The Prepaid Press - March 2009 - (Page 15)

PREPAID TELECOM March 15 · 2009 - 15 THE Jonathan S. Marashlian LEGAL LINE by Dear Jonathan – Last month, I heard that the Federal Trade Commission scored another victory against the prepaid calling card industry by reaching a settlement with several distributors and their owners in a lawsuit filed in Florida. Even though the case was settled, I understand that it could set a bad precedent, particularly for distributors that lack the ability to control ratesetting. I’m curious about some of the details of the settlement and what you think it means for the industry. Sincerely, Curious and Concerned Dear Curious & Concerned: On February 5, 2009, a handful of prepaid calling card distribution companies and a few of their principals settled a lawsuit filed last May by the Federal Trade Commission (“FTC”) in a federal district court in Florida. Federal Trade Commission v. Alternatel, Inc., et al., Case No. 08-21433. As you astutely point out, the stipulated settlement may portend more bad news for an industry that’s already seen its fair share of governmental enforcement over the past few years. The FTC’s complaint alleged that Alternatel, Inc., G.F.G. Enterprises LLC, Voice Prepaid, Inc., Telecom Express, Inc., Voice Distributors, Inc., Lucas Friedlaender, Moses Greenfield, Nickolas Gulakos and Frank Wendorff (collectively, “the Distributor Defendants”) engaged in false and on a Distributor Defendant’s motion to dismiss all but cements the FTC’s ability to regulate the marketing activities of prepaid calling card providers despite a statutory exemption that excludes telecommunications common carriers from FTC jurisdiction. By attacking the final link in the supply chain – the distributors – and succeeding, the FTC, in effect, gained leverage to regulate upstream. The terms of the settlement agreement provide a window into how the FTC expects all distributors to police both ends of the prepaid card distribution chain. Imposing these monitoring and compliance duties on prepaid calling card distributors confirms that the FTC views distributors as the parties who are most directly responsible for ensuring that the services ultimately delivered to end-users complies with the law. misleading marketing practices in their sales of prepaid calling cards. The Distributor Defendants settled the FTC’s lawsuit without admitting any wrongdoing, but agreed to pay a $2.25 million judgment and cease alleged “misleading” marketing and advertising of prepaid cards to halt further prosecution. Although the settlement agreement did not elicit an admission of wrongdoing on the Distributor Defendants, nor is it binding on any but the parties stipulating thereto, the settlement nonetheless is a significant turning point in the federal government’s effort to regulate the activities of all participants in the prepaid calling card industry, up and down the supply chain. For starters, unlike state Attorneys General, whose jurisdiction is limited to activities within the borders of a particular state, the FTC’s jurisdiction is nationwide. Furthermore, as explained below, the presiding judge’s December ruling Monitoring Requirements in the Settlement Agreement On the surface, the FTC settlement agreement is not unlike earlier settlement agreements between Attorneys Generals and the industry. The Distributor Defendants agreed to ensure that all rates, terms of use, and conditions for using their prepaid cards are “clear and conspicuous” and clearly and adequately disclosed to the consumers. This means that all prepaid calling cards and supporting materials (such as the card’s packaging, point-of-sale displays, and all print, media, and Internet advertising) must convey the rates that an average consumer can actually use to place calls. For example, a calling card consumer must be able to use the total number of advertised minutes. However, the FTC settlement agreement goes further. Under the terms of the agreement, the Distributor Defendants must take proactive steps to monitor the actions of companies on both ends of the prepaid calling card supply chain. In particular, the Distributor Defendants must aggressively regulate all distributors, sub-distributors, or retailers who purchase prepaid calling cards directly from the Defendants. Above all, the Distributor Defendants must collect contact information for distributors and retailers; supervise all sub-distributors to ensure that all sales and marketing materials comply with the settlement agreement; and monitor websites to ensure the accuracy of all disclosures regarding available minutes, fees, and terms of use. The Distributor Defendants must terminate any relationship with a sub-distributor or retailer who fails to comply with these terms. The FTC also mandated that the Distributor Defendants must monitor their underlying telecommunications carriers. Specifically, the Defendants must obtain, in writing, the applicable fees and charges from their underlying carriers; test a random sample of cards to confirm that call detail records from underlying carriers; and obtain, in writing, any changes made by underlying carriers to the per minutes rates. Imposing these monitoring and compliance duties on prepaid calling card distributors confirms that the FTC views distributors as the parties who are most directly responsible for ensuring that the services ultimately delivered to end-users complies with the law. And should the distributors fail in their duties to monitor both sides of the supply chain, they will be left “holding the bag” if the card does not deliver on what is promised to the consumer. This bifurcation of the liability between underlying carriers and prepaid calling card providers has important implications for the prepaid industry. the minutes available on the card conform to the minutes advertised; analyze a random sample of Distributors’ Duty to Monitor Underlying Rates and Ensure Accurate Marketing The most troubling outcome of the FTC settlement is the mandate that distributors must actively monitor the telecommunications services delivered by their underlying carriers. This responsibility suggests that the FTC sees distributors as being directly liable for the rate changes made by an underlying carrier, regardless of whether the distributor was aware of the changes or the unintended consequences those changes may have had on the marketing material and message conveyed at the point of sale. As alluded to above, a December ruling by the judge overseeing the trial indicates that courts may agree with the FTC position on imposing liability on distributors, regardless of the conduct of the telecommunications supplier. Early in the litigation, Distributor Defendants filed a Motion to Dismiss, arguing that the FTC should have named the underlying carriers that provided their telecommunications services as necessary defendants, asserting that: “[m]uch of the conduct that the FTC challenges -- the call rates, surcharges and fees, the voice prompts at the time calls are made, and the calculation of the remaining value of a card in minutes after deduction of fees--is conduct of the telecommunications carriers that provide the callingcard services, not conduct of a distributor….” If the underlying telecommunications carriers are a necessary party, the Distributor Defendants extrapolated, the court must dismiss the lawsuit because the FTC does not have jurisdiction over “common carriers,” i.e., the underlying telecommunications providers. The court disagreed with this argument, holding instead that the conduct at issue was not the underlying rates and terms, but how the Defendants advertised the services ultimately sold to the consumers. Thus, the court concluded, the underlying telecommunications carriers’ authority to set rates was divisible from the acts of the distributors of prepaid calling cards. This bifurcation of the liability between underlying carriers and prepaid calling card providers has important implications for the prepaid industry. Distributors can now be held independently liable for undisclosed changes in their suppliers’ rates, fees or terms. The result is that a distributor may find itself engaged in fraudulent marketing practices, and may find itself charged with fraud, even when the distributor lacks actual awareness of the fraud. Simply saying, “my carrier made me do it,” may no longer provide a safe haven. Jonathan S. Marashlian is a partner at Helein & Marashlian, LLC, The CommLaw Group, a Washington, D.C.-area law firm specializing in federal and state telecommunications and technology matters. He can be reached at jsm@commlawgroup.com. Chris A. Canter, an Associate at The CommLaw Group, assisted with this article. FREEADVERTISING? The Prepaid Press invites all companies in the prepaid services industry to submit ONE FREE 50 WORD CLASSIFIED LISTING ON WWW.PREPAID-PRESS.COM Over 2,500 unique visitors weekly! Don’t miss your chance to promote your business on prepaid’s most comprehensive online source. HTTP://WWW.PREPAID-PRESS.COM/CLASSIFIEDS_FORM.PHP In today’s economy, what could be better than Need ? Need Free Terminals? Need A Reliable Supplier? We seek ISO’s and Agents that want a safe, secure, and reliable POSA processing partner. No agent relationship is too small. 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Table of Contents Feed for the Digital Edition of The Prepaid Press - March 2009

The Prepaid Press - March 2009 Contents The Retske Report: A Disconnect in Connecticut Regulatory Rundown 5 Minutes With Brooks Smith, CEO of InComm TracFone Launches SafeLink Wireless in NY iPayStation Enables International Top-Up Comverse Launches Next-Generation IMS Solution Prepaid Companies Agree to Pay $2.25 Million Prepaid Telecom in Brief Boost Mobile Reintroduces Itself Virgin Mobile Announces New Branding Campaign The State of Prepaid Technology: Becoming a Virtual Operator Prepaid Wireless Roundup New Prepaid Calling Plans from Verizon Wireless The Legal Line Jobless Benefit Debit Card Usage Debated InsurCard Provides Catastrophic Relief Solution Metavante, Monitise Americas Launch Text Banking TransCard Provides Personal Financial Management Walmart to Help Americans Manage Finances Payments and Processing in Brief Prepaid Consumer and Employee/Partner Incentives CashStar Launches Interactive Gift Card Platform VIPGift Continues Sales Expansion Pentagon Installs Unique Card Personalization Line Digital Promotions Grow in Popularity The Ultimate Gift Card Network Retail Sales Show Unexpected Rebound Smart Transaction Systems Selects Hypercom GiftCards.com Acquires Swapagift.com InComm Gaming Opportunities on the Rise VCT Adds Equipment to New Jersey Facility Gift Cards and Promotions in Brief Our Advertisers Contact Us

The Prepaid Press - March 2009

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