Prepaid calling card providers have recently found themselves again under the government’s scrutiny for their marketing and advertising practices.  Two aspects differentiate the recent assault from the onslaught of adverse actions that last erupted several years ago.  First, it is the Federal Communications Commission (“FCC” or “Commission”) and State Attorneys General and not the Federal Trade Commission (“FTC”) leading the enforcement charge.  Second, at least in the case of the FCC, the target of the enforcement actions has been the Prepaid Service Providers themselves, not merely the calling card distributors.

This fall, in an unprecedented move, the Commission issued four NALs imposing proposed forfeitures of $5 million each, totaling $20 million, for alleged deceptive marketing practices by prepaid calling card providers.  And the FCC is not finished.  Earlier this week, the Enforcement Bureau released yet another $5 million proposed forfeiture against prepaid service provider Simple Network, Inc.  Each NAL charged the suject prepaid service providers with apparently willfully and repeatedly violating Section 201(b) of the Communications Act of 1934, as amended (“the Act”), which prohibits unjust and unreasonable practices in connection with interstate or foreign communications services, for the assessment of multiple fees and surcharges that are not clearly and conspicuously disclosed to consumers.

The NALs concluded 2010 investigations into the marketing and sale of prepaid calling card services by a number of providers. The Commission examined materials provided by the providers and concluded that the providers had apparently violated Section 201(b) by failing to convey material information about their rates for prepaid calling card services. The Commission found that while the providers advertised “hundreds if not thousands” of minutes for a few dollars, consumers could only use a portion of the advertised minutes because of hidden fees and surcharges that deplete the value of the card. The FCC also found disclosures regarding the application of these fees and surcharges insufficient as they were in small print and neither clear nor conspicuous to the average consumer. In addition, the Commission determined that even if the disclosures were more conspicuous they were insufficient to advise consumers as to how the fees and surcharges apply.

These NALs represent unprecedented penalties for alleged violations of Section 201(b) by prepaid calling card providers for deceptive marketing practices. In the past, the FCC has issued a single lower forfeiture for unreasonable and unjust practices. The FCC’s approach in these cases signals heightened enforcement of its rules against prepaid calling card providers, and may lead to harsher penalties for future violations. In conjunction with the NALs, the FCC issued an Enforcement Advisory to “alert companies that [the Commission is] monitoring prepaid calling card practices, and will continue to take aggressive action against companies engaged in unfair and deceptive advertising to consumers.”

Until recently, the FTC has been considered the primary compliance enforcer in the prepaid industry. The FTC has routinely brought actions against major distributors of prepaid calling cards charging them with deceptively marketing prepaid calling cards. Prepaid providers had operated for years on the belief that their marketing practices were subject to the scrutiny of the FTC. Companies diligently developed compliance plans and practices under the assumption that compliance with the FTC’s standards would adequately insulate them from liability. With the Commission’s issuance of the NALs and overall attack on the industry, the FCC unilaterally upped the ante for compliance.

Now, on the heels of the Commission’s NALs, at least one state’s attorney general has joined in the attack on the prepaid industry. On November 1, 2011, the Illinois Attorney General initiated two lawsuits against companies for marketing prepaid calling cards to consumers, particularly to immigrant communities. The lawsuits allege, among other things, that the companies’ prepaid card advertisements and marketing material misrepresented the actual minutes of talk time available in violation of the Illinois Consumer Fraud Act. Specifically, the suit charged that the provider “fail[ed] to clearly and conspicuously disclose on the prepaid calling card the full name of the Prepaid Calling Service Provider as certified by the Illinois Commerce Commission” and failed to clearly and conspicuously disclose on the packaging materials accompanying the prepaid calling card:

• all surcharges and fees applicable to the use of the domestic prepaid calling card service;
• all applicable rates for international preferred destinations;
• all applicable surcharges and fees for international calls; and
• a disclosure statement that all applicable rates, surcharges, and fees are available through a toll-free customer service number

The Attorney General is seeking an injunction that prohibits the companies from selling, manufacturing, distributing or marketing prepaid calling cards in Illinois, restitution for affected consumers, and the imposition of civil penalties. The Illinois Attorney General’s suit follows an increasing number of actions filed against prepaid calling card companies over the past year, including a suit by the Maryland Attorney General. This latest example of enforcement activity may signify a broader level of increased state enforcement in the aftermath of the Commission’s NALs. With the recent Illinois Attorney General action, it appears as though the compliance floor is being reset- for the entire industry, prepaid calling card carriers, distributors and resellers alike. And, this new compliance floor is being set higher than it was just a few months ago. As a result, marketing materials and business practices which may have been prepared as a way to accommodate the old compliance floor may no longer be suitable under the new standard being applied by both the Commission and the states.

Clients offering prepaid calling cards, especially those operating in Illinois, are strongly advised to consult with the Attorney assigned to their accounts to revisit their compliance with shifting federal and state requirements for prepaid calling card disclosures.