Last week, the Federal Communications Commission (“Commission”) released two forfeiture orders upholding its authority to pierce the corporate veil and impose forfeiture liability directly on the owner of a company under certain circumstances. The decisions underscore the importance of observing corporate formalities, especially for small businesses where unitary ownership and limited administrative resources might lead to less formal barriers between an owner and his or her company.
In a forfeiture order involving Telseven, LLC, the Commission imposed a $1.75 million forfeiture on the company for its failure to contribute fully to the universal service fund and the cost recovery mechanisms for local number portability and the North American Numbering Plan and for failing to pay regulatory fees or provide good faith estimates of its revenues in its Quarterly Form 499 filings. The Commission also made Telseven’s owner, Patrick Hines, jointly and severally liable for the monetary forfeiture.
In a separate forfeiture order involving Patrick Hines, Telseven and another of Hines’s companies, Calling 10, LLC, the Commission imposed a $1.68 million forfeiture jointly and severally on Telseven, Calling 10, and Hines. In this case, the forfeiture related to cramming violations and deceptive marketing practices by Hines’s companies for Enhanced Number Assistance and Directory Assistance.
In both forfeiture orders, the Commission announced that it can pierce the corporate veil: “(1) where there is a common identity of officers, directors, or shareholders; (2) where there is common control between the entities; and (3) when it is necessary to preserve the integrity of the [Communications] Act and to prevent the entities from defeating the purpose of statutory provisions.” Because the Commission rarely pierces the corporate veil, it looked to examples of it piercing the corporate veil in non-forfeiture contexts to support its conclusion in the Telseven and Calling 10 forfeiture orders. Specifically, the Commission pointed to Capital Telephone Company, Inc. v. FCC, in which the D.C. Circuit upheld the Commission’s decision to treat a company and its owner as a single entity in the context of high band paging channel applications.
In response to the Notices of Apparent Liability (“NAL”) giving rise to these forfeiture orders, Hines argued that the Commission’s test for piercing the corporate veil would necessarily allow veil piercing for almost any small business on which the Commission imposes a forfeiture. However, the Commission rejected Hines’s arguments. While many small business are under common control and have common officers, directors, or shareholders, the Commission said Hines ignored the third prong of its test in asserting that all small businesses would be subject to veil piercing under the Commission’s test. According to the Commission, the third prong of its test ensures that it will only pierce the corporate veil when an individual creates sham corporate forms to evade liability.
Moreover, in considering the first two prongs of its test, the Commission applied a number of traditional corporate veil piercing considerations. For example, Hines used his home address for Calling 10. He executed and signed all documents on behalf of Telseven and Calling 10, was the companies’ sole managing member, and was the companies’ sole employee. The Commission also noted that Calling 10 was capitalized with only $1,000. Additionally, Telseven and Calling 10 filed for bankruptcy before an NAL was issued in either case, and neither company responded to the NALs.
The forfeiture orders make clear that the Commission considers Hines’s conduct egregious and outside the norm. However, they also put businesses, especially small business, on notice that there may be personal liability for a company’s owners or officers if the company uses its corporate form to evade the Commission’s rules. If you have any questions about your business’s compliance with the Commission’s rules or you would like help putting appropriate corporate processes in place, please contact Jonathan Marashlian at firstname.lastname@example.org.