Recent actions by California regulators illustrate the increased scrutiny the state is giving to prepaid calling card (“PPCC”) services. This scrutiny stems from amendments to the California Business and Professions Code, Section 17538.9, which became effective January 1, 2009. The Code changes clarified certain disclosure requirements and standards for advertisement and sale of prepaid phone cards in the state. Importantly, it also expanded the California Public Utilities Commission (“CPUC”) authority to enforce the requirements of Section 17538.9.
On May 11, 2009, the CPUC announced a Superior Court judgment requiring California prepaid calling card company Total Call International, Inc. (“TCI”) to clearly disclose all fees, surcharges, and other costs (including “maintenance fees”) associated with the use of its prepaid calling cards, to forego $1.5 million in profits, and to pay $300,000 in penalties. The judgment also prohibits TCI from advertising its services in a misleading way. In the Public Notice announcing the judgment, the CPUC stated:
“Using its expanded authority, the CPUC is committed to increase enforcement against prepaid calling card companies.”
Evidence of the CPUC‘s increased vigilance has mounted throughout the year. Today, based on this evidence, we can confirm that the CPUC is, indeed, subjecting providers of PPCC services to greater scrutiny than providers of other types of communications services. As described below, neither new entrants nor existing providers are likely to escape this increased scrutiny, particularly when applying for regulatory authorization.
First, the CPUC posted a notice on its website relating to registration for Non-Dominant Interexchange Carrier Telephone Corporations (“NDIECs”). An NDIEC “license” or “registration” is required of any company seeking to provide intrastate telecommunications via prepaid cards or sell interstate/international only cards to California consumers, respectively. The CPUC directed prospective NDIEC applicants to disclose any history of criminal fraud or activity or civil and/or regulatory sanctions. The CPUC failed to limit disclosures to activities occurring within California, instead requiring full disclosure of violations occurring both within and outside of the state. The CPUC has also taken a very broad view of what constitutes “sanctions,” finding the term includes informal investigations, complaints, or inquiries even if these activities have not resulted in any final decision or findings of wrong-doing. For instance, the mere failure to file a required regulatory report in one state which results in a proposed enforcement action must now be disclosed to the CPUC, even if the enforcement action is ultimately resolved without material consequences or an admission of liability.
Second, the CPUC clarified that PPCC providers, even those with minimal revenues from intrastate traffic, are required to register as NDIECs, subjecting them to the disclosure requirements discussed above. The California Code requires entities offering prepaid “debit cards” (i.e. phonecards or calling cards) to register with the CPUC. The CPUC‘s website explains that these providers must obtain an NDIEC registration. In fact, there is an effort presently underway which, if successful, would even require Internet retailers of electronic PINS to register as NDIECs if PINS are downloaded by California consumers, even if the PINS are used exclusively to originate interstate and international calls.
Traditionally, states retain jurisdiction solely over intrastate communications. Therefore, PPCC providers whose cards are used primarily for interstate and international calls have not been required to register at the state level. On December 23, 2008, the CPUC issued a proposed decision in Skynet Communications, Inc.‘s (“Skynet”) NDIEC license application proceeding which expanded the CPUC‘s authority over PPCC providers.
Skynet, a PPCC provider, originally filed an NDIEC application then subsequently sought to withdraw the application after getting embroiled in a battle with the CPUC‘s Consumer Protection and Safety Division (“CPSD”). Skynet argued that the CPUC had no jurisdiction over its services and could not require it to register because consumers use its cards almost exclusively for international calls, and any intrastate revenue Skynet generated was de minimis, stemming from calls made by visitors to the state.
The CPUC rejected Skynet‘s position, concluding that Skynet provides prepaid telephone cards in California and is thus required to register with the CPUC. The CPUC explained that the California statute includes no exception for providers whose intrastate traffic is de minimis. The CPUC even asserted that no exclusion exists in the “hypothetical (and unusual) case where a provider of international phonecards would block access to intrastate calling on cards used in California.” The CPUC ultimately granted Skynet‘s original registration application, but not until after a lengthy, acrimonious and costly proceeding.
Under the Skynet decision, PPCC providers must seek registration status before selling calling cards (and possibly, according to the CPSD, even electronic PINS) that could be used in California, regardless of whether the PPCC provider actually intends to sell calling cards for use in California. To obtain the necessary registration, a calling card provider must file an NDIEC application form identifying itself as a PPCC provider eligible for registration under the California Code. Notably, the requirements of registration, which include the disclosure of past violations in any state, financial qualification and procurement of a performance bond to cover taxes and/or fees, subject PPCC applicants to more onerous requirements than those necessary to obtain a state license. If the CPUC and CPSD determine that the applicant meets the Code‘s registration requirements, the CPUC will issue an order giving the applicant registration status.
Clients are advised to review their compliance with California regulations, specifically PPCC registration requirements and disclosure obligations. Clients seeking to offer prepaid calling services that could potentially be used by customers in California should review the Skynet Order and the CPUC‘s website for additional information. Clients with questions or concerns regarding this Advisory should contact Jonathan S. Marashlian at firstname.lastname@example.org or (703) 714-1313.