Communications Law Bulletin, July/August 2007
This combined issue of our Bulletin describes events in July and August of this year. Although mid-summer tends to be a quiet
time in Washington and the state capitals, there are a surprising number of developments to report in all segments of our
industry. Those developments are covered here, along with our usual list of deadlines for your calendar.
In this issue:
No Summer Vacation for FCC Enforcement Activity
The Federal Communications Commission (“FCC” or “Commission”) has had a busy enforcement schedule this summer, involving a
variety of regulatory compliance issues. On July 3, two orders were released adopting consent decrees, one between the Enforcement
Bureau (“Bureau”) and Scientific Games Racing, LLC (“Scientific Games”) and one between the FCC and Verizon.
The Scientific Games consent decree settled an investigation of its unauthorized operation of satellite earth stations and
unauthorized assignments of earth station licenses. At various periods, Scientific Games acquired and operated satellite
earth stations without FCC authorization, although it subsequently obtained licenses, or approval for the assignment of licenses,
for all of them. Under the consent decree, Scientific Games agreed to make a voluntary contribution to the U.S. Treasury
of $215,000.
The Verizon consent decree settled an investigation of MCI’s underpayment of its universal service fund (“USF”), numbering
administration, number portability, and Telecommunications Relay Service contributions and other regulatory fees. These underpayments
resulted from MCI’s underreporting of its interstate telecommunications revenues on its FCC Forms 499A and 499Q during the
period 2003-05. MCI initially informed the Bureau of its underreporting, and Verizon, which acquired MCI in 2005, paid the
amounts owed in full in 2006. Under the consent decree, Verizon agreed to make a voluntary contribution to the U.S. Treasury
of $500,000 and to implement a two-year USF contribution reporting compliance program, including Form 499A and 499Q training
for its employees, internal Form 499 accounting controls, and independent auditing of its compliance with the internal controls.
On July 17, the FCC adopted another consent decree with Verizon, this time settling an investigation initiated by a Letter
of Inquiry (“LOI”) of Verizon’s compliance with network outage reporting requirements. Verizon agreed to a voluntary contribution
to the U.S. Treasury of $1,400,000 and to implement a two-year network outage reporting compliance program, including a training
program, internal controls over outage reporting, and annual reports to the Bureau in the form of an affidavit or declaration
under penalty of perjury by a Verizon officer verifying that Verizon has complied with the consent decree.
On July 19, the Bureau released Notices of Apparent Liability for Forfeiture (“NALs”) against Audio-Video Corporation d/b/a
A-1 Communications and Mechanicsville Telephone Co. for violations of the requirement that a corporate officer certify annually
that a carrier has adequate customer proprietary network information (“CPNI”) operating procedures. In both cases, the companies’
responses to Bureau LOIs revealed that they had not prepared proper CPNI certifications for the past five years. Citing consumers’
heightened concerns regarding the protection of CPNI, the Bureau proposed a forfeiture of $100,000 in each case. The companies
are required to pay the forfeiture or file responses to the NALs in 30 days explaining why the proposed penalty should be
reduced or eliminated. Virtually identical NALs proposing forfeitures of $100,000 each for similar violations were issued
against Capital Telecommunications, Inc. and Connect Paging, Inc. d/b/a Get A Phone on August 10.
On July 31, the FCC released an NAL against Extreme Leads, Inc., a telemarketer, for 218 violations of the FCC’s “junk fax”
rules. In response to consumer complaints against Extreme Leads, the Bureau issued a citation to Extreme Leads on June 14,
2006 for using a telephone facsimile machine, computer, or other device to send unsolicited advertisements to facsimile machines
in violation of Section 227 of the Communications Act (“the Act”) and the FCC’s related rules. Extreme Leads did not respond
to the citation. Based on 132 additional complaints that Extreme Leads sent another 218 unsolicited advertisements following
the citation to consumers without their permission and with whom it had no business relationship, the FCC proposed a forfeiture
of $1,377,000. The FCC applied a base forfeiture of $4,500 to each of 146 apparent violations and an increased forfeiture
of $10,000 to each of 72 additional violations where the consumer requested or attempted to request that Extreme Leads discontinue
its faxing. Extreme Leads has 30 days to pay the forfeiture or respond to the NAL.
On August 14, the FCC released a similar NAL against another telemarketer, The Hot Lead LLC d/b/a The Hot Lead Company (“Hot
Lead”), for 356 violations of the “junk fax” rules. In response to consumer complaints, the Bureau issued a citation to Hot
Lead on May 5, 2006 for sending unsolicited advertisements to facsimile machines. Hot Lead did not respond but instead sent
another 356 unsolicited advertisements to 110 consumers. The FCC proposed a forfeiture of $2,168,500, calculated by applying
the $4,500 base forfeiture to 253 apparent violations following the citations and an increased forfeiture of $10,000 to 103
additional violations where the consumer requested or attempted to request that Hot Lead discontinue its faxing. Hot Lead
has 30 days to pay the forfeiture or respond to the NAL.
On August 15, the FCC released an NAL against VCI Company (“VCI”) for violations of USF rules relating to Lifeline and Link
Up services. As a result of audits conducted by the Universal Service Administrative Company (“USAC”) and the Oregon Telephone
Assistance Program and an investigation by the Oregon Public Utility Commission, the Bureau sent LOIs to VCI regarding its
claims for low-income support in various states. Its responses demonstrated that it received reimbursement to which it was
not entitled for Lifeline and Link Up support. VCI included thousands of duplicate entries in the total line counts for those
low-income services over an 18-month period, continuing well after the initiation of the USAC and state inquiries. VCI blamed
these errors on a faulty computer system. The FCC proposed a forfeiture of $1,047,500 for VCI’s apparent failure to accurately
report the revenues it was forgoing in providing low-income service and for its unlawful receipt of excessive reimbursement
for Lifeline and Link Up support. The FCC also warned that it may suspend USF support to carriers not complying with the
FCC’s USF criteria and will impose larger penalties if the forfeiture methodologies proposed in the NAL are not adequate to
deter violations of its USF rules.
In at least one case, the Bureau had second thoughts about a previous NAL. On July 13, the Bureau released an order cancelling
a previous NAL against Blackstone Calling Card, Inc. for its alleged failure to file registration information with USAC in
connection with USF and other contribution obligations. In response to a Bureau LOI, Blackstone provided an unsupported statement
that it is not a carrier. In response to the subsequent NAL proposing a forfeiture of $20,000, Blackstone provided copies
of contracts establishing that it acted as an agent for carriers in distributing prepaid calling cards and that it was not
the carrier responsible for providing the underlying services. Because Blackstone was not a regulated carrier, the Bureau
was precluded by Section 503(b)(5) of the Act from proceeding with an NAL without first issuing a citation. Accordingly,
the Bureau cancelled the NAL and declined to issue a citation.
Senate Committee Approves Broadband, Number Porting, Broadcast Indecency, and Parental Control Bills, While Additional Measures
are Introduced in Congress
In July and August, the Senate Commerce Committee approved a number of bills addressing broadband, number porting, broadcast
indecency, and parental control blocking technologies. The broadband bill approved by the committee was an amended version
of a broadband data collection measure previously introduced by Committee Chairman Daniel Inouye (D-HI). The amendment was
intended to address concerns raised by telecommunications companies by allowing the FCC the option of collecting broadband
subscription data based upon five-digit or nine-digit zip codes or census tract information, rather than requiring the use
of nine-digit zip codes. The amended broadband bill is similar to a draft bill proposed by House Telecommunications Subcommittee
Chairman Ed Markey (D-MA). Sen. Markey’s draft bill, however, would ask the FCC to identify tiers of transmission speeds
that would include all speeds currently deployed and account for different applications and services. The draft bill also
would require the FCC to protect proprietary information submitted by service providers.
The Senate committee-approved number porting bill requires the FCC to establish porting deadlines for different types of telephone
service. It also establishes requirements for data exchange between service providers and requires annual reports from providers
for the first five years. Telephone industry representatives have supported the measure in order to expedite the number porting
process.
The indecency bill approved by the Senate Commerce Committee authorizes the FCC to fine broadcast stations for airing expletives
and indecent material even if the material is shown only fleetingly. Broadcasters oppose the bill, and the American Civil
Liberties Union noted that the bill would invite litigation by reversing a recent appellate court decision rejecting the FCC
policy of fining TV stations for broadcasting fleeting expletives. The Senate Appropriations Committee considered, but rejected
on a voice vote a similar measure by Sen. Sam Brownback (R-KS). Sen. Inouye opposed that measure on the procedural ground
that the Appropriations Committee was not the proper forum to debate the issue.
The Senate Commerce Committee also approved a bill directing the FCC to examine parental control blocking technologies and
consider applying them to various platforms including wireline, wireless, and the Internet. The bill would ask the FCC to
focus on technologies that would filter language based upon information in closed captioning and that would work independently
of ratings assigned by programming providers.
Meanwhile, Sen. Frank Lautenberg (D-NJ) sponsored a bipartisan bill barring states from imposing regulations that would prevent
municipalities from providing broadband services. The bill also would require municipalities providing high-speed Internet
services to comply with federal telecommunications regulations. Reps. Rick Boucher (D-VA) and Fred Upton (R-MI) introduced
a similar measure. The House bill, however, includes measures to ensure that municipalities cannot discriminate against private
competitors and requires public disclosure of information so that prospective broadband projects can be evaluated by the public.
Wireline Competition Bureau Suspends and Investigates Switched Access Tariffs of 41 Rural Carriers and Prohibits Call Blocking
Arising from “Traffic Pumping” Dispute
On June 28, the Wireline Competition Bureau (“Bureau”) released two orders in connection with the growing “traffic pumping”
dispute involving rural incumbent local exchange carriers (“RLECs”) accused of manipulating terminating interstate traffic
in order to inflate their terminating access revenues. The Bureau released an Order suspending for one day and setting for
investigation the switched access rates in the 2007 annual access tariffs of 41 RLECs that raised “access stimulation” issues.
Carriers challenging the RLECs’ tariffs contended that RLECs exiting the National Exchange Carrier Association (“NECA”) traffic-sensitive
pool in recent years had engaged in access traffic stimulation practices. For example, such RLECs had entered into agreements
with third parties to establish businesses such as conference call services that result in increased terminating interstate
traffic. Those practices inflated their terminating interstate traffic to levels far exceeding the level of historical demand
assumed in setting individual terminating access rates, enabling them to earn excessive terminating access revenue.
Carriers challenging the RLEC tariffs alleged that some of the RLECs leaving the NECA traffic-sensitive pool this year had
engaged in these “traffic-pumping” practices in the past and that many of the RLECs leaving the NECA pool this year could
be expected to do so again. They alleged that, because RLECs establishing individual rates based on historical demand know
that historical data is not a reliable proxy for future demand that will be artificially stimulated, the RLECs will earn excessive
returns if their switched access rates are not investigated.
The Bureau concluded that the switched access tariffs of the RLECs exiting the NECA traffic-sensitive pool “raise questions
of whether rates would remain just and reasonable in the face of access stimulation.” Because these carriers have set relatively
high access rates based on projected low demand, access stimulation activities could generate increased revenues “that likely
would result in rates that are unjust and unreasonable,” but that are protected by the “deemed lawful” presumption in Section
204(a)(3) of the Communications Act (“the Act”) governing access tariffs that are not suspended. Accordingly, the Bureau
suspended for one day and set for investigation the switched access rates in the 2007 annual access tariffs of 39 RLECs exiting
the NECA pool and two additional RLEC tariffs raising related issues.
The Bureau also released a Declaratory Ruling reiterating the FCC’s prohibition of unreasonable call blocking and including
within the scope of the prohibition the blocking of interexchange calls to be terminated by the RLECs assessing the disputed
access charges. The Bureau noted that RLECs and their customers had complained of blocking or potential blocking of interexchange
calls terminating with RLECs as a form of self-help to resolve the recent access charge disputes. “Because the ubiquity and
reliability of the nation’s telecommunications network is of paramount importance to the explicit goals of the Communications
Act,” the Bureau clarified that long distance carriers and wireless service providers may not block their customers’ interexchange
calls to numbers served by RLECs allegedly imposing excessive terminating switched access charges. The Bureau stated that
carriers should use appropriate procedures to challenge allegedly excessive access charges “and may not engage in self-help
actions such as call blocking.” The Bureau pointed out that it has found that, except in very unusual circumstances, call
blocking is an unjust and unreasonable practice under Section 201(b) of the Act and cautioned that its initiation of an investigation
of RLEC switched access rates is not a basis for questioning the legitimacy of calls to numbers served by those RLECs. The
Bureau also noted that complaints raising similar issues have been filed at the FCC and in federal court, which presumably
will continue to be litigated.
On August 24, the Bureau’s Pricing Policy Division (“Division”) released an Order Designating Issues for Investigation regarding
the suspended RLEC switched access rates. The designated issues include: whether the RLECs have included in their revenue
requirements any amounts they have paid to third parties engaged in access stimulation activities and, if so, the amounts
and justifications for such inclusion; whether the filed switched access rates will remain just and reasonable if demand increases
dramatically, taking into account any increases in costs resulting from increased demand; whether the switched access tariffs
under investigation should contain language requiring refiling if demand increases a specified amount to ensure that the FCC
is able to remedy rates that become excessive; and whether the FCC should forbear from enforcing the “deemed lawful” provision
in Section 204(a)(3) for such mid-course tariff filings. The Division also excused all but one of the RLECs from responding
to these issues if they agree to include tariff language committing them to file revised tariffs if demand doubles over the
previous year or if they join the NECA traffic-sensitive tariff. RLECs must file their direct cases by September 20, parties
must respond to those direct cases by October 5, and the RLECs may file rebuttals by October 12.
The FCC’s tariff and call blocking orders may not resolve all traffic pumping issues. AT&T and Qwest complained in ex parte
letters filed on July 30 and August 15, respectively, that targeting RLECs will not solve the traffic pumping problem unless
the FCC also takes action to prevent competitive local exchange carrier (“CLEC”) traffic pumping. Because CLECs are not subject
to tariff regulation, AT&T noted that, as carriers and the FCC have begun to take action to address RLEC traffic pumping,
“free” calling services have been moving their operations from RLEC numbers to numbers controlled by CLECs operating in rural
areas. Those CLECs typically assess access charges at the same high levels as the RLECs operating in the same areas. AT&T
requested that the FCC declare that traffic pumping kickback arrangements, in which CLECs share access revenues with free
calling services, are unlawful. Qwest proposed other techniques for controlling CLEC traffic pumping, such as declaring that
calls to a free calling service entering into a revenue sharing arrangement with a CLEC do not constitute terminating access
traffic, precluding the CLEC from assessing terminating access charges on such calls, or limits on the growth of terminating
access traffic to a given local exchange carrier (“LEC”).
On August 15, six RLECs and CLECs filed an ex parte letter complaining that larger carriers are wrongfully withholding access
payments owed to them. Pointing out that no regulatory body has recognized the term “traffic pumping,” they argued that there
is nothing wrong with LECs finding ways to increase traffic, such as AT&T Mobility arranging with “American Idol” to provide
the service that allows viewers to vote for their favorite finalist by text message or cell phone call. The LECs argued that
the FCC has repeatedly upheld the legality of the type of revenue sharing arrangements that AT&T now challenges as illegal
“kickbacks” and requested that the FCC stop AT&T’s and other large carriers’ self-help by issuing a Declaratory Ruling that
the withholding of payment of access charges, while refusing to file a complaint at the FCC, constitutes a violation of Sections
201(b) and 203(c) of the Act and that the FCC will not accept referrals from federal courts on the reasonableness of access
charges in lawfully-filed, effective tariffs.
New 700 MHz Band and Automatic Roaming Rules Apply to the Wireless Industry
Several significant developments have occurred that will have considerable impact on the wireless industry since the last
edition of the Bulletin. Specifically, the FCC released an order modifying the rules for the 700 MHz band, scheduled the
auction for January 16, 2008, and is seeking comment on the procedures to use in the auction. In addition, the FCC released
an order mandating automatic wireless roaming service for voice and certain data services.
700 MHz Band – New Rules Adopted and Auction Scheduled
The FCC released its long awaited order modifying the service rules for the 700 MHz band (“700 MHz Band Order”). The massive
order (around 350 pages in all) revises the existing 700 MHz band plan and service rules to facilitate the creation of a national
broadband network for public safety communications as well as promote competition and the development of innovative commercial
wireless services.
- Public Safety Allocation. The FCC modified the public safety portion of the 700 MHz band plan to group narrowband operations in 12 MHz of the upper
portion of the band while aggregating 10 MHz of public safety spectrum in the lower portion of the band for broadband operations.
The broadband and narrowband operations will be separated by two 1 MHz guardbands.
The broadband allocation will be licensed to a single non-commercial entity that will represent the interests of the public
safety community (“Public Safety Broadband Licensee”). The Public Safety Broadband Licensee will partner with the commercial
700 MHz D Block licensee and together they will develop a shared, nationwide interoperable broadband network for commercial
and public safety users. The D Block licensee will be responsible for constructing the network, subject to stringent build-out
requirements. The Public Safety Broadband Licensee will have priority access to the 10 MHz D Block network in times of emergency
while the D Block licensee will have preemptable access to the public safety portion of the network.
- Commercial Allocation. The FCC divided 62 MHz of commercial 700 MHz band spectrum into five spectrum blocks. These blocks will be auctioned in
a variety of geographic area-sized licenses, including Cellular Market Areas (“CMAs”), Economic Areas (“EAs”), and Regional
Economic Area Groupings (“REAGs”).
To promote deployment of service, the FCC adopted rigorous build out requirements. Specifically, for CMA and EA licenses,
carriers must provide service sufficient to cover at least 35 percent of the geographic area of their license within four
years, and 70 percent of this area by the end of the license term. For REAG licenses, carriers must provide service sufficient
to cover at least 40% of the population of their license area within four years, and 75%of the population of the license area
by the end of the license term. Failure to meet the four year benchmark will result in the reduction of the license term
from ten to eight years. Failure to meet the end-of-term benchmark will result in the FCC reclaiming the unserved portions
of the license area and making them available to other potential users.
Some of the more controversial provisions in the new rules relate to the 22 MHz C Block license. Specifically, the FCC mandated
that the licensee comply with certain open access requirements such that the C Block network is open to all devices and applications,
subject to certain network management conditions that allow the licensee to protect its network from harm. In addition, the
FCC concluded that the C Block licenses would be auctioned using “package bidding” so that bidders can more easily create
a nationwide spectrum footprint.
In addition, the FCC will set a reserve price for each 700 MHz block that is auctioned. If those reserve amounts are not
met, the licenses will be re-auctioned under more lenient service rules.
The ultimate impact of the 700 MHz Band Order continues to be debated by Congress, industry groups, public safety entities,
consumer groups, and others. Although few groups appear completely satisfied with the FCC’s new rules, participation in the
700 MHz Band auction will likely be high. In addition to a wide range of wireless companies, several non-traditional wireless
companies have expressed great interest in participating in the auction.
Shortly after the release of the 700 MHz Band Order, the Wireless Telecommunications Bureau released a public notice scheduling
the 700 MHz auction (Auction No. 73) to begin on January 16, 2008 and seeking comment on auction procedures. The FCC statutorily
is required to start the auction no later than January 28, 2008. Among other things, the public notice seeks comment on using
anonymous bidding (i.e., any information that may reveal the bidders’ identities would not be released until bidding concludes), package bidding
for the C Block license (the Bureau proposes making certain predetermined packages available), and the reserve prices for
each block. Comments are due August 31, 2007, reply comments must be filed by September 7, 2007, respectively.
New Automatic Roaming Rules
The FCC released in August an order (“Roaming Order”) establishing an automatic roaming requirement on commercial mobile radio
service (“CMRS”) providers and a further notice of proposed rulemaking (“Further Notice”) seeking comment on further extending
the automatic roaming requirement. In addition, the FCC maintained manual roaming obligations. Although the FCC declined
to regulate roaming rates or require carriers to file roaming agreements, certain aspects of the new automatic roaming obligation
could raise concerns for carriers.
The FCC confirmed in the Roaming Order that roaming (automatic and manual) is a common carrier service governed by Title II
of the Communications Act. Under the new rules, upon reasonable request, each “host carrier” (i.e., the carrier being roamed on) has a duty to provide automatic roaming to any technologically-compatible “home carrier” (i.e., the requesting carrier with the contractual relationship with the customer), outside of the requesting carrier’s “home market”
on reasonable and nondiscriminatory terms and conditions. However, this automatic roaming obligation is subject to a “home
market exclusion.” In other words, a host carrier is not obligated to provide automatic roaming in a requesting carrier’s
“home market” (i.e., in any geographic area where a requesting carrier has a wireless license or spectrum usage rights that
could be used to provide CMRS). This exclusion applies whether or not the requesting carrier actually is providing any service
in the overlapping areas. According to the FCC, the home market exclusion is intended to encourage CMRS carriers to construct
networks and deploy services in areas where they have access to spectrum, although the FCC also encouraged CMRS providers
“to negotiate desired terms and conditions of automatic roaming agreements, including automatic roaming in overlapping geographic
markets.” The home market exclusion seems to preclude application of the automatic roaming rule even in markets where carriers
may have recently obtained new spectrum in the Advanced Wireless Service auction.
The services that are covered by the new automatic roaming rule include real-time, two-way switched voice or data services
that are interconnected with the public switched telephone network (“PSTN”) that use an in-network switching facility allowing
frequency reuse and seamless handoffs of calls.Specific covered services (besides conventional voice) are push-to-talk and
text messaging services. The automatic roaming obligation does not apply to non-interconnected services, enhanced data services
(e.g., EVDO) or information services generally. However, the FCC requests comment in the Further Notice regarding whether to extend
automatic roaming obligations to non-interconnected services and features, information services including wireless broadband,
and other non-CMRS services offered by CMRS carriers. The Further Notice also asks about technical and capacity issues associated
with such an obligation, the policy implications for innovation and network deployment, and the FCC’s jurisdiction to impose
such obligations. Comments and replies in response to the Further Notice are due 60 and 90 days, respectively, after Federal
Register publication.
FCC Sets Annual Regulatory Fee Deadline and Orders Interconnected Voice Over Internet Protocol (“VoIP”) Providers to Contribute
In early August, the FCC released its order on 2007 annual regulatory fees, which are due no later than September 19, 2007
(except for new VoIP payees as noted below).
Of most interest this year, the FCC (as it had proposed) decided to impose regulatory fees on interconnected VoIP providers.
Although most commenters favored a numbers-based or subscriber-based approach, the FCC instead adopted a revenue-based approach.
Specifically, the FCC decided that interconnected VoIP providers should pay regulatory fees based upon their interstate and
international revenues (as reported on the Form 499-A) at the same rate as set forth for interstate telecommunications service
providers (“ITSPs”). Because the FCC must provide Congress with 90 days’ notice of the addition of this category to regulatory
fees, interconnected VoIP providers will pay their fees this year during a separate filing window to be determined later (probably
in late 2007 or early 2008). Then in 2008, interconnected VoIP providers will pay during the normal September window along
with all other payees.
With respect to international bearer circuit (“IBC”) regulatory fees, the FCC (as expected) deferred the issue of real reform
to the separate pending rulemaking proceeding on this issue. Commissioners Copps and Adelstein, however, issued separate
statements stating that they wished the Commission had taken on more comprehensive reform in this proceeding rather than deferring
the issue yet again. The silver lining is that the IBC regulatory fee was reduced from last year, and was even lower than
the fee initially proposed for this year.
Finally, the FCC issued a further notice of proposed rulemaking on the regulatory fees applicable to broadband radio service
(“BRS”).
FCC Revises EAS Rules and Gives Broadcasters and Minority Groups Additional Time to Compromise on How to Alert Non-English
Speakers
The FCC, pursuant to the President’s Public Alert and Warning System Executive Order, adopted in July an order (“Order”) modifying
its Emergency Alert System (“EAS”) rules to increase the “reliability, security and efficacy” of the EAS network in the United
States. The new rules, which facilitate the dissemination of emergency communications through multiple communications platforms
and formats, will help ensure that citizens receive critical public safety and other information in emergency situations.
The FCC also released a further notice of proposed rulemaking (“Further Notice”), hoping that additional time will prompt
broadcasters and minority groups to compromise on how to provide such information to non-English speakers.
The new rules adopted in the Order are meant to “ensure the efficient, rapid, and secure transmission of EAS alerts in a variety
of formats (including text, audio, and video) and via different means (broadcast, cable, satellite, and other networks).”
Specifically, the FCC extended its EAS requirements, which already apply to a variety of television, radio and cable systems,
to wireline common carriers that provide video programming. Those required to participate in EAS must be able to accept emergency
messages using a common protocol, and subject to certain conditions transmit state and local EAS alerts, within 180 days after
the Federal Emergency Management Administration (“FEMA”) publishes its system standards. In addition, EAS participants must
adopt “next generation” EAS delivery systems within 180 days after FEMA releases standards for those systems.
Rather than acting on a pending petition by the Minority Media & Telecom Council regarding alerting non-English speakers of
emergencies through the EAS network, the FCC requested additional comment on the issue. The Further Notice specifically seeks
information on the best way to disseminate information to those whose primary language is not English, including whether certain
localities should be targeted, in what languages the emergency information should be transmitted, who is responsible (broadcasters
or government authorities) for translating the emergency messages, and other technical, economic, practice, and legal issues.
The Further Notice also seeks comment on making emergency information accessible to persons with disabilities, whether local
government authorities should be allowed to initiate emergency alerts, and how the FCC can best monitor EAS operations. Comments
and replies in response to the Further Notice are due 30 and 45 days, respectively, after the Further Notice is published
in the Federal Register.
Courts Find Unilateral Changes to Web-Based Terms and Conditions and Prohibitions on Class Action Lawsuits by Consumers Unconscionable
In a number of recent cases brought by consumers against telecommunications carriers and web-based retailers, courts have
refused to enforce the mandatory arbitration provisions of the contracts when they include a waiver of a consumer’s right
to bring a class action claim. While these recent cases are precedential only in 9th Circuit states and rely on the court’s
interpretation of state law, they will likely impact any contract with consumers in other states that have expressed a policy
against class action waivers, regardless of the location of the retailer or carrier or the choice of law provisions in the
contract.
The most important of these cases is Douglas v. United States District Court for the Central District of California, where the 9th Circuit granted a consumer’s writ of mandamus challenging the lower court’s ruling to compel arbitration in
a dispute between plaintiff Douglas and long-distance provider Talk America. Douglas addressed the plaintiff’s allegation that Talk America had changed the terms and conditions of his service contract by modifying
its website without notifying him of the change. One of Talk America’s unilateral modifications was the addition of a mandatory
arbitration clause and a class action waiver. The lower court had granted Talk America’s motion to compel arbitration based
on the modified contract and Douglas challenged that decision by filing a writ of mandamus with the 9th Circuit (the writ
was required because the Federal Arbitration Act does not permit interlocutory appeals of district court opinions compelling
arbitration). The 9th Circuit called the lower court decision enforcing the mandatory arbitration provision a fundamental
misapplication of contract law and held that the plaintiff could not be bound by the terms of the revised contract when he
was not notified of the changes. The court distinguished this case from others where unilateral changes to terms and conditions
posted on a website were found to be enforceable because in those cases the consumers had received separate notice of the
modified contract by mail or involved new customers who were required to assent to specific contract terms as a condition
of receiving service.
In addition, the Douglas court ruled that even if the added mandatory arbitration provision was enforceable, the lower court had further erred by
failing to find that the modified terms, in particular the class action waiver, probably would not have been enforceable in
California because it conflicted with California’s fundamental policy as to unconscionable contracts. The validity of an
arbitration agreement must be determined using state law principles governing the formation of contracts, and contract choice-of-law
provision is not determinative for purposes of this analysis. While the Talk America contract stated that New York law governed,
under California’s choice-of-law rules a court may not enforce the choice-of-law provision if New York law is contrary to
a fundamental policy entrenched in California substantive law and if California has a “materially greater interest” than New
York in the determination of the issue. Analyzing each state’s law, the 9th Circuit found that under California law, a contract
can be procedurally unconscionable if a service provider has overwhelming bargaining power and presents a “take-it-or-leave-it”
contract to a customer, even if the customer has meaningful choices as to other service providers. Under New York law, the
modified contract would have been enforceable because the customer had meaningful alternative choices for telephone service,
therefore foreclosing any procedural unconscionability claim. Therefore, finding New York law to be fundamentally at odds
with California’s on this point and California’s interest in protecting its consumers more compelling that New York’s interest
in the litigation (in part because Talk America is a Pennsylvania corporation), the 9th Circuit determined that California
law applied, and under well-settled California law (as set forth in the 2005 California Supreme Court decision in Discover Bank v. Superior Court of Los Angeles), a class action waiver may be substantively unconscionable.
Douglas is an important case because, as the court itself noted, “[t]his the first time any federal court of appeals has considered
whether to enforce a modified contract with a customer where the customer claims that the only notice of the changed terms
consisted of posting the revised contract on the provider’s website.” It also highlights a number of significant differences
between New York and California law with respect to the enforceability of terms commonly included in contracts for telecommunications
services and online retailing.
Douglas has quickly become important precedent even though Talk America has petitioned for en banc rehearing. Within a month of its issuance, the 9th Circuit held, in Shroyer v. New Cingular Wireless Services, Inc., that neither the existence of marketplace alternatives nor the payment of the fees and costs of arbitration will make an
otherwise unconscionable class action waiver enforceable. As was the case in Douglas, the Shroyer court found that Cingular’s “take-it-or-leave–it” contract was a procedurally unconscionable contract of adhesion even though
the consumer had meaningful alternative service choices. In Shroyer, the plaintiffs challenged Cingular’s practice of requiring its customers to consent to terms of service that included a
required renewal of their contracts for a term period, in order to obtain a remedy for service quality problems allegedly
caused by Cingular’s merger with AT&T. In another recent case, Oestreicher v. Alienware Corp., the U.S. District Court for the Northern District of California found a mandatory arbitration clause in a web-based click-through
agreement to purchase a computer to be unenforceable when it included a class action waiver. Both of these cases turned on
California law. Although Alienware was based in Miami, Florida, the Northern District found California’s interest to outweigh
that of Florida’s and found the arbitration provision unconscionable with respect to the class action waiver. Similarly,
in Brazil v. Dell, the U.S. District Court for the Northern District of California found a class action waiver caused an arbitration clause
to be unconscionable even when the consumer had clear notice of the terms before purchasing the goods.
In addition to California, Washington state law also precludes class action waivers in consumer agreements. In July, the
Washington Supreme Court found the class action waiver in Cingular Wireless’s contracts to be unenforceable under the state’s
Consumer Protection Act. As the California Supreme Court had found in Discover Bank, the Washington court found that a class action waiver would protect Cingular from liability for small claims and prevent
consumers from pursuing valid claims.
Third Circuit Finally Resolves Core v. Verizon
In recent Bulletins we have reported on the decision of the U.S. Court of Appeals for the 3rd Circuit’s in Core Communications, Inc. v Verizon Pennsylvania, Inc., where the court held that disputes regarding interconnection agreements must be taken to the public utility commission that
approved the agreement before complainants may resort to the federal courts. On June 15, the 3rd Circuit vacated its opinion
due to the recusal of one of the judges on the original panel and announced that it would rehear the case at a future date.
On July 18, the court’s reconstituted panel issued its revised decision in which it reached the same conclusion as the earlier
panel, based on the same reasoning. Again, concluding that Chevron deference to the FCC’s decision requiring parties to first exhaust their remedies with the state public utilities commissions
was appropriate, the court found that “… the most sensible harmonization of the Act’s structure and the FCC’s declarations
is a solution under which the bodies that are responsible for overseeing the formation of interconnections agreements [the
state public utility commissions] are given the first crack at interpreting and enforcing them.”
State Regulatory and Legislative Activity
Many state legislatures have wrapped up their 2007 sessions or have recessed for the summer months, and state regulatory commissions
typically slow down in July and August. Despite this summertime break, a number of issues have not taken a holiday and continue
to be in the headlines. These include VoIP related legislation and consumer protection bills, which continue to advance in
a number of jurisdictions.
In New York, Governor Spitzer has signed SB-4611 requiring all interconnected VoIP providers to notify their customers of
any material limitations associated with basic or enhanced 911 services. The notifications must be provided before commencement
of service and periodically thereafter, and in all marketing materials in television, radio, print media, and online materials.
VoIP providers must obtain express acknowledgement of the limitations from their customers and, where service limitations
exist, must provide their customers with warning stickers to place on their telephones. Additional notification regarding
the need to reinitialize service must be provided to nomadic VoIP consumers. The bill will take effect 120 days after July
18, the day it was signed. On the same day, Governor Spitzer also signed HB-3397 to reduce the costs of collect calls made
by inmates from state prisons. The bill codifies an earlier change incorporated into the 2007-08 state budget that eliminated
the 57.5% commission paid by MCI, the current inmate pay phone service provider, to the state Department of Correctional Services.
The new law prohibits the state from charging a commission on inmate payphone calls in the future and requires that any contract
for this service awarded after April 2008 be awarded to the lowest bidder.
In late June, the New York Assembly and Senate each passed and sent to the other similar wireless consumer protection bills.
SB-6176 requires the wireless carrier or the authorized retailer to provide a new customer or a customer that has agreed to
a change in service that results in an extension of its contract, with written confirmation of the service or service change
and other specific information. It also requires all charges for wireless services to be distinguished from taxes, surcharges,
and other imposed surcharges, and prohibits carriers from labeling cost recovery fees or charges as taxes. Carriers also
must provide the Consumer Protection Board with information for the board to publish an informational guide for the purchase
of wireless services, as required by the bill. The comparable Assembly bill, AB-2030, would give the Consumer Protection
Board authority to regulate wireless services with respect to consumer protection issues and administer a consumer complaint
resolution process. It would also provide consumers with a right to cancel service without termination fees within fifteen
days after the first invoice for service is issued, require carriers to disclose detailed service coverage information, and
require detailed disclosure of all monthly fees, taxes, surcharges, and other charges for using the service, information about
911 service, estimates of anticipated monthly bills, and a description of the complaint process available at the Consumer
Protection Board.
Other year round legislatures are considering VoIP bills. In Pennsylvania, SB-1000 would prohibit any state commission or
department from regulating the rates, terms, and conditions of any VoIP or IP-enabled service. The bill will not affect VoIP
providers’ obligations under state consumer protection laws, the applicability of cable franchise laws, or mandate or prohibit
any 911 or other regulatory fees, switched access charges, or intercarrier compensation that may be deemed to apply. The
bill was sent to the Senate Communications and Technology Committee on August 9; the Pennsylvania legislature is in recess
until September 17. Both houses of the New Jersey legislature have passed and sent to the other VoIP preemption bills. Both
bills, HB-4339 and SB-2777, if ultimately passed and sent to the governor, will prohibit the Board of Public Utilities or
any other state agency from regulating VoIP or any other IP-enabled telephone service except for 911 fees, telecommunications
relay service fees, universal service fees, and intercarrier compensation.
State public utility commissions also continue to relax the regulations they impose on competitive carriers. The Pennsylvania
Public Utilities Commission recently eliminated the requirement that long distance carriers file tariffs or price lists, instead
requiring them to post their rates at their business offices and online at their websites. Consumer complaints about inadequate
notice of price changes will be handled by the state Attorney General, not the PUC. The new rules will take effect upon approval
by the Pennsylvania Attorney General and the Independent Regulatory Review Commission. The Texas Public Utility Commission
is considering whether to eliminate all review of competitive carriers’ mergers and acquisitions, as requested by Level 3.
Commission staff has opposed Level 3’s request.
The California Public Utilities Commission also continues to reduce its oversight of telecommunications utilities. Its most
recent proposal is to eliminate the tariff filing requirements for all incumbent carrier services except basic exchange, resold
services, and other limited exceptions. The Commission is authorized by existing state statute to establish rules for detariffing
if it finds that a carrier lacks significant market power for the services it seeks to detariff. The draft decision containing
the proposal was circulated for comment on July 23 and is scheduled to be considered at the Commission’s September 6 public
agenda meeting. At its August 23 meeting, the Commission voted to extend for an additional three years its two-year pilot
program of streamlined review of uncontroversial small-scale (under $5 million and requiring no environment review) asset
transfers by all utilities. Under the pilot program, qualifying mergers, acquisitions, and other transfers may be approved
using the less formal advice letter process rather than the more time-consuming formal application. A number of parties sought
to make the pilot program permanent, but the Commission determined that two years was not sufficient time to evaluate the
program.
Federal Court Rules that Arizona May Not Include Unbundling Requirements in Interconnection Agreements
In late July, the U.S. District Court for Phoenix ruled that the Arizona Corporation Commission may not include Section 271
unbundling requirements in an interconnection agreement between Qwest and Covad. In a February 2006 decision challenged by
Qwest, the ACC had concluded that it was authorized by state law and Section 252(e) to require Qwest to meet Section 271 unbundling
obligations. Finding in favor of Qwest, the court held that the ACC’s authority under Section 252 does not extend to Section 271
unbundling. While the ACC can advise the Federal Communications Commission on Section 271 bundling issues, its ability to
mandate unbundling is limited to that which is authorized by Section 251. Also, since the ACC may not mandate the unbundling
of Section 271 network elements, it also is precluded from setting rates for those elements.
Private Equity Update
Over the last several months, private equity has demonstrated an increasing appetite for media and telecom transactions.
Examples include the acquisition of Clear Channel Communications Inc. by Thomas Lee Partners LP and Bain Capital LLC, the
sale of Alltel Corp. to TPG Capital and GS Capital Partners, and the purchase of Intelsat Holdings Ltd. by a consortium of
firms led by BC Partners. These deals were reported in the November 2006, May 2007, and June 2007 editions, respectively,
of the Communications Law Bulletin. On June 30th, the Canadian telecommunications operator BCE Inc. agreed to be acquired
by the investment arm of Ontario Teachers’ Pension Plan, Providence Equity Partners Inc., and Madison Dearborn Partners for
a total value, including debt, of $48.5 billion, the largest private equity buyout package in Canadian corporate history.
This trend has not gone unnoticed by members of the U.S. Congress. In July, House Commerce Committee Chairman John Dingell
(D-MI.) and Telecommunications and the Internet Subcommittee Chairman Edward Markey (D-MA) sent a letter to FCC Chairman Kevin
Martin requesting that he investigate the policy implications of the growing trend of private equity ownership of communications-related
entities. The letter noted that, as a generalization, the history of private equity ownership suggests (i) a financial management
style focused on cutting costs, increasing revenues, and an ultimately reselling the enterprise, (ii) a management structure
that is not overly transparent, and (iii) fluid asset management where actual holdings and control may vary. These characteristics
may run contrary to the historic role of FCC licensees as trustees of the public’s airways, may not be consistent with many
of the core public interest and localism values, and may implicitly undermine the FCC’s media ownership rules. On the other
hand, the letter noted that some supporters of private equity argue that, by taking entities private, the businesses are
better insulated from financial market pressures.
Despite Congressional concern, the marketplace might be decelerating, at least for now, the trend of private equity’s growing
influence in the communications sector. Across all industries, the volatility in the debt markets has slowed private equity
investments. Overall, billions of dollars in funding has been pulled since late June 2007 as investment banks balk at providing
financing for deals, and the communications industry has not been spared. The auction of Virgin Media Inc., the United Kingdom
cable operator listed on Nasdaq, has been delayed and deals involving Insight Communications Co., Nexstar Broadcasting Group
Inc., and Clear Channel Communications Inc. have all been impacted by the squeeze on debt financing.
FCC Releases NPRM Promoting Adoption of Two-Way CableCARD Standard and Grants Waivers of Its Set-Top Box Security Integration
Ban
On June 29, the FCC released a notice of proposed rulemaking (“NPRM”) seeking comments on proposed standards to ensure two-way
plug-and-play capability in consumer cable devices. The NPRM is part of a larger effort to promote competition in the market
for set-top navigation boxes by requiring multichannel video programming distributors (“MVPDs”) to offer security measures
in a modular form like the CableCARD that can be used with independently manufactured devices. CableCARD-ready devices sold
in retail stores currently are unable to access the two-way features available on many cable systems, such as on-screen programming
guides, video-on-demand, and interactive television. The cable and consumer electronics industries, long-time rivals, have
submitted different proposals and the Commission seeks comment on both of them. The Commission also is considering applying
two-way capability standards to equipment for services other than cable television, such as satellite, IPTV, and pay-TV services
offered by Bell Companies.
Meanwhile, in late June, the FCC granted several requests for waiver of its rule prohibiting the sale or lease of new set-top
boxes with integrated security features. Waivers were granted for some smaller cable operators facing difficulties in complying
by the Commission’s deadline, and a blanket waiver was issued to MVPDs planning to switch to all-digital programming by February
17, 2009.
FTC Urges Caution on Net Neutrality as Battle Shifts Focus
At the end of June, the Federal Trade Commission (“FTC”) released its report resulting from the two-day workshop it held in
February 2007 on broadband access regulation (a/k/a network neutrality or “net neutrality”). In short, the report concluded
that the U.S. does not need net neutrality regulation, and that lawmakers and agencies should proceed with great caution because
the effect of any such regulation on consumers is unclear. The FTC stated that it was unaware of any market failure or consumer
harm, and that it has other tools at its disposal to address broadband access issues and any possible consumer harms. The
FTC also announced its intention to hold a series of “town hall” meetings in November to explore net neutrality and related
issues.
Following this report, the primary battle over net neutrality shifted focus to the upcoming 700 MHz auction and the “open
access” rules being urged by some in that rulemaking. The FCC ultimately did adopt a requirement that the winners of the
largest 700 MHz spectrum block permit any and all devices and applications to run on their networks (see “New 700 MHz Band and Automatic Roaming Rules Apply to the Wireless Industry,” this issue).
FCC Reminds Licensees of Bankruptcy Requirements
In a letter to Northwest Airlines, the FCC recently reiterated its role in bankruptcy reorganizations. Specifically, the
Northwest reorganization plan stated that the bankruptcy court’s approval was the only required governmental consent or approval
needed. Nonetheless, Northwest in fact did apply for FCC approval for the assignment of the licenses from the debtor-in-possession
to the newly reorganized entity. The FCC granted the requested approval, but cautioned licensees that bankruptcy plans must
expressly recognize that any proposed transfer or assignment of licenses requires FCC regulatory approval in addition to court
approval.
AT&T’s IPTV Offering Is a Cable Service; Video Franchising Reform Continues to Make Progress in Several States
In late July, a federal court in Connecticut ruled that AT&T’s U-verse Internet Protocol Television (“IPTV”) product is a
cable service, meaning AT&T will need to seek a state franchise to sell its service in the state. The court reasoned that
two-way transmission of data between customers’ set-top boxes and the network causes U-Verse to fall within the definition
of cable service set forth in 1984 Cable Act. Prior to the court’s ruling, the Connecticut Department of Public Utility Control
allowed AT&T to offer IPTV services free from franchising requirements. One week later, AT&T filed a petition seeking reconsideration
of the federal district court’s ruling. AT&T’s efforts to find relief in court may be thwarted by pending state legislation;
Connecticut’s governor recently signed a law shifting video franchising from municipalities to the public utility commission
and extending the franchise requirement to IPTV and all other landline delivery technologies effective October 1.
At the federal level, the FCC’s March 5, 2007 order streamlining video franchising is being challenged in federal court by
various cities and municipalities, who argue the Commission’s action usurps local oversight of pay-TV providers. The U.S.
Circuit Court of Appeals in Cincinnati announced an expedited schedule for oral arguments, which likely will be held before
the end of the year.
Meanwhile, efforts to transfer video franchising authority to the state level continue to make progress in many states. California,
Florida, Georgia, Indiana, Iowa, Kansas, Michigan, Missouri, Nevada, New Jersey, North Carolina, South Carolina, Texas, and
Virginia all have passed video franchise reform bills. Recently joining this group is Ohio, which in late June passed a bill
shifting video franchising from municipalities to the state Commerce Department. In early July, Illinois passed a bill shifting
video franchising from municipalities to the state Commerce Commission. A video franchising reform bill recently was introduced
in the Pennsylvania House.
Summer Broadcast Developments Heat Up
The summer heat in Washington, D.C. usually dictates a slower pace during July and August, but Congress and the FCC forged
ahead on a variety of broadcast issues despite the rising temperatures. Congress tackled DTV transition education funding
and med
