On December 3, 2009, the Federal Trade Commission ("FTC") presented a statement on prepaid calling cards to the Subcommittee on Commerce, Trade and Consumer Protection of the U.S. House of Representatives, Committee on Energy and Commerce. The statement supplements 2008 testimony regarding the state of the prepaid calling card industry, focusing on federal and state actions taken to combat fraud and increase consumer protection. In the supplemental statement, the FTC summarized recent enforcement actions against prepaid calling card distributors for deceptive trade practices violating Section 5 of the FTC Act.  The FTC also highlighted state enforcement actions against deceptive marketing practices achieved in direct cooperation with the FTC's joint task force.

Further, the FTC commented on a bill pending before the House, H.R. 3993, the Calling Card Consumer Protection Act ("CCCPA"), introduced in its current form this November.  The FTC emphasized its support for the bill, in particular the provisions relating to elimination of the so-called common carrier exemption.  The FTC Act currently exempts common carriers, regulated by the Federal Communications Commission ("FCC") under the Communications Act of 1934, from its prohibitions on unfair and deceptive acts affecting trade.  Because of the exemption, the FTC has focused its enforcement efforts on prepaid calling card distributors, rather than underlying carriers which qualify for the exemption. The FTC further proposed the repeal of the exemption altogether.  It suggested that because highly regulated monopolies no longer dominate the industry, the rationale for the exemption no longer exists. The FTC concluded that the FCC's jurisdiction would remain intact with the FTC's concurrent authority increasing.

The FTC expressed concern, however, about the bill's proposed exclusion of wireless service providers suggesting that it would incentivize carriers to switch to wireless services in order to evade the application of the law.  Finally, the FTC indicated its support for the bill's proposal to adopt civil penalties for violations of the FTC Act and requested authority to initiate enforcement actions directly rather than through the Department of Justice.

The FTC supports the limited carve-out in the bill which would permit enforcement actions against common carriers providing service for prepaid calling cards. Justifying its position, the FTC stated, The FTC believes the proposed elimination of the common carrier exemption with respect to the providers of telecommunications service for prepaid calling cards is essential to the FTC's ability to protect consumers in this arena. 

CLIENT ADVISORY

Elimination of the common carrier exemption as applied to prepaid calling card providers, whether in conjunction with the adoption of the proposed CCCPA or by repeal of the exemption entirely would significantly impact carriers providing services for prepaid calling cards.

If adopted as a limited carve-out for prepaid calling card providers under the CCCPA, the exemption would place providers of prepaid calling cards in a legal, and thus, competitive disadvantage vis-a-vis other providers of telecommunications services not subject to the CCCPA. That is, it would subject prepaid calling card service providers to the jurisdiction of both the FCC and the FTC, whereas all other common carriers would remain subject only to the FCC's exclusive jurisdiction.

If, however, Congress repeals the exemption altogether, all carriers would experience the increased regulatory oversight, decreasing the disproportional impact.  Nonetheless, prepaid calling card service providers would likely still suffer competitive disadvantages as a large portion of the FTC's efforts to curb deceptive trade practices have focused on the prepaid industry.

Clients are encouraged to monitor the debate over the CCCPA in general, and the elimination of the common carrier exemption in particular.  Clients with questions about this Advisory should contact Jonathan Marashlian at: jsm@commlawgroup.com or 703-714-1313.