Newsletter

Communications Law Bulletin, July 2006

7/31/2006

In this issue:

 


The Month in Brief

In July, the Federal Communications Commission ("FCC" or "Commission") requested further comment on its proposed media ownership rules and asked a reviewing court to give it another opportunity to consider objections to some of its indecency rulings.  Also in July, one of the court challenges to the government’s covert surveillance activities was dismissed, and a federal judge took a surprisingly hard look at the SBC AT&T and Verizon MCI mergers.

These and other developments are covered in this issue of our Bulletin, along with our usual list of deadlines for your calendar.

FCC Effectively Subjects All Prepaid Calling Card Services to USF and Access Charges 

The FCC recently released an important order ("Order") adopting new rules regarding prepaid calling card services.  Specifically, the FCC found that the broad classes of "menu-driven" and "IP-in-the middle" prepaid calling card services are telecommunications services and concluded that providers of such services must pay intrastate and interstate access charges and contribute to the federal Universal Service Fund ("USF").  The effect of the Order is to ensure that most, if not all, prepaid calling card services will be treated as telecommunications services.  Qwest Communications International Inc. ("Qwest") has appealed the Order to the U.S. Court of Appeals for the D.C. Circuit ("D.C. Circuit"), claiming that the Order is arbitrary and capricious and not in accordance with the law.

Basic prepaid calling card services have long been considered regulated telecommunications services.  In addition, the FCC determined in a 2005 decision, which was just upheld by the D.C. Circuit, that a prepaid calling card service that includes an advertising message also constitutes a telecommunications service.  The Order expands the scope of these determinations in concluding that the following are also telecommunications services:  (1) menu-driven prepaid calling cards (for which users dial a toll-free number and are presented with a menu of options, such as making a telephone call or accessing sports, weather, or other information); and (2) IP-in-the-middle prepaid calling cards (cards that utilize Internet Protocol transport to deliver all or a portion of the call).

With regard to menu-driven prepaid calling cards, the FCC found that these cards are marketed to consumers largely as a transmission service, even though they give users the option to access additional information, and therefore should be treated as a "telecommunications service" under the Communications Act.  According to the FCC, any information service features of the cards are not used simultaneously with the telecommunications service features, and thus they are only minimally linked or bundled together.  With regard to IP-in-the-middle prepaid calling cards, the FCC had concluded in a prior decision that services using IP technology to transport interexchange services and 1+ dialing are telecommunications services.  The Order now concludes that prepaid calling card services using IP transport and toll-free dialing effectively are no different and that "the use of IP transport…does not alone convert that service from a telecommunications service to an information service."  The Order also states that to the extent a service provider develops a prepaid calling card service that does not fall within any of the categories addressed by the FCC and that it believes to constitute an information service, the service provider must seek a declaratory ruling or waiver from the FCC.  Effectively, the default assumption is that all prepaid calling cards are basic telecommunications services. 

The Order concludes that as telecommunications services, menu-driven and IP-in-the-middle prepaid calling card services are subject to interstate USF contribution and interstate and intrastate access charge obligations.  The FCC also adopted a limited exception in which calling cards sold by, to, or pursuant to a contract with the U.S. Department of Defense ("DoD") or a DoD entity are exempt from contributing to USF so that U.S. military personnel can obtain calling cards at reduced prices. 

To ensure that service providers correctly distinguish interstate from intrastate calls for purposes of assessing access charges, the FCC also adopted new reporting and certification requirements.  Prepaid calling card service providers must transmit certain call information and submit quarterly reports to interconnecting carriers so they may accurately determine the location of called and calling parties.  Further, such providers must submit a certification quarterly to the FCC regarding their compliance with the new reporting requirements.

All reporting and certification requirements apply prospectively only.  With respect to payment of access charges and USF, however, the FCC treats menu-driven prepaid calling cards differently from the IP-in-the-middle prepaid calling cards.  According to the FCC, IP-in-the-middle prepaid calling card services will be treated as telecommunications services on a retroactive basis because prior FCC decisions provided ample notice that such services would be considered telecommunications services.  In contrast, it previously was not clear that menu-driven prepaid calling card services might be treated as telecommunications services.  Therefore, providers of such services are subject to regulation (and thus USF and access charge obligations) only prospectively.

 

FCC Releases Multiple Ownership FNPRM

On July 24, the FCC released the much-awaited Further Notice of Proposed Rulemaking on its proposed media ownership rules, which the Third Circuit in Prometheus v. FCC remanded to the Commission after staying its 2002 Biennial Review Order.  The Commission specifically seeks comment on the following FCC Rules: 

  • Local television ownership limit; 
  • Local radio ownership limit; 
  • Newspaper-broadcast cross-ownership ban; 
  • Radio-television cross-ownership limit; 
  • Dual network ban; and 
  • UHF discount on the national television ownership limit.

Specifically addressing the rules remanded in Prometheus, the Commission invites comment on the following issues:

  • Whether the Commission should revise the limits adopted in the 2002 Biennial Review Order on the number of stations that can be commonly owned in one market, or whether there is additional evidence or analysis available now upon which the Commission can rely to further justify the ownership limits that the Commission adopted in 2002; 
  • Whether the Commission should revise the numerical limits it adopted in 2002 or whether there is additional evidence available to further justify them; and 
  • How the Commission should address radio/television and newspaper/broadcast cross-ownership issues.

The Further Notice also seeks comment on the court’s remand of certain proposals relating to minority ownership and minority participation in the current media environment.  In addition, the Further Notice seeks comment on whether, as a result of competition, the rules remanded to the Commission by the Third Circuit, as well as the dual network rule (which was not at issue in Prometheus), are in the public interest.

The Commission has allocated $200,000 to conduct studies on a variety of ownership-related topics and plans to hold six public hearings on the Further Notice in various locations around the country.  Opening comments are due September 22, 2006, and reply comments are due November 21, 2006.

FCC Asks Appeals Court to Remand Indecency Lawsuit

On July 5, 2006, the FCC petitioned the Court of Appeals for the Second Circuit to remand Fox v. FCC, which is the challenge by Fox and CBS to certain FCC indecency rulings released last March.  "The remand," the Commission has said, "would allow the Commission to hear all of the licensees’ arguments, which is necessary for the broadcasters to make these same arguments before the court."  Several parties to the case have complained to the Commission that it failed to provide them with any opportunity to be heard because it did not follow its ordinary practice of seeking a response to a notice of apparent liability before issuing an adverse ruling.

The request covers four programs alleged to be indecent but for which fines were not imposed.  The Commission said that the ABC, CBS and NBC affiliate organizations backed its remand request.  The ABC network supports the FCC’s remand request, but only if the court retains jurisdiction in the case.  The court can remand the case to the FCC (with or without maintaining jurisdiction) or proceed to the merits of the appeals of the FCC’s indecency rulings.  The Fox, CBS and NBC networks and the Fox affiliates have opposed the remand request.

In opposition to the request, Fox argued that the remand request is "a transparent attempt to continue [the FCC’s] practice of shielding its new indecency enforcement regime from judicial review" and that "it is clear that the Commission has no intention of reconsidering its underlying approach."  Fox also argued that if the court decides to remand the case to the Commission, the court should concurrently stay the challenged indecency enforcement regime because "[o]therwise . . . broadcasters will remain subject to a blatantly unconstitutional and illegal regime of censorship that is enforceable with crippling fines."  CBS similarly opposed the remand in a separate brief, arguing that courts "routinely deny such remand motions where they are filed for tactical reasons or to evade review."  CBS also argued that remand is unnecessary because the broadcasters are opposing only the FCC’s policy, not its procedures, and that no facts are in dispute.

On July 19, the Second Circuit approved an FCC request for oral arguments on the FCC’s remand request, which could further delay the Court’s decision on the Commission’s request.  That oral argument is scheduled for August 29.

Verizon Sues D.C.-Area County over Franchise Deal

On June 29, Verizon sued Montgomery County, Maryland, after failed negotiations to sell fiber video service and the county’s demand that Verizon pay taxes on broadband service.  In its complaint filed in U.S. District Court in Greenbelt, Maryland, Verizon asks the court to declare that Montgomery County’s cable franchise process and requirements violate federal communications and antitrust law, as well as the First Amendment to the U.S. Constitution.  Montgomery County possesses broad discretion over franchise awards under county code provisions dating to 1982.  The county’s position is that the code "is in full compliance with federal law and has been tested in the courts."  Verizon asks the court for a preliminary injunction invalidating Montgomery County’s current cable franchising law and directing the county to negotiate a franchise with Verizon on lawful terms within 60 days.

Montgomery County reportedly sought many concessions from Verizon, including dedication of 13 analog or 65 digital channels to public access programming, payment of a 5% tax on broadband revenue and Verizon "support" of 100 Wi-Fi hot spots.  Verizon alleges that the tax, in particular, would violate FCC rules because localities "may not use their franchising authority to impose fees upon telecommunications and information services."  With about 225,550 cable customers, Comcast is the largest subscription television provider in Montgomery County, according to Verizon.  Verizon says that it offers its competing service, called FiOS, to 142,000 homes in the county, or 41% of all households.

Associate General Counsel John Frantz, Verizon’s lead attorney on the case, reports that the complaint is Verizon’s first suit over local franchising.  Verizon, however, has raised similar allegations in the FCC’s franchising proceeding, which has stalled as Congress debates nationwide franchise reform.  Frantz remarked that this case "highlights the need for legislation."  "In the Washington, D.C. metropolitan area, Verizon affiliates have obtained or are obtaining a franchise everywhere they have sought one," the company said.  "Montgomery County’s recalcitrance in preventing Verizon from competing with the incumbent cable operator stands in sharp contrast to the actions of other local governments." 

Montgomery County officials have revealed part of their litigation strategy.  County Chief Administrative Officer Bruce Romer stated that "Verizon has not yet submitted a franchise application to the county, so they are challenging a process which applies to their competitors but which they have not officially entered."  Verizon attorney Frantz is undeterred: "We’re expecting some pretty quick action by the court," he said, adding that "a prelim[inary] injunction motion . . . is acted on very quickly."

Statewide Franchising Advances While FCC Awaits Congressional Action on National Franchising

Reports suggest that the FCC likely will vote on streamlining video franchising if Congress fails to enact nationwide video franchising legislation in 2006.  The Commission has refrained from addressing whether municipalities must approve video franchise applications more quickly while Congress has debated federal legislation.  The FCC is poised to act, however, if Senate Commerce Committee Chairman Stevens’ legislative efforts fail.  The legislation reportedly faces a contentious floor debate and stiff odds of passage.  According to reports, FCC staffers are preparing a draft order for circulation among Commissioners in case the legislation fails.

Meanwhile, state action continues.  A California bill that would transfer franchising authority from localities to the California Public Utilities Commission will advance to the State Senate Appropriations Committee after receiving unanimous approval from the Senate Energy, Utilities & Telecom Committee.  The committee approved the bill after amending it drastically by, for example, designating the Public Utilities Commission as the state franchising authority. The committee’s amendments also would permit incumbent cable providers to opt out of existing municipal franchises when a competitor begins providing service, would protect municipal franchise fee revenue streams, and would require at least 25 percent of households served to be in low-income areas.  Support for local public access channels was not addressed, but municipalities would have authority over video consumer complaints.

Although the bill will be referred to the California Senate Appropriations Committee, the legislature is in recess for its summer break and will not reconvene until mid-August.  If the State Senate approves the bill as amended, the Assembly will need to approve the Senate’s alterations.

On July 11, 2006, the North Carolina legislature approved a bill that would shift authority away from municipalities to the state.  Local franchise agreements would be replaced by regulations under which companies providing pay television service over phone lines or broadband Internet can register with the Secretary of State’s Office.  The state Attorney General’s office will have the task of investigating consumer complaints.  Reports suggest that municipalities’ revenue streams will not be affected.  After a House vote of 115-5 in favor, the bill now goes to Gov. Mike Easley for his signature.

Louisiana Governor Kathleen Blanco vetoed a state video franchising bill that, among other things, would have transferred franchising decisions away from localities to the Secretary of State.  Governor Blanco said she vetoed the bill because it failed to sufficiently protect local government’s revenue streams, could expose the state to liability for right-of-way access decisions and would interfere with existing municipal franchise pacts.  In addition to providing for statewide franchising, the bill would have allowed incumbent cable operators to opt out of existing franchises when a competitor enters the market and would have prohibited local video taxes and assessments other than the 5 percent franchise fee.

The D.C. Circuit Upholds the FCC's Core Forbearance Decision

On June 30 the U.S. Court of Appeals for the District of Columbia upheld the FCC’s 2004 decision denying in part and granting in part Core Communications’ petition to forbear from enforcing the interim rules for reciprocal compensation adopted by the FCC’s 2001 ISP Remand Order.  Both Core Communications and the incumbent local exchange carriers had appealed the Order.  Core had complained that the FCC incorrectly refused to forbear from enforcing all four of the interim rules (the FCC had refused to forbear from enforcing the "rate cap" and the "mirroring" rules but had granted Core’s request to forbear from enforcing the "new markets rule" and the "growth caps"), while the incumbents complained that the FCC had improperly granted Core’s request with respect to the "new markets rule" and the "growth caps." 

The court reviewed the substance of Core’s and the incumbents’ challenges under the deferential "arbitrary and capricious" standard, and denied relief to both parties.  As the court stated, "[t]he question before us is not whether the FCC’s economic conclusions are correct or are the ones that we would reach on our own, but only whether they are reasonable."  As long as the FCC had established a reasonable basis for its decision, the court was not about to second-guess its conclusions.  Finding that neither Core nor the incumbents had sufficiently challenged the basis for the FCC’s decision, the court upheld the order.

Core also challenged the Order on the grounds that the FCC had failed to act on the petition within the statutory time period allowed by Section 160(c) of the Communications Act.  Under that section, a petition for forbearance is deemed granted if the FCC does not deny it within one year of the date the petition was filed (plus a ninety-day extension that the FCC may unilaterally allow itself, which it did in this instance).  The FCC voted on the petition prior to the extended deadline but did not issue its written decision until a week after the deadline had passed; a delay which Core claimed violated Section 160.  The court refused to review this question, however, on the grounds that Core had not raised it before the Commission prior to asking the court to address it.  While it chastised the FCC for waiting until the eleventh hour to vote on the petition and the thirteenth hour to issue its order, the court held that it did not have the authority under Section 405(a) of the Communications Act to review the issue at all.  Under Section 405(a), the court does not have jurisdiction to review arguments that have not first been presented to the FCC – a petition for reconsideration is a condition precedent for judicial review of such a question.  Even though Core had no reason to raise this argument before the Commission, since the issue of the timing of the decision did not exist until after the FCC issued its final order, the court held that Section 405(a) precluded Core from seeking judicial review absent first filing a petition for reconsideration.

Illinois Initiates a Proceeding to Establish Consumer Protection Rules for Certain Wireless Services

Illinois has joined the ranks of those states establishing consumer protection and service quality rules for wireless services.  In late June, the Illinois Commerce Commission ("ICC") initiated a rulemaking to consider subjecting wireless carriers having ETC status (that is, "Eligible Telecomm Carriers" receiving federal Universal Service Support) to wireless-specific consumer protection requirements.  The FCC expressly permits state commissions to impose consumer protection requirements on wireless carriers as a condition of receiving ETC status.  In its report recommending that the ICC initiate such a rulemaking, ICC staff noted that many of the existing consumer protection and service quality regulations that apply to carriers with ETC status are wireline-specific and do not readily translate to wireless carriers.  Any new regulations that the ICC may adopt will apply to the three Illinois wireless carriers that have been designated as ETCs. 

California Public Utilities Commission Poised to Issue Rules Concerning Environmental Review of Construction of Telecommunications Facilities 

Six and a half years after opening a rulemaking to consider how to implement the California Environmental Quality Act ("CEQA") with regard to the construction of new telecommunications facilities, the California Public Utilities Commission ("CPUC") has issued a draft decision that, if approved, will adopt a streamlined environmental review process.  The proposed "CEQA Expedited Treatment Process" would apply to all telecommunications carriers.  Although the CPUC is the "lead agency" for CEQA purposes, it has never adopted a standard process for the environmental review of telecommunications companies’ plans to construct new facilities.  At present, incumbents’ construction projects are not subject to environmental review by the CPUC and the process differs amongst competitive local exchange carriers, depending on when they were certified.  The draft decision notes that its current practices place "widely varying burdens on different telecommunications providers, and the disparities are also ongoing."  If the draft decision is approved (the CPUC is scheduled to vote on it at its August 24 agenda meeting), all telecommunications carriers must submit a proposal to Commission staff for any construction activity that they believe is exempt from CEQA, and staff will review the proposal on an expedited basis.  The specifics of the process are to be developed in workshops and embodied in a new general order to be adopted at a future date. 

The draft decision also notes that parties should not attempt to use CEQA to counterbalance other competitive advantages or disadvantages between carriers – new market entrants will likely need to construct more facilities, and therefore be subject to greater environmental scrutiny than incumbent carriers.  CEQA is not an appropriate vehicle for addressing this competitive disparity between carriers.

CPUC Rolls Out Phase One of Its Consumer Education Initiative

In late June the CPUC’s new telecommunications consumer education website, CalPhoneInfo (www.calphoneinfo.com), went online.  The website is the centerpiece of the consumer education program adopted by the CPUC earlier this year, replacing in large part the controversial consumer protection regulations the CPUC previously had adopted and subsequently rescinded.  The website is the result of collaboration between the CPUC, community organizations, consumer groups, and the telecommunications carriers.  It is viewable in English and Spanish, and additional educational materials will be available for downloading in ten other languages.  Audio and large-font versions of brochures also will be available for the visually and hearing impaired.

At the same time, a majority of the Commissioners have gone on record as opposing a pending state "slamming and cramming" bill (SB-440) unless the bill is stripped of a requirement that telecom carriers include with their customer bills an insert explaining consumers’ rights when unauthorized charges appear on their statements.  Commissioners Peevey, Bohn, and Chong claim that the bill insert requirement runs counter to the consumer education program and criticized the legislature for micromanaging the carriers’ billing practices.  Dissenting Commissioners Brown and Grueneich disagreed, stating that bill inserts are consistent with the Commission’s practices and consumer education goals.  The bill has passed the Senate and all applicable Assembly committees and will be taken up by the full Assembly when it returns to session in the fall.

CPUC Releases Proposed Decision Eliminating Price Regulation for Most Telecommunications Services

On July 25, CPUC Commissioner Chong released a nearly 300-page proposed decision in the CPUC’s "Uniform Regulatory Framework" proceeding.  The proceeding was opened in the spring of 2005 for the primary purpose of developing a uniform regulatory framework for the incumbent local exchange carriers that takes into account competition for telecommunications services as well as the scope of the CPUC’s jurisdiction over those providers that compete with the incumbent LECs.  Over the course of the following year, interested parties have filed comments and participated in workshops and hearings.  Based on the record developed as a result of this process and an independent analysis of the statutes and the markets, Commissioner Chong’s draft proposes eliminating all earnings regulation and most price regulation of telecommunications services.  Foremost amongst the many proposed changes to the current regulatory scheme, the draft decision recommends that: tariffs will still be required but will be filed on one day’s notice, and all contracts for telecommunications services will be effective upon execution (although they must still be filed with the Commission); geographic rate averaging will be eliminated for all services except for Lifeline services and services that receive the California High Cost Fund "B" subsidy; and price caps for basic residential services will be lifted in two years.  Interested parties may file comments on the proposal by August 14 and the Commission will schedule a vote on this draft and any alternatives that may be issued by other Commissioners, possibly as soon as its August 24 public meeting.

FCC Approves Adelphia Deal, but Debate Exposes Net Neutrality Rift

As FCC Commissioners debated and ultimately approved the $17.6 billion cash/stock divestiture of Adelphia Communications Corporation to Comcast Corporation and Time Warner Inc., the net neutrality controversy took center stage.  The 4-1 decision, a rare split of the Commission under Chairman Kevin Martin, imposed no net neutrality conditions on the purchasers, but the Commissioners revealed their various views on the subject as they debated the details of the deal. 

While concerns about competitive effects and the impact on consumers were expressed, the public interest benefit of resolving the four-year Adelphia bankruptcy saga prevailed.  The Commission approved the deal partly because Time Warner and Comcast have pledged at least $1.6 billion to upgrade Adelphia’s system.  The absence of net-neutrality conditions, however, helped create eleventh-hour debate and was a basis for Commissioner Copps’ lone full dissent.  For his part, Chairman Martin downplayed differences of opinion at the Commission on net neutrality: "This should not be a surprise, as there is not consensus on net neutrality within the industry or among policy experts."  Chairman Martin also said that while he continues to support the non-binding policy principles that the Commission adopted last summer, he does not think mandatory requirements "are necessary at this time without evidence of actual harm to consumers or Internet users." 

Commissioner Copps, however, stressed his concern that the Adelphia approval decision "tightens the grip" that the cable and telecom companies have over U.S. broadband access.  Mr. Copps was also disappointed that the Adelphia order "gives such short shrift" to net neutrality when the FCC imposed its four principles as an enforceable condition on the SBC/AT&T and Verizon/MCI merger approvals.  "But here we backtrack and are too timid to even apply them in an enforceable fashion to the transaction at hand," he said.  Copps also called for a principle of enforceable non-discrimination, that "allows for reasonable network management but makes clear that broadband network providers will not be allowed to shackle the promise of the Internet in its adolescence."  Commissioner Adelstein dissented in part because he also was concerned that the Commission failed "to adopt explicit, enforceable provisions to preserve and promote the open and interconnected nature of the Internet."  Commissioner Adelstein added that it is "a major step back to let these large media conglomerates, including two of the nation’s largest broadband providers, grow even bigger without requiring that they comply with basic network neutrality principles."  Commissioner Deborah Taylor Tate implied that the Commission should address the net neutrality debate in future, but said that the Commission should not use the Adelphia transaction to conduct an industry-wide rulemaking. 

Adelphia officials reportedly are saying that local franchise authorities in most affected areas have approved the transfers to Time Warner and Comcast.  The two companies have also agreed to a $3.5 million settlement with Minneapolis, ending a lengthy dispute over franchise terms.  An Adelphia spokesperson has said that there are no "issues relating to franchise transfers for this sale to close."  "There were a few [franchise] issues here and there," the spokesperson added, "but in general I think it went very well."

FCC Debars Two Companies from E-Rate Program

The FCC debarred NEC-Business Network Solutions, Inc. ("NEC") and Inter-Tel Technologies, Inc. ("Inter-Tel") from participating in the federal universal service Schools and Libraries, or "E Rate," Program after they pled guilty to defrauding the program.  The vendors are the first and second companies, respectively, debarred from the E-Rate Program.  However, the FCC reduced the debarment period for each company – which typically is three years – to six months for NEC and one year for Inter-Tel because each vendor fully cooperated with the government’s investigations. 

NEC, an equipment and internal connections provider, pled guilty in 2004 to bid-rigging in the competitive process to win E-Rate Program contracts and submitting inflated service invoices for reimbursement from the Universal Service Fund.  Similarly, Inter-Tel, which sells telecommunications products and services, pled guilty in 2005 to submitting fraudulent and non-competitive bids for E-Rate funding and submitting inflated service invoices.

The FCC concluded that although there were no extraordinary circumstances in either case to justify waiver of the FCC’s debarment rules, certain mitigating factors warranted a shorter debarment period for NEC and Inter-Tel.  The most significant factor was that the Department of Justice ("DOJ") submitted two letters in the case of NEC and one letter in the case of Inter-Tel documenting each vendor’s cooperation in advancing the DOJ’s investigations and law enforcement efforts.  Further, the vendors took steps to compensate the victims of their crimes, prevent similar crimes in the future, implement comprehensive compliance programs, and accept responsibility for their actions through payment of millions of dollars in fines, restitution and damages.  Once NEC and Inter-Tel re-enter the E-Rate Program, the administrator of the USF will review each company’s funding applications with heightened scrutiny and subject them to annual audits for two years.

FCC Continues CPNI Enforcement Activities

In July, the FCC continued its activities regarding possible customer proprietary network information ("CPNI") violations by data brokers and carriers.

Early in July, the FCC released a consent decree pursuant to which AT&T agreed to a $550,000 payment to settle two separate CPNI issues:  (1) some April 2005 self-reported problems by the former SBC involving its CPNI opt-out mechanisms; and (2) a January 2006 proposed $100,000 fine against AT&T for failure to provide a CPNI certification.  (AT&T filed a certification for the former SBC, but not the old AT&T.)  The consent decree mandates a compliance plan that includes a training program and the naming of personnel to oversee CPNI procedures and monitor customer complaints.  Given that the 2005 problems reportedly did not result in the sale of any customer information, and given that the company self-reported these problems, the dollar amount of the settlement was higher than many expected.

After issuing four more in a string of enforcement citations against data brokers, the FCC also released its first Notice of Apparent Liability ("NAL") against a data broker at the FCC’s July open meeting.  The data broker, LocateCell, had repeatedly refused to respond to an FCC subpoena, and the FCC proposed a fine of $97,500 – the statutory maximum fine for a non-licensee.  FCC representatives warned that other data brokers (approximately 40 have been subpoenaed) who do not respond may face similar fines. 

Federal Judge Questions Telecom Mega-Mergers

As part of the public-interest review required under the Tunney Act, U.S. District Court Judge Emmet Sullivan is scrutinizing the SBC AT&T and Verizon MCI mergers.  On Friday, July 14, Judge Sullivan demonstrated his seriousness when he asked the FCC to furnish the court with internal documents concerning the Commission’s approval of the mergers.  The Judge later indicated that he does not, at this time, plan to take testimony or engage in his own ground up investigation.  Judge Sullivan does plan, however, to satisfy himself that the FCC and the Department of Justice gave appropriate weight to antitrust concerns when they approved the deals.

Although Judge Sullivan’s aggressive approach surprised some industry watchers, no one seems to expect the Judge to reject the mergers, or require substantial, additional conditions.  There is some concern, however, that future industry mergers will be scrutinized more closely by the Department of Justice and the FCC, in anticipation of more stringent judicial oversight.

Court Challenge to AT&T's Sharing of Information with NSA Dismissed

On July 27, a federal judge in Chicago ruled that one of the pending lawsuits against AT&T, challenging that company’s cooperation with information-gathering activities of the National Security Agency ("NSA"), may not proceed because of national security concerns.

The lawsuit in issue was brought by the American Civil Liberties Union of Illinois on behalf of a number of individual plaintiffs.  Judge Matthew Kennelly of the U.S. District Court for the Northern District of Illinois found that requiring AT&T to disclose the fact and extent of its cooperation with the NSA would jeopardize intelligence-gathering operations.  As an additional ground for dismissal of the complaint, Judge Kennelly found that the individual plaintiffs lacked standing to bring the action.

Despite Judge Kennelly’s decision, a number of court challenges to the NSA program are pending.  In one such action, brought in federal court in San Francisco, the judge has refused to dismiss the complaint on national security grounds.  Specifically, U.S. District Judge Vaughn Walker has held that extensive press coverage of the NSA surveillance issue has mooted the issue of divulgence of secret intelligence activities.

NARUC Task Force on Intercarrier Compensation Files "Missoula Plan" at FCC

On July 24, the National Association of Regulatory Utility Commissioners ("NARUC") Task Force on Intercarrier Compensation filed a revised proposal for reforming intercarrier compensation with the FCC.  Dubbed the "Missoula Plan" for industry meetings held there, the proposal somewhat simplifies and clarifies the draft circulated by the NARUC Task Force in March.  The Missoula Plan has not been endorsed by NARUC or the Task Force, but represents a consensus among certain industry participants, including AT&T, BellSouth, Cingular, Level 3 Communications, Global Crossing and over 300 rural telephone companies.  The final version is not supported by Verizon or Qwest, which had participated in the Task Force workshops.    

The plan calls for a gradual, four-year unification and reduction in intercarrier compensation rates to a single termination rate and, in some cases, a single origination rate, for each of three categories, or "tracks," of carriers.  Smaller carriers in Tracks 2 and 3 would enjoy higher rates than larger carriers in Track 1.  The origination and termination rates for each carrier track would cover all types and jurisdictions of calls, although coverage of intrastate access traffic would depend on state commission action mirroring the reduction in interstate rates.  The plan also includes incentives to encourage states to so act.  In order to make up for the incumbent local exchange carrier ("ILEC") revenue "lost" to lower rates, the plan would raise the current caps on the subscriber line charge and create a new ILEC subsidy, referred to as the Restructure Mechanism ("RM"), that would enable ILECs to recover the same revenue as they do currently.  Funding the RM would add the equivalent of about 25 percent of current universal service fees to service providers’ funding obligations.

The National Association of State Utility Consumer Advocates ("NASUCA"), which dropped out of the Task Force discussions early this year, and trade associations representing cable operators, wireless carriers and competitive local exchange carriers ("CLECs") all blasted the revised plan as anti-consumer, stating that it would "exacerbate problems with the current intercarrier compensation and universal service systems  e.g., uneconomic regulatory distinctions and incentives for inefficiency."  Rural telephone interests endorsed the plan as offering regulatory stability.  NASUCA said that the plan would primarily help medium- to high-volume customers by generally reducing long distance rates and eliminating universal service assessments on long distance service revenues.  NARUC plans a session at next week’s summer meeting in San Francisco to explain the proposal to industry and regulators. 

D.C. Circuit Remands FCC Denial of the Former SBC's Broadband Forbearance Petition

On June 27, the U.S. Court of Appeals for the D.C. Circuit overturned an FCC ruling denying a forbearance petition filed by SBC Communications, Inc. (now AT&T Inc.), holding that the FCC did not have the authority to reject the petition as procedurally improper and failed to properly explain its rationale.  SBC had requested the FCC to eliminate any doubt concerning the regulatory status of "IP platform services" by forbearing under Section 10 of the Communications Act from applying common carrier regulation to such services.  In a second simultaneously filed petition, SBC requested a declaratory ruling "‘confirm[ing] that IP platform services… are not subject to Title II regulation.’"  The FCC responded to the declaratory ruling request by releasing a Notice of Proposed Rulemaking ("NPRM"), which is still pending, raising many of the same issues presented in SBC’s petitions.  The FCC denied SBC’s forbearance petition, however, on the grounds that it was hypothetical and thus "procedurally defective," explaining that it would violate Section 10’s "public interest" standard to devote administrative resources, subject to the statutory deadline for deciding forbearance petitions, to determine whether to forbear from imposing requirements that might not apply.  The FCC also denied the petition because it did not specifically identify the services at issue or the regulations it was targeting. 

The court, in an opinion by Judge Tatel, rejected the FCC’s procedural rationale on statutory grounds.  It held that the FCC could not create a blanket rule that the public interest prong of the forbearance standard necessitated denial of hypothetical petitions, as such a rule would conflict with the FCC’s Section 10 obligation to consider whether granting forbearance would promote competitive market conditions.  The court also concluded that the statutory deadline for acting on forbearance petitions was not a proper basis for categorically refusing to decide hypothetical petitions "whenever the [FCC] finds the statutory deadline inconvenient," although the FCC could consider the hypothetical nature of a particular petition in assessing its merits.

The court also rejected the FCC’s rationale that the petition lacked sufficient clarity.  With respect to the FCC’s finding of vagueness as to the regulations from which SBC was seeking forbearance, the court held that the FCC had not adequately addressed AT&T’s argument on appeal that the FCC has required less specificity in other forbearance contexts, including its subsequent grant of forbearance relief from Title II regulation for Verizon’s broadband services.  The court accordingly remanded the vagueness issue for "further explanation." 

The ruling was not surprising in light of the panel’s criticisms of the FCC’s decision at the March 7 oral argument.  At one point, Senior Judge Williams had asked for a specific example of a Title II regulation or statutory provision that the FCC could not determine was covered by the petition, and FCC counsel could not respond to his satisfaction.  An AT&T spokesman said that the company hopes for a "speedy resolution" of the issue "now that the court has made clear that the FCC must address our petition on its merits."

FCC Initiates Rulemaking to Establish New Service for Advanced Medical Radiocommunication Devices

On July 18, the FCC issued an NPRM, notice of inquiry ("NOI"), and order regarding medical radiocommunication devices.  The NPRM proposes to establish a new service for advanced medical radiocommunication ("MedRadio") devices and to add 1 MHz to each end of the existing medical implant communications service ("MICS") band so that a total of 5 MHz of spectrum in the 401-406 MHz band would be designated for MedRadio services (including MICS).  Under the FCC’s proposal, the MedRadio rules would accommodate a wider variety of devices, including body-worn devices, than permitted under the existing MICS rules.  The MedRadio rules also would offer greater flexibility to allow use of low-power, low-duty-cycle MedRadio devices in the 401-402 MHz and 405-406 MHz segments without requiring the frequency agility capability required under the existing MICS rules.  Additionally, the NPRM seeks comment on the appropriate mix of spectrum that should be reserved for MedRadio and MICS devices.

The NOI seeks comment on future developments in medical devices and their likely spectrum requirements.  Specifically, the NOI seeks comment on three key areas: (1) new implant and body-worn medical radiocommunication technologies and how the FCC could address spectrum issues raised by those technologies; (2) the relative benefits and trade-offs regarding licensed and unlicensed approaches to authorizing the operation of these devices; and (3) collaborative efforts between the FCC and the FDA regarding options for better educating medical equipment manufacturers regarding radiofrequency issues.  Comments on the NPRM and NOI are due on October 31, 2006, and reply comments on December 4, 2006.

Finally, the FCC order granted an extension of a rule waiver to Biotronik, a manufacturer of cardiac implant devices, to permit its continued operation of certain low-power, short-duration, non-frequency-agile devices in the 402-405 MHz band.

Legislative Developments

To expedite Congressional consideration of the communications reform bill approved by the Senate Commerce Committee at the end of June, Committee Chairman Ted Stevens (R-Ak.) employed a rarely used procedural tactic of re-designating the Senate bill as a House bill and re-filing it under the same numerical designation as the House version that is heading for a vote on the House floor.  As a result of this tactic, upon approval by the House or Senate, the two bills can proceed directly to House-Senate conference committee sessions without requiring the House to hold separate hearings on the Senate version.  Despite this maneuver, the Senate measure is not expected to head for a vote on the Senate floor until September at the earliest, and it apparently still lacks the necessary 60 votes to avoid a filibuster that would delay a vote on the Senate floor.

Data Security Breaches Demonstrate Need for Employee Training

As we all know by now, the Veterans Administration ("VA") announced in May that a burglary at an employee’s home resulted in the loss of a laptop (since recovered) containing personal information of some 26.5 million veterans of the armed services.  According to news reports and statements from the VA, the employee had been taking his government laptop, including sensitive stored information, home with him for at least three years.  As the VA also pointed out, the employee’s practice was strictly in violation of the agency’s policy.

The VA incident, like many other "lost or stolen laptop" events disclosed in recent weeks, reflects a recurring theme in breaches of privacy and data security.  Organizations develop sound policies; they may even take the trouble to write those policies down and disseminate them to employees; but the policies are not followed. 

In many cases, the problem is a failure to distinguish between announcing a policy and training the employees who must implement that policy.  As anyone who has been part of a large organization knows, policies and practices will not be consistently implemented unless someone looks the responsible personnel in the eye, tells them what the policy is, emphasizes that management takes the policy seriously, and explains every action that will be required if that policy is to succeed.  These steps — along with some method of testing and periodic reinforcement of the lessons learned — make up the process commonly described as training.  Without that process, even the best, most thorough policies are nothing more than "shelfware."

Congress and federal regulators acknowledge the importance of privacy and data security training and have written it into law.  For example, the various rules implementing the Gramm Leach Bliley Act ("GLBA") and the Health Insurance Portability and Accountability Act ("HIPAA") specifically provide that entities covered by those statutes must train employees in their requirements.  And a number of regulatory enforcement proceedings have expressly cited the alleged failures of the target companies to train their personnel in the proper handling of personal information.

Against this background, effective employee training can accomplish at least two things.  First, training can reduce the likelihood that data security breaches will occur.  Second, if an incident does occur, the ability to furnish regulators and investigators with documented evidence of a well conceived training program can improve the company’s chances of avoiding formal enforcement action.

In any case, in light of the proliferation of state laws that require notification to consumers of data security breaches, the option of failing to train employees to protect customer data and hoping to sweep the resulting security breach incidents under the rug is no longer available.

Once a company recognizes the need for employee training, it still must decide how to design and deliver that training.  Some large organizations may have the resources to design and carry out training programs internally.  Even for those companies, such an in house effort might not be the best use of scarce business resources.  For smaller companies, such an internal effort may simply be infeasible. 

The best approach to training is a cooperative effort between the company and an expert trainer, or trainers, who can offer intimate familiarity with the subject matter, well designed training materials, and a track record of effective teaching.  By familiarizing itself with the client’s privacy and data security needs and practices, such an expert consultant can efficiently prepare and conduct a training program that is tailored to the client’s business.

Morrison & Foerster LLP has prepared and conducted a number of such programs, and can offer training on a full range of privacy and data security subjects for all responsible personnel, including in house attorneys, managers, and non-management employees.

The Morrison & Foerster training programs cover more than data protection practices.  They include legally compliant methods of collecting, using, and distributing customer information under state and federal laws that apply to specific industries.  They also include the proper use of marketing channels, such as telemarketing, commercial email, and fax advertising, that are subject to stringent — and often confusing — state and federal regulation.

Both the content of Morrison & Foerster’s training programs and the method of delivery can be customized to your needs.  Although on-site training is most desirable, work schedules often do not permit gathering of all responsible personnel in one place at one time.  To accommodate these realities, live or recorded webinars also can be designed and delivered.

For more information on Morrison & Foerster’s training programs, we encourage you to contact Charles H. Kennedy, an attorney in our Washington, DC office, at ckennedy@mofo.com or (202) 887-8794.

Upcoming Deadlines for Your Calendar

Note:  Although we try to ensure that the dates listed below are accurate as of the day this edition goes to press, please be aware that these deadlines are subject to frequent change.  If there is a proceeding in which you are particularly interested, we suggest that you confirm the applicable deadline.  In addition, although we try to list deadlines and proceedings of general interest, the list below does not contain all proceedings in which you may be interested. 

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