Our firm recently became aware of on-going investigations by the Federal Communications Commission ("FCC" or "Commission") into the regulatory compliance of providers of "virtual office" communications solutions.  The Commission's Enforcement Bureau ("EB") issued letters of inquiry ("LOIs") seeking information specifically related to Universal Service Fund ("USF") compliance. 

For many years, if not decades, most virtual office communications solutions providers operated under the assumption that their services qualified them as "information service" providers, which are generally exempt from the common carrier regulations applicable to providers of telecommunications services.  Historically, such information service providers were treated as the "end users" of telecommunications services and were not subject to direct regulation by the FCC.  Certain recent rulings by the Commission, coupled with its on-going enforcement actions, may suggest that providers of virtual office solutions may no longer rely upon the information services exemption.  The Commission appears poised to expand its regulatory authority to bring virtual office providers within its direct jurisdiction.  It began in 2008 when the Commission issued a decision upholding the Universal Service Administrative Company's ("USAC") classification of InterCall's audio-bridging services as "telecommunications" subject to USF reporting and contribution.  Since then, the Commission, both directly and through USAC, has slowly been extending the reach of InterCall to a broader and broader sphere of service providers.

Combined with other recent actions, the Commission's expansive interpretation of InterCall suggests that reclassification of virtual office services as regulated telecommunications services appears inevitable.  For example, on March 16, 2010, the FCC published its National Broadband Plan aiming to increase broadband deployment nationwide.  The Plan also included comprehensive measures to reform the USF and related federal programs.  To implement its Plan, the Commission plans to release a series of Notices of Proposed Rulemaking ("NPRMs") soliciting comments on its regulatory reform proposals.  The Commission could, therefore, seek to bring virtual office service providers within the scope of its authority through a rulemaking.

In addition, legislation recently proposed in Congress provides further support for the FCC's expansion of its authority over a wide range of services.  If it becomes law, the Universal Service Reform Act of 2010 ("USF Reform Act") would permit the FCC to assess USF contributions not only on telecommunications service providers, but providers of information services and even Internet access providers.  The legislation appears to have bipartisan support in Congress and, perhaps just as importantly, broad support from the telecommunications industry.  Consistent with the Broadband Plan, the USF Reform Act sets an eighteen-month timeline for implementation of its provisions.  Thus, whether by adjudication through the EB or by its implementation of the USF Reform Act through rulemaking, it appears inevitable that the FCC will extend its authority to minimally impose USF contribution and reporting duties on virtual office service providers. 

 CLIENT ADVISORY

Clients are advised that the FCC's recent enforcement activity, when combined with the goals outlined in the National Broadband Plan and scope of the recently proposed USF Reform Act, may signal the inevitable reclassification of "virtual office" services as retail telecommunications or even telecommunications services, subject to USF reporting and contribution obligations.  Affected clients should begin preparing for the eventual regulatory reclassification of virtual office services so as to minimize both operational and regulatory compliance complications.  Moreover, understanding and preparing for the inevitable changes now can mitigate risks and hedge against allegations of non-compliance.

The FCC has the ability to issue forfeitures against companies for failure to comply with FCC rules.  For example, it can impose penalties for failure to contribute to the USF if it determines virtual office services constitute retail telecommunications under its existing authority and jurisprudence.  However, the FCC can only fine carriers for acts or omissions occurring in the twelve (12) months preceding the issuance of a Notice of Apparent Liability, which typically follows an investigation.  Therefore, to the extent actions can be taken to mitigate against forfeiture proceedings, we recommend that clients consider such measures.