to be going back in time to an era where competition was scarce. The Commission ignores the fact that the telecommunications marketplace overflows with competition, and consumers have choices. The Commission, therefore, has no basis for micromanaging competitive providers and dictating the terms of their offerings.
Consider this a warning - a silent industry may embolden the Commission to reach further, even going so far as to dictate the marketing practices of ISPs. Providers with concerns about the impact of the Commission’s recent actions may be well served by taking actions to encourage the Commission to discontinue its trajectory down this slippery slope.
About the Author
Jonathan Marashlian is the Managing Partner of Marashlian & Donahue, PLLC, The CommLaw Group (www.CommLawGroup.com) and is counsel to Locus Telecommunications. Mr. Marashlian may be reached at (703) 714-1313 or jsm@CommLawGroup.com.