[Senate Hearing 110-1218]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1218
IMPROVING CONSUMER PROTECTION IN THE PREPAID CALLING CARD MARKET
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HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 10, 2008
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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20402-0001
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West KAY BAILEY HUTCHISON, Texas,
Virginia Ranking
JOHN F. KERRY, Massachusetts TED STEVENS, Alaska
BYRON L. DORGAN, North Dakota JOHN McCAIN, Arizona
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota ROGER F. WICKER, Mississippi
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Paul Nagle, Republican Chief Counsel
C O N T E N T S
----------
Page
Hearing held on September 10, 2008............................... 1
Statement of Senator Hutchison................................... 1
Statement of Senator Nelson...................................... 1
Statement of Senator Pryor....................................... 46
Statement of Senator Thune....................................... 48
Witnesses
Acampora, Hon. Patricia L., Commissioner, Public Service
Commission, State of New York; Member, Committee on Consumer
Affairs, National Association of Regulatory Utility
Commissioners.................................................. 35
Prepared statement........................................... 36
Engel, Hon. Eliot L., U.S. Representative from New York.......... 6
Prepared statement........................................... 8
Greenberg, Sally, Executive Director, National Consumers League.. 21
Prepared statement........................................... 22
Kovacic, Hon. William E., Chairman, Federal Trade Commission..... 15
Prepared statement........................................... 9
O'Brien, Rosemary G., President, Military Marketing LLC.......... 33
Prepared statement........................................... 33
West, Gus K., President and Chairman of the Board, The Hispanic
Institute...................................................... 27
Prepared statement........................................... 28
Appendix
Submission of Mark E. Budnitz, J.D., Professor of Law, Georgia
State University, Martina Rojo and Julia Marblue, entitled,
``Deceptive Claims for Prepaid Telephone Cards and the Need for
Regulation,'' Loyola Consumer Law Review, 2006................. 55
IMPROVING CONSUMER PROTECTION IN THE PREPAID CALLING CARD MARKET
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WEDNESDAY, SEPTEMBER 10, 2008
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 10 a.m., in room
SR-253, Russell Senate Office Building, Hon. Bill Nelson,
presiding.
OPENING STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Good morning. The meeting will come to
order.
And as a nod to our distinguished Senator from Texas who
has another important appointment, I want to yield to her to
please make an opening statement.
STATEMENT OF HON. KAY BAILEY HUTCHISON,
U.S. SENATOR FROM TEXAS
Senator Hutchison. Mr. Chairman, thank you so much.
I really appreciate your letting me go first, and I just
want to make a brief statement.
First of all, I will cosponsor your bill. I think it is
very important that we have the ability to establish a standard
and it is kind of a clear, easy bar to clear that whatever is
on a card should be on a card. And we have had trouble in my
home State of Texas and the Attorney General has even filed a
lawsuit against a company that was found not to have produced
the correct number of minutes for what was promised. And I
think it particularly preys on people who perhaps do not speak
English or elderly people, people who use these cards in good
faith.
So I think we need to take action, and I really appreciate
the leadership that you are showing. And I will look forward to
reading the testimony from the Chairman and look forward to
working through this so that there is a standard that Americans
or anyone buying a card can rely on.
Thank you very much. And thank you, Mr. Chairman.
Senator Nelson. And I want to thank the Senator from Texas
for her leadership also with regard to our Space Subcommittee.
We have a real challenge, as she well knows, in trying to get
little old NASA back on track. And now with insurgent and
resurgent Russia, how can we continue to rely on the Russians
to get to the International Space Station, which is a national
laboratory thanks to the Senator from Texas, for a 5- or 6- or
7-year period?
And this is one of the most mismanaged programs that we
have ever seen. It has put us in this terrible circumstance of
having built and paid $100 billion for a national lab that is
an International Space Station, and come 2011, we may not even
be able to get to it. The Russians would have total control of
it, and who knows, they might decide to form a joint
partnership with the Chinese and take advantage of our $100
billion.
Senator Hutchison. Mr. Chairman, I think we need to take a
very strong action because the possibilities I think have been
clarified even in the last 2 months that Russia may not be a
reliable partner for us to use. And I think we should step up
the efforts to get the Crew Return Vehicle moved up. And then I
think we need to extend our shuttle missions to finish out the
Space Station so that it can do the most good for us in energy
research, as well as the other research that's being done
there. I think that it will take a very bold action, and I
think we should start that effort right now.
Senator Nelson. Well, I am going to need the Senator from
Texas' help because we want to put all of this in the NASA
reauthorization bill, but we are having difficulty with a
certain Senator from South Carolina. And I need the Senator's
help.
Senator Hutchison. I was not aware that we had a problem in
South Carolina, but I am certainly willing to discuss that.
So that this wonderful conversation we are having is
relevant, we all want to have calling cards that can take us to
Mars.
[Laughter.]
Senator Nelson. And I thank the Senator.
Well, let us come back down to Earth. We have got all kinds
of skullduggery going on here that we need to attack. It has to
do with prepaid calling cards which are used by millions of
folks and they buy these cards to stay in touch with their
loved ones. It is a simple, little card. They buy these and
they can call their loved ones around the country, around the
world. It is particularly helpful to military members, seniors,
immigrants, and low income Americans. With limited financial
resources, these things become a lifeline to their family and
their friends.
But what we have seen is a number of unscrupulous providers
that are now operating in the market. And basically what it is
is deception.
Now, most of the calling cards are from large, well-known
companies offering these prepaid cards at good rates and
conditions that are fair and reasonable. That is most of it.
But as is the case in many things, we have people that are
taking advantage of the system, and so that is now spilling
over into the good companies that are fair and reasonable and
their reputation is on the line.
Unlike a legitimate prepaid calling card, the fly-by-night
operators increasingly are not interested in the welfare of the
Americans buying the calling cards trying to connect with their
loved ones. Instead, what they are doing is scamming consumers.
And what they end up doing is imposing junk fees, exorbitant
rates, selling cards that expire shortly and, in some cases,
start expiring right when the consumer starts using the card.
Now, I want to give you two examples. Here is one. It is
two bucks. It is marketed to people as if you can use this for
$2 worth of calling. But you see that little red circle up
there? That is what is on this card. Now, I could get a
magnifying glass and I might be able to read this. I can tell
you with my eyes, even with my magnifiers, it is hard for me to
read this.
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Senator Nelson. And would you flip it over to the next
chart? Let us give you an example of some of the things that
are in that small type. Now, this is blown up and bolded and
underlined so that you all can see it. This, obviously, is not
in that small little writing there. ``Rates and fees vary and
are subject to change without prior notice. Advertised minutes
and rates are based on a single, non-pay phone call from the
contiguous United States.''
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Congressman, just have a seat there at the table and we
will get to you in a second.
``Succeeding calls are billed at a higher rate. Calls are
billed in 3-minute increments.'' So if the calling person calls
and they get an answering machine and they take all of 30
seconds, it is still billed at 3 minutes. ``A post-call service
fee of 40 percent and a hang-up fee of 99 cents apply per
call.'' Now, that's just that one.
Flip it over to the next one. Is this on the same card?
This is on the Africa Card or the Go Card? This is on this one.
This is the Go Card.
``A semi-monthly charge of up to 89 cents applies to 24
hours of first use. Card expires 180 days after the date of
first use. Standard off-peak hours are from 2 a.m. to 4 a.m.--
--
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[Laughter.]
Senator Nelson.--``weekdays, excluding holidays.''
Can you flip it to the next one?
Now, this is a card that is aimed at immigrants so that
they can call their loved ones in Africa. Look down at the
bottom. Can you lift it up there? Down at the bottom, it is so
small on this blowup I cannot read it, much less can I read it
on that. And that's the card.
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Senator Nelson. And what that says is: ``Call time is
deducted in 1- to 3-minute increments. Service fees of up to 25
percent apply. A disconnect fee up to 98 cents may apply. A
weekly maintenance fee of 69 cents may apply.'' This is for a
$5 card. ``Card expires 3 months from first use or 2 years from
purchase.''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. You got any more up there?
OK. You see the problem.
So I hope we can hear some testimony on this subject and
try to expose it. You might think that the language might tell
you how much it costs to make a domestic or international call,
but it does not. And instead, we have a bunch of statements
telling you how the card will not work and listing numerous
add-on fees and caveats, all of which we have just gone over
and which you cannot read on the card. If you can read the
King's English, you better have a microscope. Otherwise, you
are not going to be able to understand what you have just
bought for $2 or $5.
So the bottom line is if you use that card twice, you lose
it. You lose the value of the card. And you may lose it just by
using it once with all those add-ons.
So with that as an intro, I want to call on the Honorable
Eliot Engel, Congressman from New York, who wants to make a
statement. And Congressman, we understand that--was it Delta or
the US Air Shuttle that was late?
Representative Engel. It was Delta.
Senator Nelson. OK. Duly noted in the record.
Representative Engel. The truth is US Air probably would
have been even later, but that is OK.
[Laughter.]
Senator Nelson. Give us a quick statement. We have pretty
well laid it out. Senator Hutchison was here and I have laid it
out. We want your endorsement and your observation on this.
STATEMENT OF HON. ELIOT L. ENGEL,
U.S. REPRESENTATIVE FROM NEW YORK
Representative Engel. Well, thank you, Senator.
As you have been stating, legislation of this kind should
be a no-brainer. I mean, it is just crying out for attention,
and it is something that everybody can agree on.
And I want to thank you and the Ranking Member Hutchison
for holding today's hearing and for the invitation to speak. I
know, Senator, you have done lots of work on this issue.
I must comment that you have certainly come a long ways
since we were House colleagues together, and I am always happy
to see my good friends in the House move on to the Senate and
do really great work. And that is especially true of the work
that you have done. I am always pleased to have your
cooperation and your friendship.
I am here to discuss my legislation, the Calling Card
Consumer Protection Act, and the reasons that I introduced this
bill. I think that you have made it very clear as to why we
have introduced bills like this and why it is needed.
Obviously, calling cards are an invaluable resource for
people who do not have long distance telephone service in their
home or those who make frequent overseas calls. Common users of
these cards are students, members of the armed forces, and
those whose family lives outside of the country. They are also
popular among people who either choose not to subscribe to long
distance telephone service or who simply cannot afford it. They
are a necessary tool for keeping in touch with friends or
family members. Calling cards that provide the services that
the companies advertise can save consumers a great deal of
money when they call home. But, unfortunately, as you have
pointed out, Senator, and we are seeing over and over again,
many companies fail to keep their advertised terms or hide
them.
About 2 years ago, I started hearing from a number of
constituents regarding their prepaid calling cards. They were
contacting me because their calling cards were not providing
the number of minutes that were advertised. In fact, many were
not even close to delivering the promised number of minutes.
Furthermore, when my constituents attempted to contact the
calling card company, they found it difficult or impossible to
reach a customer service line.
I investigated this myself by purchasing a calling card. I
found the same problem that my constituents were having. This
is when I decided to introduce my legislation with Congressman
Mike Ferguson of New Jersey to ban these practices.
In independent tests, as well as those conducted by States
Attorneys General--and I know Florida has done a lot in this
regard--calling cards were shown to provide far fewer minutes
than they advertised. One study by The Hispanic Institute found
that on average the caller only received about 60 percent of
the minutes guaranteed by the card. In a $4 billion a year
industry, obviously this deception is costing consumers and
honest companies hundreds of millions of dollars every year,
and of course, these companies prey on minority communities,
communities that do not speak English well. This is especially
prevalent in those communities.
Companies have also instituted a variety of hidden fees.
For example, some cards deduct minutes even if the call is not
connected or if you get a busy signal. Other cards cut off the
call after a few minutes so the consumer must redial and again
be subjected to the connection charge. And the connection
charge is obviously on top of the regular charge, and so people
find that it might take 5 minutes or 10 minutes away just for a
connection. Some cards round up the number of minutes used in
4-minute increments. Others advertise no connection fees in big
letters on a sign, but instead charge you a hang-up fee. These
fees take considerable money out of consumers' pockets every
time they pick up the phone.
Obviously, calling card fraud harms segments of the
population who are among the most vulnerable to being
victimized by unscrupulous companies only seeking to make a
quick profit. These unscrupulous companies are known to target
poor, minority, and immigrant populations, and they do not stop
there. Even our soldiers in Iraq have been preyed upon by
deceptive practices of calling card companies.
In a recent article in BusinessWeek magazine, the author
detailed one example of a company that marketed towards
Spanish-speaking consumers, but the fine print that detailed
all the various fees they would charge the user was in English.
The company's answer to this? We are in America, they said.
They had the temerity to claim that even when they put Spanish
language advertisements in markets with Spanish-speaking
consumers, they can hide all their fees in English.
My legislation, like yours, Senator Nelson, would put a
stop to a number of deceptive practices employed by these
companies. It would require an advertisement or packaging to
include clear disclosure of all terms, conditions, and fees in
the language in which the calling card is advertised. In
addition, it would ensure that the Federal Trade Commission has
the jurisdiction to pursue enforcement of these rules against
companies who are not abiding by them.
Calling cards can be extremely useful for consumers, and I
do not want to see honest companies punished and there are,
obviously, a lot of honest companies. But the honest companies
are also being harmed by these dishonest companies. There is a
large enough market for a company to live up to its promises
and to turn an honest profit. If consumers know that the card
they purchase will provide the full amount of calling time that
is advertised, this will benefit both consumers and the
marketplace.
So I, in conclusion, would strongly encourage the Members
of this Committee to support S. 2998, Senator Nelson's
legislation to protect consumers from calling card fraud. With
only a few weeks remaining in the 110th Congress, our
constituents should not have to wait for Congress to reconvene
in 2009 for action on this important legislation.
Once again, Senator, thank you for holding this hearing
today and allowing me to testify.
[The prepared statement of Representative Engel follows:]
Prepared Statement of Hon. Eliot L. Engel,
U.S. Representative from New York
Chairman Inouye, Ranking Member Hutchison:
I want to thank you for holding today's hearing and for the
invitation to speak on this important topic. I especially want to thank
Senator Bill Nelson for his work on this issue. I have collaborated
with Senator Nelson in the past, and I am always pleased to have his
cooperation and his friendship.
I am here to discuss my legislation, the Calling Card Consumer
Protection Act, and the reasons that I introduced the bill.
Calling cards are an invaluable resource for people who don't have
long distance telephone service in their home or those who make
frequent overseas calls. Common users are students, members of the
Armed Forces, and those whose family lives outside of the country. They
are also popular among people who either choose not to subscribe to
long distance telephone service, or who cannot afford it. They are a
necessary tool for keeping in touch with friends or family members.
Calling cards that provide the services that the companies advertise
can save consumers a great deal of money when they call home.
Unfortunately, as we are seeing over and over again, many companies
fail to keep their advertised terms.
About 2 years ago, I began hearing from a number of constituents
regarding their prepaid calling cards. They were contacting me because
their calling cards failed to provide the number of minutes that were
advertised. In fact, many were not even close to delivering the
promised number of minutes. Furthermore, when my constituents attempted
to contact the calling card company, they found it difficult or
impossible to reach a customer service line.
I investigated this myself by purchasing a calling card. I found
the same problems that my constituents were having. This is when I
decided to introduce my legislation, with Congressman Mike Ferguson, to
ban these practices.
In independent tests, as well as those conducted by states'
Attorneys General, calling cards were shown to provide far fewer
minutes than were advertised. One study by The Hispanic Institute found
that on average, the caller only received an average of 60 percent of
the minutes guaranteed by the card. In a $4 billion a year industry,
this deception is costing consumers and honest companies hundreds of
millions of dollars every year.
Companies have also instituted a variety of hidden fees. For
example, some cards deduct minutes even if the call is not connected.
Other cards cut off the call after a few minutes so the consumer must
redial and again be subjected to the connection charge. Some cards
round up the number of minutes used in 4 minute increments. Others
advertise ``no connection fees,'' in big letters on a sign, but instead
charge you a hang-up fee. These fees take considerable money out of
consumers' pockets every time they pick up the phone.
Calling card fraud harms segments of the population who are among
the most vulnerable to being victimized by unscrupulous companies only
seeking to make a quick profit. These unscrupulous companies are known
to target poor, minority, and immigrant populations. And they don't
stop there. Even our soldiers in Iraq have been preyed upon by
deceptive practices of calling card companies.
In a recent article in BusinessWeek magazine, the author detailed
one example of a company that marketed toward Spanish-speaking
consumers. But the fine print that detailed all the various fees they
would charge the user was in English. The company's answer to this?
``We're in America,'' they said. They had the temerity to claim that
even when they put Spanish language advertisements in markets with
Spanish-speaking consumers, they can hide all their fees in English.
My legislation, like Senator Nelson's, would put a stop to a number
of deceptive practices employed by these companies. It would require an
advertisement or packaging to include clear disclosure of all terms,
conditions, and fees in the language in which the calling card is
advertised. In addition, it would ensure that the Federal Trade
Commission has the jurisdiction to pursue enforcement of these rules
against companies who are not abiding by them.
Calling cards are a useful product for consumers, and I do not want
to see honest companies punished. There is absolutely no reason why a
company can't deliver what is promised, and still turn an honest
profit. If consumers know that the card they purchase will provide the
full amount of calling time that is advertised, this will benefit both
consumers and the marketplace.
I would strongly encourage the Members of this Committee to support
S. 2998, Senator Nelson's legislation to protect consumers from calling
card fraud. With only a few weeks remaining in the 110th Congress, our
constituents shouldn't have to wait for Congress to reconvene in 2009
for action on this important legislation.
Once again, thank you for holding this hearing today, and allowing
me to testify.
Senator Nelson. Thank you, Congressman. Thank you.
You are welcome to stay. You can leave--whatever is your
pleasure. We are very grateful to you for having come over here
and also for having introduced this legislation in the House.
Representative Engel. Thank you very much.
Senator Nelson. So thank you and good luck to you in the
House.
We are pleased to have William Kovacic, the Chairman of the
Federal Trade Commission. What I am going to do to truncate
this hearing is we are going to take your written testimony and
enter it into the record.
[The prepared statement of Mr. Kovacic follows:]
Prepared Statement of Hon. William E. Kovacic, Chairman,
Federal Trade Commission
I. Introduction
Chairman Inouye, Ranking Member Hutchison, Members of the Committee
on Commerce, Science, and Transportation, I am William Kovacic,
Chairman of the Federal Trade Commission (``Commission'' or
``FTC'').\1\ Thank you for giving the Commission this opportunity to
testify before the Committee about consumer protection issues
associated with the sale of prepaid calling cards.
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\1\ The written statement presents the views of the Federal Trade
Commission. Oral statements and responses to questions reflect the
views of the speaker and do not necessarily reflect the views of the
Commission or any other Commissioner.
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The Commission appreciates the Committee's decision to hold a
hearing to shed light on deceptive practices in the calling card
industry. Over the last decade, the prepaid calling card industry has
grown into a multi-billion dollar a year industry. Prepaid calling
cards can provide consumers with a convenient and inexpensive way to
call friends and family at home and abroad. Unfortunately, however,
purchasers of prepaid calling cards often do not receive the number of
calling minutes advertised for the cards they purchase and are charged
undisclosed or inadequately-disclosed fees and surcharges that reduce
the value of the prepaid calling cards they purchased.
As the Nation's consumer protection agency, the FTC is committed to
protecting consumers from deceptive marketing of prepaid calling cards.
The FTC recently brought two cases alleging that distributors of
prepaid calling cards had been deceptively marketing such cards. The
Commission also has other active prepaid calling card investigations.
This statement provides the Committee with background information
about the prepaid calling card industry and describes the FTC's recent
law enforcement actions against distributors of prepaid calling cards.
It also discusses the FTC's consumer education and outreach efforts.
Additionally, it offers comments on S. 2998, the ``Prepaid Calling Card
Consumer Protection Act of 2008,'' introduced by Senators Bill Nelson,
Olympia Snowe, John Kerry, and Mel Martinez. Finally, the Commission
reiterates its support for the provision of the FTC reauthorization
bill that would amend the FTC Act to repeal the exemption for common
carriers subject to the Communications Act. Repealing the exemption for
telecommunications carriers would ensure that the Commission can bring
law enforcement actions against all participants in the prepaid calling
card industry that are engaging in deceptive and unfair practices,
including those companies that provide the underlying
telecommunications services for these cards.
II. Background
Calling card providers market their cards for a variety of uses.
Some cards are marketed primarily for use by consumers making calls
within the United States. Such cards usually offer consumers the
ability to make domestic long distance calls for pennies per minute.
Other cards are marketed to U.S. consumers who want to call the United
States when they are traveling or working in other countries. Indeed,
many such cards are marketed to members of the United States armed
forces serving around the world. In addition, a substantial number of
prepaid calling cards are sold to recent immigrants to the United
States who depend on calling cards to stay in touch with family and
friends abroad.\2\ Such calling cards, which typically retail for
between $2 to $10 each, are generally sold in small retail outlets,
including grocery and convenience stores, gasoline stations, and
newsstands.
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\2\ See Susan Sachs, Immigrants See Path to Riches in Phone Cards,
N.Y. Times, Aug. 11, 2002, available at http://query.nytimes.com/gst/
fullpage.html?res=9800E7D6123AF932A2575BC0A9
649C8B63&sec=&spon=&pagewanted=2; Talk Isn't So Cheap on a Phone Card,
Business Week, July 23, 2007, available at http://www.businessweek.com/
magazine/content/07_30/b4043
079.htm; Mark E. Budnitz, Martina Rojo and Julia Marlowe, Deceptive
Claims for Prepaid Telephone Cards and the Need for Regulation, 19
Loyola Consumer L. Rev. 1 (2006).
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To advertise prepaid calling cards directed to consumers making
international calls from the U.S., companies distribute eye-catching
posters that are displayed on the walls and windows of the stores where
such cards are sold. One hallmark of such posters is bold claims, made
in large, colorful type, about the number of calling minutes the
advertised cards provide for calls to particular countries. In stark
contrast to the claims about available calling minutes that dominate
the posters, the bottom of the posters generally contains small print
disclaimers about a wide variety of fees and surcharges that reduce the
value of the cards. The disclaimers are frequently in type so small as
to be nearly illegible and in language so vague as to be effectively
incomprehensible.\3\
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\3\ For example, in FTC v. Alternatel, Inc., G.F.G. Enterprises
LLC, also d/b/a Mystic Prepaid, Voice Prepaid, Inc., Voice
Distributors, Inc., Telecom Express, Inc., Lucas Friedlaender, Moses
Greenfield, Nickolas Gulakos, and Frank Wendorff, 08-21433-CIV-Jordan/
McAliley (S.D. Fla.), the FTC has alleged in its complaint that: ``in
numerous instances defendants' posters contain vague disclosures about
fees in tiny font on the bottom of the poster, stating in relevant
part:
by using this card you agree to the following: Prompted minutes are
before applicable charges and fees, application of surcharges and fees
have an effect of reducing total minutes on cards. One or all of the
following may apply: (1) A weekly maintenance fee ranging between $.49
and $.79. (2) A hang-up fee between $.05 and $1 depending upon length
and destination of the call. (3) A destination surcharge of between 0
percent and 100 percent.--minutes and/or seconds are rounded to
multiple minute increments.--International calls made to cellular
phones are billed at higher rates.--Toll free access numbers are
subject to an additional fee of up to 4 cents per minute.--Prices are
subject to change without notice.--This card has no cash value.--Card
expires 3 months after first use or 12 months after activation.''
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Consumers typically use their prepaid calling cards as follows: the
consumer dials an ``access number'' printed on the back of the card. A
recorded message then prompts the consumer to enter the card's
authorization code or Personal Identification Number (``PIN''), which
is printed on the card. Next, the consumer usually hears an
announcement of the monetary value of the card. The consumer then
enters the phone number he or she is trying to reach and hears an
automated ``voice prompt'' announcing the number of minutes of time
ostensibly available on the card.
As discussed in more detail below, the FTC, our state law
enforcement colleagues, and third parties who have tested a wide
variety of prepaid calling cards have found that prepaid calling cards
offered by a number of industry participants routinely fail to deliver
the minutes promised in their advertising and voice prompts. As alleged
in two cases recently brought by the FTC, our testing showed that the
defendants' prepaid calling cards delivered about half the number of
promised minutes.
III. Law Enforcement Actions
The FTC works closely with the offices of State Attorneys General
and other state agencies. In the fall of 2007, the FTC established a
joint Federal-state task force concerning deceptive marketing practices
in the prepaid calling card industry. The task force members include
representatives from the offices of more than 35 State Attorneys
General and other state and local agencies, and the Federal
Communications Commission (``FCC''). Working cooperatively allows us to
share information and facilitate law enforcement activity in the
prepaid calling card area.\4\
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\4\ Representatives from the following Offices of Attorneys General
are members of the task force: Alabama, Arizona, Arkansas, California,
Colorado, Connecticut, District of Columbia, Florida, Georgia, Hawaii,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Maine,
Massachusetts, Minnesota, Missouri, Montana, New Mexico, Nevada, New
Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio,
Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas,
Virginia, Washington, Wisconsin. In addition, the New York State
Consumer Protection Board and the New York City Department of Consumer
Affairs have participated in the task force.
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Currently, the Commission is litigating two actions in Federal
district court, alleging that the defendants deceptively marketed their
prepaid calling cards. In addition, as discussed below, the Attorneys
General for the states of Florida and Texas recently have taken action
against prepaid calling card companies for their allegedly deceptive
practices.
A. FTC Enforcement Actions
Under Section 5 of the FTC Act, the FTC has authority to bring
cases against companies and individuals for engaging in deceptive or
unfair acts or practices in or affecting commerce.\5\ Since the 1990s,
the FTC has used this power to bring enforcement actions against
entities for deceptively selling prepaid calling cards. The Commission
brought its first two prepaid calling card cases against companies that
the FTC alleged were deceptively marketing prepaid calling cards by,
among other things, misrepresenting the per-minute rates consumers
would be charged when using the cards and by failing to clearly and
conspicuously disclose connection and maintenance fees associated with
the cards.\6\ Since then, the FTC has brought several cases alleging
that telemarketers deceptively marketed calling cards to consumers and
charged consumers without their authorization.\7\
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\5\ 15 U.S.C. 45(a)(2).
\6\ FTC v. PT-1 Comm'cns, Inc., 99-CIV-1432 (S.D.N.Y.) (Stip. Final
Order filed Feb. 25, 1999) (order requiring monetary relief and barring
defendants from misrepresenting the value of its prepaid calling cards
and from failing to clearly and prominently disclose fees and charges);
FTC v. Trans-Asian Comm'cns, Inc., 97-CIV-5764 (S.D.N.Y.) (Stip. Final
Order filed Mar. 17, 1998) (order requiring $1 million performance bond
before defendants can advertise or sell prepaid calling cards and
barring future material misrepresentations about prepaid calling
cards).
\7\ FTC v. 9131-4740 Quebec, Inc., CV-02242 (N.D. Ohio) (Compl.
filed July 25, 2007) (pending); FTC v. T2U, Inc., 101-CV-811 (N.D.
Ohio) (Stip. Final Order filed Sept. 13, 2001); FTC v. Enhanced Billing
Servs., Inc., 101-CV-1060 (D.D.C.) (Stip. Final Order filed Aug. 1,
2001).
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This spring, the FTC filed two cases against major distributors of
prepaid calling cards. On March 25, 2008, the FTC sued Clifton Telecard
Alliance, a national distributor of prepaid calling cards based in New
Jersey, and the company's principal.\8\ The FTC alleged that the
defendants, which market their cards chiefly to recent immigrants,
engaged in deceptive marketing practices by: (1) misrepresenting the
number of calling minutes provided by their cards; (2) failing to
adequately disclose fees and charges associated with their cards; and
(3) failing to adequately disclose that the value of their cards may be
reduced even when a call does not connect. In support of its case, the
FTC tested 46 of Clifton Telecard Alliance's calling cards purchased at
various retail outlets.\9\ In the FTC's tests of these cards, none
delivered the number of calling minutes advertised in posters displayed
at the point of sale. Three of the 46 cards failed to work at all, and,
on average, the remaining 43 cards delivered only 43 percent of the
advertised calling minutes. On April 2, 2008, the Federal district
court in New Jersey granted the FTC's motion for a temporary
restraining order.
---------------------------------------------------------------------------
\8\ FTC v. Clifton Telecard Alliance One LLC, d/b/a Clifton
Telecard Alliance and CTA, Inc., and Mustafa Qattous, 2:08-cv-01480-
PGS-ES (D.N.J.).
\9\ The FTC has been able to test prepaid calling cards thanks in
part to the invaluable assistance of El Salvador's Defensoria del
Consumidor, Colombia's Superintendencia de Industria y Comercio, the
Egypt Consumer Protection Authority, Mexico's Procuraduria Federal del
Consumidor (PROFECO), Panama's Autoridad de Proteccion al Consumidor y
Defensa de la Competencia, and Peru's Instituto Nacional de Defensa de
la Competencia y de la Proteccion de la Propiedad Intelectual
(INDECOPI). In this area, as in so many others, international
cooperation has proved to be vital to the Commission's law enforcement
actions.
---------------------------------------------------------------------------
On May 19, 2008, the FTC filed a similar action, FTC v. Alternatel,
against several companies alleged to act as a common enterprise in
distributing prepaid calling cards out of Florida, Massachusetts, and
New Jersey. In the Alternatel case, the Commission alleged that the
defendants violated Section 5 of the FTC Act by misrepresenting the
number of calling minutes their cards provide and failing to adequately
disclose fees and charges associated with their cards. As in the
Clifton Telecard Alliance case, the FTC conducted extensive testing of
the Alternatel defendants' prepaid cards and found that the actual
number of minutes provided by the cards fell far short of the
defendants' advertising claims. In tests of 87 of the defendants'
cards, the cards delivered on average only 50.4 percent of the minutes
advertised on posters at the point of sale.\10\ On May 23, 2008, the
Federal district court for the Southern District of Florida entered a
temporary restraining order in the Alternatel matter.
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\10\ The results of the FTC testing of the defendants' cards in the
Clifton Telecard Alliance and the Alternatel cases are consistent with
the testing results of The Hispanic Institute, a nonprofit organization
that has issued a report on its testing of a wide variety of prepaid
calling cards. The Hispanic Institute reports that, on average, the
cards it tested delivered only 60 percent of the minutes promised in
voice prompts. See http://www.thehispanicinstitute.net/research/
callingcard/qa (visited June 18, 2008). They are also consistent with
testing results that have been offered in private litigation. See IDT
Telecom, Inc. v. CVT Prepaid Solutions, Inc., et al., Civil Action No.
07-1076 (D.N.J.) (Pls. Mem. In Supp. of Their Order to Show Cause Why a
Prelim. Inj. Should Not Issue, at 6-10; Ex. 1 to Suppl. Aff. of Gabi
Schechter, dated Mar. 26, 2007) (alleging the defendants' calling cards
delivered on average only 60 percent of prompted minutes); IDT Telecom,
Inc. v. Voice Distributors, Inc., d/b/a Voice Prepaid, et al., Civil
Action No. 07-2465 (Mass. Sup. Ct., Middlesex Cty.) (Compl. 16)
(alleging that the defendants' calling cards delivered on average only
65 percent of prompted minutes); IDT Telecom, Inc. v. Diamond Phone
Card, Inc., et al., Index No. 3682-08 (N.Y. Sup. Ct., Kings Cty.)
(Compl. 15) (alleging that the defendants' calling cards delivered on
average only 59 percent of prompted minutes).
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In both the Clifton and Alternatel actions, the defendants have
moved to dismiss the FTC's case on the grounds that the underlying
telecommunications carriers are necessary parties that the FTC cannot
join because of the exemption in the FTC Act for common carriers
subject to the Communications Act. The FTC has opposed defendants'
motions, and is confident that it will win on the merits. As final
relief in both cases, the FTC seeks a permanent injunction and consumer
redress and/or disgorgement of ill-gotten gains.
B. State Law Enforcement Actions
Two states recently brought law enforcement actions against a
number of prepaid calling card companies. Over the last few months, the
Florida Attorney General has announced that he has entered into
Assurances of Voluntary Compliance (``AVC'') with eleven prepaid
calling card companies doing business in Florida.\11\ These settlements
are the culmination of a broad investigation into the prepaid calling
card industry launched by the Florida Attorney General in July of 2007.
Notably, while the FTC has brought its lawsuits solely against
distributors of prepaid calling cards, the Florida Attorney General
entered into AVCs with eleven companies that include both distributors
and telecommunications service providers for prepaid calling cards.
---------------------------------------------------------------------------
\11\ See McCollum Announces Prepaid Calling Card Settlements,
Industry-Wide Reform (June 11, 2008) available at http://
myfloridalegal.com/newsrel.nsf/newsreleases/79C6666DB24608
D785257465004EC901 (visited on August 27, 2008) (announcing settlements
with IDT America, Inc.; Union Telecom Alliance; Total Call
International, Inc.; Blackstone Calling Card, Inc.; CVT Prepaid
Solutions, Inc.; Dollar Phone Enterprise, Inc.; STi Prepaid, LLC;
Alternatel, Inc; and Cristel Telecommunications, LLC); Prepaid Calling
Company Reaches Settlement with Attorney General (July 2, 2008)
available at http://myfloridalegal.com/newsrel.nsf/newsreleases/1439
BD5308D470588525747A006423B8 (visited on August 27, 2008) (announcing a
settlement with Touch-Tel Partners USA, LLC); Attorney General Reaches
Settlement with 11th Prepaid Calling Card Company (August 21, 2008)
available at http://myfloridalegal.com/newsrel.nsf/news
releases/C410C546EB409C93852574AC006C9499 (visited on August 27, 2008)
(announcing settlement with Cinco Telecom Corp. d/b/a Orbitel).
---------------------------------------------------------------------------
On May 23, 2008, the Texas Attorney General filed a lawsuit against
Next-G Communication, Inc., a telecommunications service provider that
produces, sells and distributes prepaid calling cards.\12\ The Texas
lawsuit alleges that Next-G Communication has marketed and sold prepaid
calling cards throughout Texas that fail to deliver the number of
minutes it advertises to customers and that the defendant has failed to
disclose fees and charges associated with its calling cards. The Texas
Attorney General alleges that Next-G's prepaid calling cards
consistently delivered only 40 percent of the minutes claimed on the
Next-G's advertising posters and confirmed by Next-G's voice prompt
given at the beginning of each call.\13\
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\12\ State of Texas v. Next-G Commnc'n, Inc., Taj Khwaja,
2008CI08149 (Bexar County, TX) (Pet. filed May 23, 2008).
\13\ See Attorney General Abbott Takes Legal Action Against Prepaid
Calling Card Company (May 23, 2008) available at http://
www.oag.state.tx.us/oagNews/release.php?id=2479 (visited on August 27,
2008).
---------------------------------------------------------------------------
The FTC applauds the actions of the Florida and Texas Attorneys
General and is grateful for the participation of all of our law
enforcement partners in the joint Federal-State calling card task
force.
IV. Consumer Education and Media Outreach
In addition to bringing enforcement cases, the Commission has made
consumer education and outreach a high priority. The FTC recently
updated its consumer education brochure on calling cards, which is
available in both English and Spanish on the Commission's website.\14\
The Commission also has done extensive outreach about prepaid calling
cards to media outlets that cater to non-English and English speaking
consumers. The FTC wants to make sure consumers know that it is
unlawful to advertise calling cards that misrepresent the number of
minutes that the calling cards provide or to fail to clearly and
conspicuously disclose the fees and charges that reduce the value of
the calling cards. The FTC also wants consumers to know that they can
and should complain to the FTC if they do not get what they pay for.
---------------------------------------------------------------------------
\14\ See Buying Time: The Facts About Pre-Paid Phone Cards (2008)
available at http://www.ftc.gov/bcp/edu/pubs/consumer/products/
pro04.pdf (visited on August 27, 2008).
---------------------------------------------------------------------------
V. The Proposed Legislation
As described above, the FTC Act's prohibitions on deceptive and
unfair practices provide the Commission with a powerful tool to bring
enforcement actions against the distributors of prepaid calling cards.
Senate Bill 2998, the proposed ``Prepaid Calling Card Consumer
Protection Act,'' is directed at the conduct of prepaid calling card
service providers (carriers) as well as distributors, and therefore
would implicitly give the FTC jurisdiction over common carriers engaged
in the deceptive practices prohibited by the proposed legislation.
Consumers would benefit greatly from legislation giving the FTC
jurisdiction over such practices by telecommunications carriers. The
legislation also would authorize the FTC to seek civil penalties for
violations of the Act or of the rules issued by the FTC pursuant to the
Act, thus adding an important remedy to those already available to the
Commission.
Generally, S. 2998 requires the FTC to promulgate a rule requiring
that, among other things, prepaid calling card providers and
distributors provide clear and conspicuous disclosures of the number of
minutes provided by the calling cards, the amount and frequency of all
fees assessed for use of the calling cards, and the expiration date of
the cards. The bill also prohibits prepaid calling card providers and
distributors from selling or distributing calling cards that do not
provide the advertised number of calling minutes or from assessing
inadequately disclosed fees. The bill further provides for the FTC to
bring suit alleging violations of the Prepaid Calling Card Consumer
Protection Act as if they were violations of an FTC rule, thus enabling
the agency to seek civil penalties for violation of the Act and the
FTC's rule promulgated pursuant to the Act.
The FTC supports the goals of S. 2998, and appreciates the implied
extension of jurisdiction--which will ensure a level playing field by
allowing the Commission to act to hold violators responsible for
deceptive trade practices whether they are providing the
telecommunications services or distributing the prepaid calling cards--
and the proposed authority to seek civil penalties. Two aspects of the
bill raise concerns, however. First, the bill creates a knowledge
standard for holding prepaid calling card distributors liable if they
violate the Act by distributing calling cards that provide fewer
minutes or a higher per minute rate than advertised, or announced on
the voice prompt given when a consumer places a call.\15\ Incorporating
a knowledge standard into the law could create an additional--and
potentially very challenging--evidentiary burden on the FTC when
seeking injunctive relief in a civil case.\16\ Second, the bill
explicitly exempts from its coverage prepaid wireless phone services
where the consumer has established a relationship with the wireless
carrier by purchasing a wireless service handset package. The
Commission is concerned that the bill's exception for prepaid services
based on the purchase of a handset and wireless calling services would
provide a powerful incentive for the worst actors in the prepaid
calling card industry to migrate their business practices to prepaid
wireless handsets and refill cards, and thereby avoid the mandates of
the proposed law.\17\
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\15\ The bill does not have a parallel knowledge requirement for
prepaid calling card service providers.
\16\ Indeed, under general consumer protection principles and
traditional jurisprudence under Section 5 of the FTC Act, 15 U.S.C.
45, the Commission need not show knowledge or intent in order to stop
an entity from engaging in unfair or deceptive practices. Notably,
however, Section 5(m)(1) of the FTC Act includes a knowledge standard
for instances where the FTC is seeking civil penalties for violations
of an FTC Rule, as opposed to equitable relief, such as an injunction.
15 U.S.C. 45(m)(1) (``The Commission may commence a civil action to
recover a civil penalty in a district court of the United States
against any person, partnership, or corporation which violates any rule
under this chapter respecting unfair or deceptive acts or practices . .
. with actual knowledge or knowledge fairly implied on the basis of
objective circumstances.''). Eliminating the knowledge threshold from
the bill would not change the Commission's elevated burden for
obtaining monetary relief in civil penalty cases.
\17\ Some participants in the prepaid calling card industry are
beginning to offer prepaid wireless services. As the cost of providing
cellular phones and calling minutes continues to decrease, the
incentive to move consumers to prepaid wireless accounts from more
traditional prepaid calling cards has increased.
---------------------------------------------------------------------------
To enable the Commission to address problems with deceptive conduct
involving prepaid calling cards more effectively, the Committee might
also consider giving the Commission authority to bring actions seeking
civil penalties in its own right against prepaid calling card providers
and distributors rather than through the Department of Justice. Giving
the FTC authority to bring its own civil penalties cases in this area
would help ensure that the Commission does not have to forego quick
relief in order to seek civil penalties.
The Commission recognizes that the agency and the Committee share
the same goal: stopping unscrupulous calling card companies from
defrauding vulnerable consumers. The Commission looks forward to
working with the Committee regarding the language of the legislation as
the Committee moves forward.
VI. The Common Carrier Exemption
On several occasions, the Commission has testified in favor of the
repeal of the common carrier exemption.\18\ The Commission continues to
endorse its repeal, and thanks the Committee for its continued support
for this measure. The FTC Act exempts common carriers subject to the
Communications Act from its prohibitions on unfair and deceptive acts
or practices and unfair methods of competition. This exemption
originated in an era when telecommunications services were provided by
highly-regulated monopolies. The Commission believes that the exemption
is now outdated. In the current marketplace, firms are expected to
compete in providing telecommunications services. Congress and the FCC
have dismantled much of the economic regulatory apparatus formerly
applicable to the industry. Removing the exemption from the FTC Act
would not alter the jurisdiction of the FCC, but would give the FTC the
authority to protect consumers against unfair and deceptive practices
by common carriers in the same way that it can protect against unfair
and deceptive practices by non-common carriers involved in the
provision of similar services.
---------------------------------------------------------------------------
\18\ See Prepared Statement of the Federal Trade Commission, Before
the Subcommittee on Interstate Commerce, Trade, and Tourism Committee
on Commerce, Science, and Transportation, U.S. Senate (April 8, 2008),
available at http://www.ftc.gov/os/testimony/P034101
reauth.pdf; Prepared Statement of the Federal Trade Commission, Before
the Subcommittee on Interstate Commerce, Trade, and Tourism Committee
on Commerce, Science, and Transportation U.S. Senate (Sept. 12, 2007),
available at http://www.ftc.gov/os/testimony/070912
reauthorizationtestimony.pdf; Prepared Statement of the Federal Trade
Commission On FTC Jurisdiction Over Broadband Internet Access Services,
Before the Committee on the Judiciary, U.S. Senate (Jun. 14, 2006),
available at http://www.ftc.gov/opa/2006/06/broadband.shtm; The
Reauthorization of the Federal Trade Commission: Positioning the
Commission for the Twenty-First Century: Hearing Before the Subcomm. on
Commerce, Trade and Consumer Protection of the H. Comm. on Energy and
Commerce, 108th Cong. (2003) (``FTC 2003 Reauthorization Hearing'')
(statement of the FTC), available at http://www.ftc.gov/os/2003/06/
030611reauthhr.htm; see also FTC 2003 Reauthorization Hearing
(statement of Thomas B. Leary, FTC Commissioner), available at http://
www.ftc.gov/os/2003/06/030611learyhr.htm; FTC Reauthorization Hearing:
Before the Subcomm. on Consumer Affairs, Foreign Commerce, and Tourism
of the S. Comm. on Commerce, Science, and Transportation, 107th Cong.
(2002) (statement of Sheila F. Anthony, FTC Commissioner), available at
http://www.ftc.gov/os/2002/07/sfareauthtest.htm.
---------------------------------------------------------------------------
Prepaid calling cards are a case in point. In contrast to the State
Attorneys General, who are able to bring enforcement actions to stop
both telecommunications providers and distributors offering prepaid
calling cards from engaging in unfair and deceptive practices, the FTC
has targeted only the deceptive practices of prepaid calling card
distributors, because of the FTC Act common carrier exemption.
Furthermore, even when the Commission has identified and brought
enforcement actions against non-common carriers, the common carrier
exemption can impose additional litigation costs on the FTC. For
example, as noted above, in both the Clifton Telecard Alliance and
Alternatel cases, which the FTC has brought against distributors of
prepaid calling cards, the defendants have moved to dismiss the FTC's
cases on the grounds that the FTC has not sued and cannot sue the
underlying carriers, which defendants allege to be necessary parties.
While the Commission is confident that it will prevail in its
opposition to these motions, the burden of having to respond to such
motions is not insubstantial.
The American public will benefit greatly from S. 2998's grant to
the FTC of jurisdiction over common carriers in the prepaid calling
card arena. The FTC respectfully continues to recommend that, rather
than take a piecemeal approach to providing the FTC with jurisdiction
in this important area of commerce, Congress repeal altogether the FTC
Act exemption for common carriers subject to the Communications Act.
The FTC has extensive expertise with such areas as advertising,
marketing, billing, and collection, areas in which significant problems
have emerged in the telecommunications industry.\19\ In addition, the
FTC has powerful procedural and remedial tools that could be used
effectively to address developing problems in the telecommunications
industry if the FTC were authorized to reach them.
---------------------------------------------------------------------------
\19\ For example, the FTC has brought numerous cases involving the
cramming of unauthorized charges onto consumers phone bills. See, e.g.,
FTC v. Verity Int'l Ltd., 335 F. Supp. 2d 479 (S.D.N.Y. 2004), aff'd in
part, rev'd in part, 443 F.3d 48 (2d Cir. 2006), cert. denied, 127 S.
Ct. 1868 (2007); FTC v. Audiotex Connection, Inc., C-97 0726 (DRH)
(E.D.N.Y. 1997); FTC v. Int'l Telemedia Assocs., Inc., 1-98-CV-1925
(N.D. Ga., 1998); FTC v. Sheinkin, 2-00-363618 (D.S.C., 2000); FTC v.
Mercury Marketing of Delaware, Inc., 00-CV-3281 (E.D. Pa. 2000); FTC v.
Epixtar Corp., 03-CV-8511 (DAB) (S.D.N.Y. 2003); FTC v. Nationwide
Connections, Inc., 06-80180-CIV-Ryskamp/Vitunack (S.D. Fla. 2006); FTC
v. Websource Media, LLC, Civ. No. H-06-1980 (S.D. Tex. 2006).
---------------------------------------------------------------------------
VII. Conclusion
The Commission will continue its aggressive law enforcement and
consumer outreach and education programs in the prepaid calling card
arena. The Commission thanks this Committee for focusing attention on
this important issue and for the opportunity to discuss its law
enforcement program.
Senator Nelson. I am going to start asking questions of
you, Mr. Chairman, and if you would then feel free to expand as
much as you want with regard to your answers.
STATEMENT OF HON. WILLIAM E. KOVACIC, CHAIRMAN, FEDERAL TRADE
COMMUNICATION
Mr. Kovacic. Great.
Senator Nelson. I understand that the FTC has taken some
actions to rein in some of these bad actors and the costs of
entering this business are fairly low, and it seems like a lot
of these bad actors may be able to get around the injunctions
against them and consent decrees by reincorporating and moving
on to safer regions or other states.
So as these bad actors are trying to avoid the arm of the
law, what do you need to do at the FTC to address this problem?
Give us your thoughts as to whether we need to get the criminal
justice system involved in going after these bad actors.
Mr. Kovacic. Let me begin by thanking you, Mr. Chairman,
Ranking Member Hutchison, for the privilege of speaking about
this enormously high priority area of concern.
I would say there are three things that we should focus on
in considering the phenomenon that you mentioned.
One is to continue our existing efforts to strengthen our
compliance program. Over the past couple of years, we have
devoted a lot of resources to increasing our ability to follow
what happens to our existing orders and to identify instances
in which people subject to our orders have violated them, and
to make a point of going after recidivists both with our own
resources and in cooperation with other enforcement agencies. I
think we have converted what used to be a system of manual
retrieval to an electronic database that lets us follow these
folks along.
Second, where there are recidivists who violate existing
orders, I think you put your finger on a key consideration.
Increasingly, we seek to engage the efforts of Federal and
State officials who have the capacity to enforce infringements
of that type as crimes. And it is our view that where the kind
of misconduct that you and the Congressman have been describing
is repeated, the only truly credible sanction is to take their
freedom away because in many instances they dissipate assets.
They hide them effectively so that the sanction that counts is
the sanction that involves imprisonment. So greater cooperation
through what we call our Criminal Liaison Unit, which is now
roughly at its fifth anniversary, but expanded efforts of those
types, and with your encouragement and cooperation, we will
make that a focal point of what we do.
Senator Nelson. Now, does that unit work with the U.S.
Attorney?
Mr. Kovacic. Yes, sir.
Senator Nelson. And then the U.S. Attorney prosecutes the
case.
Mr. Kovacic. Precisely. The partnership that is developed
is with the U.S. Attorney's Office with the Department of
Justice, and with our state government counterparts. We assist
in preparing the cases and they deliver them through their own
efforts and through our cooperation. And I would be happy to
share for the record later with you and your staff the
extraordinary success that this cooperation has had in putting
serious offenders in prison.
Senator Nelson. Do you want to do that in testimony or
submit it in writing?
Mr. Kovacic. If I could submit that in writing to you, I
would be delighted to do it. But your encouragement to continue
on that path is very important.
[The information referred to follows:]
But there are a couple of ideas the Senate may want to consider
including in its legislation. First, you can specify that the FTC can
freely share and coordinate enforcement activities and complaint
information with authorized State officials in affected States; for
instance, State Attorneys General, State Commissions, and certain
categories of statutorily authorized consumer advocates. At a minimum,
complaint information could be shared with suitable advanced
disclosures to the complainant specified. (Meaning the FTC should
notify complainants--up front--orally or on the website--that
information about their complaint may be shared with State authorities
to facilitate resolution). Second, you can require that the FTC
maintain the task force initiative. In his testimony, FTC Chairman
Kovacic stated the task force was formed at his behest and is not
statutory required. Should Chairman Kovacic step down from his post
there is no guarantee that a successor would continue this
collaborative effort. Memorializing Chairman Kovacic's task force
innovative in law would provide consumers with higher level of
protection from fraud and abuse.
Mr. Kovacic. The third element I think is to improve our
cooperation with our state and local government counterparts.
Last year, with a number of people quite happily in this room
whose efforts you will hear about later today, we formed a
joint Federal-State task force. What we have come to understand
is that in the archipelago of public institutions that work in
this area, only if we link the islands together and work
effectively will we be able to track and identify offenders no
matter where they go within the United States. And
increasingly, they exploit gaps in cross-border enforcement so
that the cooperative effort has to involve not simply our
partners at the state and local level.
And as you have already heard today, our state counterparts
have done wonderful things using their own authority. Someone
you know quite well, Attorney General Bill McCollum in Florida,
has done a fantastic job as well.
But to deepen the integration of our efforts with our state
counterparts because the sum of our efforts will be much
greater if those are improved, and by having local authorities
and state authorities work with us, sharing the resources we
have, both access to information about infringements, access to
information about existing orders, sharing information, we
greatly increase the likelihood that individuals will not evade
the force of the law simply by moving from one place to
another.
Those would be three key priorities for us.
Senator Nelson. Tell us about standardized disclosure
requirements. Would they help the Commission's enforcement
efforts?
Mr. Kovacic. I think the disclosure requirements that are
spelled out in S. 2998 are an excellent foundation for
providing standardized disclosures. I think those key
ingredients adopted into law will be enormously useful. They
address precisely the kinds of concerns that you identified in
reviewing the card examples that we have seen today, that
assist in overcoming the misleading representations or
nonrepresentations that Congressman Engel just mentioned a
moment ago. And I think S. 2998--simply adopting that menu of
considerations into law--would be a great step toward providing
greater assurance about what is actually associated with each
of these transactions.
Senator Nelson. What can the FTC do to collect more
accurate information regarding the consumer complaints?
Mr. Kovacic. We have got, I think, the framework of a
superb system in place now. It is our Sentinel database through
which a large number of government and nongovernment
organizations now, again, owing to efforts that had been
encouraged with enormous effectiveness by this committee, by
this chamber, and by the House--to build Sentinel, which is an
electronic database, we obtain information directly through
complaints that come into our Complaint Center and through our
state and local government enforcement counterparts. So we have
not only an excellent repository now that collects information
from a variety of streams--literally dozens of partners
participate in this--but owing to resources, again, that
Congress has generously provided us, we now have mechanisms for
identifying almost in real-time patterns of misconduct.
An important supplement to that is to increase our consumer
education efforts, that is, to alert consumers about where to
go. And this is where the point about economic disadvantage and
vulnerability is terribly important. We realize that an
increasing focus of our work has to be to reach populations
that are not likely to go to public authorities, immigrant
populations that are the victims of misconduct, minority
individuals in poor communities who may have simply despaired
at the prospect that public authorities of all types will
assist them in matters of need.
We are increasing our efforts through our Hispanic language
initiative now, which is about 5 years old, where we are
retooling many of our brochures that deal with prepaid calling
cards to ensure Spanish language speakers inform us and
exercise precautions on their own. To inform us, we are also
developing efforts that we are pursuing now to work with a host
of different organizations to reach populations that might not
otherwise alert us to patterns of misconduct. So to expand
these consumer education efforts, but in particular, to reach
populations that for a variety of reasons, economic
disadvantage, social disadvantage, historical disadvantage of
all types, may simply not have confidence that public
institutions at all levels of our government are willing to
help out because if we can detect the misconduct, we now have
the apparatus in place to identify problems quickly, to build
the cooperative framework with our state and local counterparts
and our counterparts at the Federal level to do something about
it promptly.
Senator Nelson. And are you doing an outreach to our
military population?
Mr. Kovacic. We are indeed. Under our Sentinel program, we
have a cooperative program with the Department of Defense. One
of our main partners is the Department of Defense. And a number
of our projects involving not simply prepaid calling cards but
other areas of concern involving consumer protection, financial
practices, and others have our military service people as
important focal points. And again, these are relationships that
we can deepen and strengthen over time, but I am happy to
report to you that the basic infrastructure to do that work is
in place and is working now, but it can be enhanced.
Senator Nelson. Describe how you have a mechanism as part
of the task force for sharing the complaint information with
State and local governments.
Mr. Kovacic. Through the Sentinel system, our law
enforcement counterparts are able to share and access
information in those databases. That is a condition of
participating. And these are secure systems, and the eligible
participants, to obtain that information, are law enforcement
authorities, public authorities with law enforcement
responsibilities. They have access to this information.
But it is, I think, again something you pointed to before.
It is not simply the access to the raw information. It is
building the personal relationships and the institutional
networks that ensure that we share information about better
practices and techniques about what is taking place, patterns
we are observing, as well as enforcement techniques that put us
in a better position to apprehend wrongdoers and sanction them.
Senator Nelson. Now, some of these charges that they list
are payments to the Federal Universal Service Fund and the pay
phone owner compensation. How do you go about determining
whether these calling card companies have remitted the money to
these government entities or in the case of pay phone
compensation, to the pay phone owners?
Mr. Kovacic. Senator, that is an ingredient of the problem
that we have not focused on. Typically the payments to the
Universal Service Fund and the fulfillment of obligations have
tended to be the province of our telecommunications regulators
at the state and Federal level. That is a level of expertise, a
specific concern we have not focused on. But we do work
actively with our state and local counterparts involving
telecommunications oversight on the other dimensions of the
problem.
Senator Nelson. And that would be in the case of Government
as well where it might be the Federal Universal Service Fund?
Mr. Kovacic. We tend not to focus on fulfillment of those
obligations, but we do work actively with the Federal
Communications Commission in sharing information, what we learn
about the operation of the sector itself.
Senator Nelson. It seems like that is important because
that is another case of fraud about which a prosecutor needs to
know.
Mr. Kovacic. No question.
Senator Nelson. What percentage of the total calling card
market would you say constitutes these bad actors?
Mr. Kovacic. Very hard to determine, Senator, and I do not
know that we have attempted a precise calculation. It is about
a $4 billion-plus a year sector. And as you and your colleagues
and Congressman Engel have mentioned today, the vast bulk of
activity in that sector is performed by legitimate enterprises.
Our concern is that whatever the actual percentage of
commerce accounted for by illegitimate enterprises is, it has
the capacity to taint the entire sector. That is, if
individuals repeatedly have bad experiences, it becomes very
difficult for the legitimate enterprise to step forward and say
you can trust me. ``My representations are honest. I am not
going to cheat you.'' So the real hazard here, again, whatever
the precise calculation is--and for the record, we would be
glad to take our best stab at giving you our own estimate.
Whatever it is, it has a unique capacity to taint the entire
field, and that is the menace that we have to deal with.
Senator Nelson. Are you getting cooperation from the good
actors?
Mr. Kovacic. Indeed, we are, sir. Yes. It is the good
actors who help identify the nature of the problem. They have
made suggestions about what to do about it. And I think for the
very reason that you and Senator Hutchison mentioned
originally, their own investments, their own good name is at
stake. And if consumers believe that this is a bad commercial
neighborhood, they will stay out completely and the others will
suffer. They are helping us.
Senator Nelson. A minute ago, you mentioned the activity of
the states going after these bad actors. And I would like you
to comment on what occurs if a state goes after them, the state
gets them in a scenario that applies just to that state. So the
bad actors move to another state. So the FTC is going to have
to coordinate the activities of those state lawsuits when they
raise the violation of section 5 of the FTC Act. Tell us about
that.
Mr. Kovacic. I think what we will certainly have to do is,
first, to have a network that ensures that all of us are aware
of the activity of each institution so that we have a sense of
what the individual pieces of enforcement look like, but also a
sense of how to develop a collective strategy about the timing
and the prosecution of matters.
One thing that increasingly has become part of our
portfolio is what we call sweeps, where we work in cooperation
with our State counterparts and sometimes our international
counterparts where on a single day we will announce the
prosecution or completion of literally dozens of matters
involving a related practice. And these sweeps have become an
extremely valuable tool to ensure that we get broad coverage
and from the point of view of raising consciousness, the fact
of bringing lots of them at once tends to generate lots of
attention which ensures that the consequence of prosecution is
greater deterrence.
Senator Nelson. Do you want to comment on the controversial
issue in the Committee on common carrier exemption?
Mr. Kovacic. I would like to thank the Committee, to thank
Senator Dorgan, to thank you, Mr. Chairman, for the
possibilities in S. 2998 to permit us to operate much more
extensively in instances in which a potential wrongdoer is a
communications service provider that is a common carrier.
As you know, there are other public institutions that have
the capacity in some ways to do what we do, Federal and State.
The reason we are keen on eliminating and attenuating these
restrictions is that there are many instances in which we are
dealing with firms that are not, we believe, common carriers,
but they raise defenses that implicate the common carrier
exemption. In the two matters that you are aware of, our two
cases brought in the spring, Clifton Telecard and Alternatel,
we are having to spend precious resources to defeat--and we
believe we will--arguments that communications firms are
necessary parties and must be brought into the lawsuit.
In other instances, we see clear evidence of misconduct by
firms that are unmistakably communication services providers.
We cannot address those directly. We have to hand those off.
And that handoff can be a source of fumbles, and it is not
always clear that someone else will inevitably take the ball
and run with it.
We think that given the changes in the sector today, that
if we have the capacity to deal universally across the country
with not only the distributors of these cards whom we are
dealing with in the Clifton and Alternatel cases, but also with
telecommunication services providers, we have the ability to
create a much more effective source of protection.
And it is not to denigrate the work that other public
institutions have done in any way. We are simply proud of the
experience we built. If I can go back to the Delta or US
Airways Shuttle example before, we have flown these routes in
advertising and misleading conduct lots of times. And if it is
a dark, rainy night on the northern approach coming down the
Potomac, which we have done many times into National Airport,
which has sort of a short runway, and you think about who you
want in the cockpit, you want someone there with a little bit
of gray in the temples who has done it a lot, who says this is
the 2,500th landing I have made at National on a dark, rainy
night.
We have flown this route lots of times, and we think we are
pretty good pilots when it comes to dealing with deceitful and
misleading behavior so that there are other good pilots out
there, but we think we can fly this route very well if we are
given authority to fly over this part of the commercial space.
Senator Nelson. So the bottom line is you support the
legislation and you think it would be a step in the right
direction.
Mr. Kovacic. No question, Senator. We have some specific
suggestions which we are happy to share with your staff and to
continue to discuss with you about areas in which we think the
legislation can be improved. There are some technical
adjustments we would suggest. But we think the legislation is
unmistakably a step ahead and a crucial element that you and
the Committee appreciate quite well. Our regulatory frameworks
need upgrades over time, and your colleagues, your counterparts
in the House, understand this quite well, as Representative
Engel just mentioned. And we see the adoption of this type of
legislation as being the equivalent of getting the upgrades we
need to make sure that the enforcement operating system works
well over time.
Senator Nelson. Well, thank you, Mr. Chairman. And without
objection, part of the record will be the written material that
you wanted to insert in the record.
Mr. Kovacic. Thank you.
Senator Nelson. And I thank you, and let me call up the
second panel.
Mr. Kovacic. Thank you very much for the chance to be here
today.
Senator Nelson. Thank you.
We are happy to have Sally Greenberg, Gus West, Patricia
Acampora, and Rosemary O'Brien. Sally Greenberg is the
Executive Director of the National Consumers League. Gus West
is the President of The Hispanic Institute. Patricia Acampora
is Commissioner of the New York State Public Service
Commission. Rosemary O'Brien is the Director of Marketing of
Military Marketing.
As stated in the previous panel, your written testimony
will be included as part of the record.
Senator Nelson. Mr. West and Ms. Greenberg, both of you
have followed this issue for some period of time, and it seems
that in the past couple of years, there has been a dramatic
spike in the number of complaints against the bad actors in the
industry. Can you tell us what factor is responsible for this
increase in complaints? Is it the low cost of entry into this
lucrative market? Is it the failure of regulators? What is your
opinion? Ms. Greenberg?
STATEMENT OF SALLY GREENBERG, EXECUTIVE DIRECTOR, NATIONAL
CONSUMERS LEAGUE
Ms. Greenberg. I do believe that the low cost of entry is a
contributing factor. It is really easy to get in and out. It is
easy to get out from under the lens of law enforcement. I have
in my written statement a quote that I could not resist adding
from one episode of The Sopranos where Tony Soprano is talking
about how he and his cronies are in the business of prepaid
calling cards and somebody else is left holding the bag. Very
easy to get in, very easy to take people's money and run.
One of the things that we are recommending in our testimony
is that there be some bond that entrants to the market who are
selling prepaid calling cards put up so that if law enforcement
finds that the cards are not providing the minutes that are
promised, that we have a place to go to look for and compensate
consumers who have been ripped off or defrauded as a result of
these cards. So I think that low barrier to entry is a real
problem then. I think we could tackle that.
[The prepared statement of Ms. Greenberg follows:]
Prepared Statement of Sally Greenberg, Executive Director,
National Consumers League
Introduction
Good morning, Mr. Chairman. My name is Sally Greenberg and I am
Executive Director of the National Consumers League. I appreciate this
opportunity to appear before the Senate Committee on Commerce, Science,
and Transportation to discuss the need for greater consumer protections
in the purchase and use of prepaid calling cards. This largely
unregulated consumer product is a ``Wild West'' of sellers and
merchants who too often prey upon the most vulnerable consumers by
promising minutes they don't deliver and loading up on hidden or
undisclosed charges and fees. In an industry like this, with low
barriers to entry and a totally unregulated market, you can be sure
there will be unscrupulous operators who will take the money and run.
The National Consumers League, whose founding in 1899 makes us the
oldest consumer organization in the United States, has a longstanding
interest in protecting consumers from fraudulent practices and is the
only consumer group that operates a national fraud center. (The NCL's
Fraud Center is described at www.fraud.org).
I want to commend you, Senator Nelson, for your leadership in
offering S. 2998, the Prepaid Calling Card Consumer Protection Act of
2008. Consumers rely on you, an outspoken defender of consumer rights
and protections, to look out for their interests. In my testimony, I
will address some of the facts and figures describing the magnitude of
the prepaid calling card industry and the large amounts of money
involved. I'll discuss the fraud and deceptive practices associated
with that industry and actions taken at the state and Federal levels in
response to fraud I'll discuss why NCL supports your bill, S. 2998, and
I'll make some policy recommendations. Our written testimony also
includes a timeline detailing the growth of the industry and the rise
in fraud associated with that growth.
Let's start with the industry. It is illustrative that the shady
practices of the prepaid calling industry were featured prominently on
the HBO series, The Sopranos. In Episode 26, Tony is discussing the
mob's work with prepaid cards. I've deleted the obscenities:
Tony Soprano. ``So, telecommunications once again fails to
disappoint. What's this thing? Telephone calling cards. You
find a front man who can get a line of credit, you buy a couple
of million units of calling time from a carrier. You become
`acme telephone card company'. `Acme'. You're now in the
business of selling prepaid calling cards. Immigrants
especially, no offense. They're always calling back home to
whoever (deleted). And it's expensive, right? You sell
thousands of these cards to the (deleted), cards at a cut rate.
But you bought the bulk time on credit, remember? The carrier
gets stiffed. He cuts off the service to the card holders, but
you already sold all your cards. That's (deleted) beautiful!
(Laughing) it's a good one.''
Of course, no one should conclude that the whole prepaid calling
card industry is controlled by organized crime: we have no such
evidence, but this vignette from The Sopranos demonstrates how easy it
is to get into the industry, rip off consumers, and disappear with no
accountability whatsoever. That must change.
Prepaid Calling Card Facts
Prepaid cards are a $4 billion a year industry, responsible
for 11 billion calls in 2004.\1\
The industry is estimated to reach $6.4 billion in revenue
in 2008.\2\
Examples of fraudulent practices used by the prepaid
companies include ``hang-up fees,'' periodic maintenance fees,
destination surcharges, and high billing increments.\5\
Companies that try to ``play by the rules'' are often
punished by a loss of market share due to fraudulent
carriers.\6\
Only 11 states, including California, Connecticut, Florida,
and Illinois, currently have laws pertaining to calling card
fraud, specifically. Most turn to generic consumer protection
statutes, but enforcement has been extremely light.\7\
Hispanic consumers may be losing up to $1 million per day
because of fraudulent phone cards.\4\
The average calling card delivers only 60 percent of the
minutes promised, according to The Hispanic Institute, a non-
profit research group.\3\
The FTC's survey of prepaid calling cards confirms The
Hispanic Institute's findings. For instance, one calling card
tested by the FTC claimed to offer 360 minutes to Panama, but
only delivered 23 minutes of calling time. The FTC said that in
87 tests of the prepaid cards, the cards delivered an average
of only 50 percent of the advertised minutes.\8\
The cost-per-minute rates for prepaid phone cards can be up
to 87 percent higher than expected. An expected call rate of 15
cents per minute, for example, may end up costing 28 cents per
minute.\9\
Customer service representatives for prepaid calling cards are
often unavailable or not knowledgeable regarding the prepaid phone
cards their employers are selling. A 2005 University of Georgia study
found that in a third of the calls to prepaid calling card customer
service lines, callers couldn't reach a representative. When they did
make contact, the representative often was unable to answer basic
questions about fees or rounding up of minutes.\10\
Why We Need To Protect Users of Prepaid Calling Cards
The rapid growth of the prepaid calling card industry combined
with, until recently, a lax enforcement of consumer protection statues
at the state and Federal levels, has enabled consumer fraud to
flourish. Like so many other scams, the most frequent victims of the
fraud and deception are the most vulnerable consumers: immigrants and
the working poor; and those lower income Americans who often cannot
afford or obtain regular phone service. These consumers rely on calling
cards to stay in touch with friends and loved ones in the U.S. and
abroad. Sadly, we believe that military families are also likely
victims of the prepaid card scams and rip-offs.
Yes, the cards provide these users with an alternative means of
calling home, but many use false and deceptive practices in the
process, and impose unconscionable terms. Fraud is fraud--if an
automobile is sold with the promise of a sun roof and chrome wheels, it
better have a sunroof and chrome wheels--if a phone card promises 500
minutes to call El Salvador, it should deliver those 500 minutes.
Some state attorneys general--notably in your state of Florida,
Senator Nelson--have done a commendable job in prosecuting fraudulent
prepaid card companies. The Federal Trade Commission has also conducted
investigations and brought important cases against individual prepaid
phone card providers. Unfortunately, these scattered efforts are
insufficient. We need basic Federal protections to stem the tide of the
many deceptive practices in this industry.
NCL believes that FTC regulations, as called for S. 2998, would
help to level the playing field for all phone card providers. Such
regulations include requirements that prepaid phone card providers and
distributors disclose the terms and conditions of the cards, and list
the per minute rates, preferred international destination rates, and
any fees or surcharges, in their advertising.
We need a national floor of minimum requirements stating what
industry practices won't be permitted. We applaud S. 2998's provisions
preserving the rights of states to go forward with their own civil
cases--as Florida did. The Federal Government should set minimum
standards and permit states to go forward with provisions that don't
conflict with the Federal law. That's a pro-consumer position and
acknowledges the important role states have played in enacting and
enforcing consumer protections.
NCL believes that both your bill, Senator Nelson, S. 2998, and
Congressman Elliot Engel's bill, H.R. 3402, would go far in addressing
the false promises and deception associated with these cards. Anecdotal
evidence suggests that the simple threat of regulation has already
increased pressure on the prepaid calling card industry to reform its
marketing practices.\12\ We've also seen evidence through the IDT
settlement in Florida that if one company is forced to disclose
accurately how many minutes a card will provide and what the surcharges
and fees will be, they will lose market share to the other firms who
are shading the truth. Therefore, we need to create a level playing
field where all participants are required to provide accurate
information.
Beyond Disclosure: What More Can We Do To Protect Consumers
While NCL supports your efforts, Senator Nelson, to require full
disclosure of terms and conditions on these prepaid calling cards, we
find that the terms themselves, when they are disclosed, are too often
unconscionable.
For example, the text in fine print on the back of my $5.00
``Africa Sky'' card states the following:
All of the following fees will reduce the number of available
minutes and the value of the card. Use of a toll free number
from a pay phone will incur a $.99 per call fee. Per minute
rate will be $.02 higher for calls placed using toll free
access numbers. Call time for multiple calls is calculated by
rounding the last minute up to the closest multiple of 3 and
then adding 1 minute except that if your call lasts less than 1
minute you will be charged only for a minute. If available
minutes are not all used up on the first call the following
fees will apply: (1) the multiple call rate will be 40 percent
higher and will apply to all calls (see poster for details);
(2) a fee per call of $.59 will apply to each call; and (3) on
midnight after the first call a fee of $.69 will be deducted
and then weekly thereafter. Card Expires Three Months After
First Use . . . Rates and Fees are Introductory and are subject
to change anytime. . . .
The same or similar text is found on most of the cards. So, though
we have the terms disclosed, albeit in fine print, we have a company
that is rapidly subtracting money from the user's original purchase. A
40 percent higher rate is imposed after the first call; a fee of 59
cents per call will apply to each one after the first call; and after
midnight of the first call, the fee is 69 cents, which will be deducted
weekly thereafter. This is from an original $5.00 card. No wonder users
find that two or 3 weeks--or sooner--after first use, the card has no
credit remaining. Notice the card also contains this catch-all phrase
``Rates and Fees are Introductory and are subject to change anytime . .
.'' leaving the card distributors the option of changing the rules
whenever they wish.
Worse still is the ``Majestic DMV'' Card I purchased for $2.00:
(1) A $.99 fee applies on the 1st day of use and every 5 days
thereafter; (2) Calls made through tollfree access numbers are
subject to a fee of up to 4 cents a minute; (3) payphone
surcharge of $.99; (4) A destination surcharge of between 20-60
percent of the total call; and/or (5) a fee of $.10-$.99 for
connected calls, $.15/minute maximum domestic call rate (before
applicable charges and fees); minutes and/or seconds are billed
at a minimum of 1 minute and up to 5 minute increments, plus
any applicable fees. Card expires 3 months after first use or
12 months after activation.
As a consumer advocate, I've often found it useful to look at
consumer protection measures in other countries. I lived in Australia 2
years ago and used prepaid cards for calls to the United States. My
experience was uniformly positive--the Australian prepaid cards tended
to deliver the minutes they promised, and they were good for multiple
uses. Choice Magazine, Australia's counterpart to our Consumer Reports,
tested these international calling cards and found that indeed, many
delivered good value and low rates without connection fees or added
charges. When I arrived back in the United States and began buying
cards here, I found that their value tended to disappear after the
first call. When I read the fine print, I understood why.
I also consulted the document Consumer Protection in the European
Union--Ten Basic Principles--and note that the Fifth Principle is
relevant to our discussion of prepaid calling cards:
Contracts Should Be Fair To Consumers
Have you ever signed a contract without reading all the small
print? What if the small print says the deposit you just paid
is non-refundable--even if the company fails to deliver its
side of the bargain? What if it says you cannot cancel the
contract unless you pay the company an extortionate amount in
compensation? EU law says these types of unfair contract terms
are prohibited. Irrespective of which EU country you sign such
a contract in, EU law protects you from these sorts of abuses.
We could apply the EU's notion of contract fairness to this issue.
NCL supports S. 2998's disclosure requirements and hopes that they will
satisfactorily address the problem of consumers paying good money for a
prepaid calling card that fails to deliver the service. An open
marketplace where all prepaid calling card companies are providing
accurate information may do the trick; the market has a way of working
very effectively when consumers have accurate information upon which to
compare rates.
NCL would like to suggest, however, that after passage of your
bill, the FTC closely monitor the industry and in a year's time, report
on whether disclosure is addressing the problem adequately.
Diogenes called the market ``a place set apart where men can
deceive each other.'' We must impose some limits on that paradigm. If
after a year we still see failure to accurately disclose rates and
unconscionable terms when the rates are disclosed, we would urge this
Committee to consider stronger regulation of this industry.
NCL Policy Recommendations Related to Disclosure and S. 2998
The National Consumers League strongly supports S. 2998 and its
provisions to give enforcement authority to the Federal Trade
Commission under the ``unfair or deceptive act or practice,'' clauses
of the Federal Trade Commission Act. While prepaid calling cards
generally offer savings on international long distance calling versus
traditional ``Dial 1,'' 10-10 dial-around and wireless long distance
calling,\13\ these savings are no excuse for fraud or deception.
We also support FTC's call to appoint a monitor to oversee the
prepaid calling card business,\14\ and a requirement that the FTC
report back to Congress on a periodic basis regarding the status of its
efforts to enforce the terms of the proposed legislation.
As a general proposition, we applaud the requirements included in
the Florida Attorney General's June 2008 settlement with prepaid card
companies, such as:
Ceasing all deceptive advertising.
Providing 100 percent of the minutes advertised.
Not using hidden fees or misleading minute calculations to
increase their profits at consumers' expense.
Printing disclosures for a given card in any language used
to advertise that card.
Printing the exact number of minutes available and the
card's expiration date (if applicable) on the card.
Prohibiting naming of card surcharges to resemble taxes.
Requiring one-minute increment billing.
While S. 2998 requires that the disclosure text on the calling card
itself, packaging, or other promotional material (including online) be
in same language used to advertise the card, we would recommending
expanding Sec. 3.(b)(4) of the bill to require that prepaid phone card
providers provide toll-free customer service lines staffed by customer
service representatives able to converse in the languages that the
cards are advertised in.
Further Recommended Action If Disclosure Requirements Are Not
Sufficient
If after 1 year, the FTC reports back to Congress with evidence
indicating that greater disclosure is not reducing the consumer abuses
in the industry, we recommend that further action be considered by this
Committee, with the Federal Trade Commission given the authority to
enforce these provisions:
Require all market entrants to be licensed and post a bond
before marketing cards to consumers. That bond would go into a
fund to compensate consumers who are victims of fraud. Those
companies that market prepaid calling cards should also be
required to provide a name, address and place of incorporation.
Right now, the barriers to entry are so low and the penalties
for not making good on the value of the cards are so minimal
that it's simply open season on consumers. We believe requiring
a bond will act to keep many bad actors out of the industry.
Require all market entrants to have a 24 hour, 7 days a week
toll free number that has a live person on the other end who
must be knowledgeable about the use of the card.
Require that fees and surcharges imposed be related to
actual costs. Congress has imposed rules on other industries
that were charging consumers outrageous fees--the moving van
industry, payday lenders, and funeral homes, to name a few. If,
in a year's time, this Committee finds that disclosure is not
easing the deception and rip-offs that plague this industry,
the Committee should consider imposing stronger regulations on
prepaid calling card companies and the many fees and surcharges
they impose on consumers.
Require that all cards have an expiration date and that this
date be no shorter than 1 year after activation. If a seller
fails to make a disclosure on expiration, the card should be
valid indefinitely.
Require sellers to list the minimum charge per call and the
balance in minutes and dollars remaining on the card.
Require sellers to inform consumers, via a website or toll-
free phone number, of any proposed changes in terms and
conditions, with consumers given the chance to reject these
changes and receive a refund on the card with no fee imposed
for requesting such a refund within an appropriate grace period
of no less than 30 days after posting of the proposed change.
Prepaid calling card providers should also be required to
prominently list a mailing address to which customers can
direct refund requests and/or a website with a refund form that
the consumer can access easily.
Require uniform terms in all prepaid calling card contracts
so that consumers can comparison shop. Companies should not be
allowed to confuse consumers by using a variety of terms for
charges such as ``administrative fee'' or ``service fee.''
The amounts involved in prepaid phone card transactions are
too small for any one individual to bring a case to court. The
only meaningful way to allow consumers to hold prepaid card
sellers accountable is through use of the class action process.
Consumers need to be guaranteed a private right of action and
the ability to band together as a class to bring cases against
dishonest prepaid phone card providers.
Conclusion
We strongly support S. 2998 and commend this Committee for holding
the hearing today. By requiring much better disclosure on prepaid
calling cards, this bill will help to mitigate the deception and fraud
associated with these cards. We also support further monitoring of the
industry by the FTC, which will in turn report to the Members of this
Committee.
NCL also urges Congress to find a way to require that prepaid
calling card companies go beyond simple disclosure of their onerous
rates. The most vulnerable consumers--military families, immigrants,
low-income families--rely on these cards and spend their hard-earned
money only to see the value of the cards disappear quickly after first
use. NCL believes we can do better by consumers. We support the
disclosure required under this bill and hope that it works. If we need
to take stronger action, this bill's requirements will represent an
excellent first step.
Thank you, Mr. Chairman, for giving the National Consumers League
this opportunity to comment on your bill. We commend you for your pro-
consumer record and look forward to working with you and your staff to
see this bill enacted into law.
Issue Timeline
We have provided a timeline of enforcement actions and legal
settlements pertaining to prepaid calling cards below.
------------------------------------------------------------------------
------------------------------------------------------------------------
1986 Prepaid calling cards introduced to
the North American market.\15\
------------------------------------------------------------------------
1996 U.S. prepaid card sales reach $1.1
billion.\16\
------------------------------------------------------------------------
April 2001 New York Attorney General Eliot
Spitzer announces settlement with
five companies accused of
deceptively marketing prepaid
telephone cards throughout upstate
New York. This settlement was part
of Spitzer's ongoing efforts to
combat illegal marketing practices
of prepaid phone card companies
dating back to 1999.\17\
------------------------------------------------------------------------
2006 Newark, NJ-based IDT Corp., the
largest prepaid calling card company
in the U.S. reports $2.2 billion in
total sales.\18\
------------------------------------------------------------------------
2007 U.S. prepaid market reaches $4
billion in revenue.
------------------------------------------------------------------------
January 2007 IDT Corp. settles Federal class
action suit brought on behalf of
hundreds of phone card customers
alleging fraudulent and deceptive
advertising practices.\19\
------------------------------------------------------------------------
March 2007 IDT files lawsuit against 9
competitors, alleging that they
provide 40 percent less time than
advertised. Epana Networks, Dollar
Phone, and Locus Telecommunications
quickly reach settlement with IDT,
agreeing to cease any misleading
marketing practices. Six other
companies named in the suit,
including CVT Prepaid Solutions Inc.
issue an open letter to the
industry, claiming that IDT's suit
is ``nothing but an underhanded ploy
to regain lost market share by
intimidation.'' \20\
------------------------------------------------------------------------
------------------------------------------------------------------------
-----------------------------------------------------------------------
July 2007 Florida Attorney General Bill
McCollum announces investigation of
10 prepaid calling card companies
for fraudulent or deceptive
advertising.\21\
------------------------------------------------------------------------
August 2007 Representative Eliot Engel (D-NY)
introduces H.R. 3402 ``Calling Card
Consumer Protection Act.'' \22\
------------------------------------------------------------------------
March 2008 FTC asks U.S. District Court for the
District of New Jersey to halt
allegedly illegal marketing
practices of prepaid card companies
CTA Inc., Clifton Telecard Alliance
One LLC, and Mustafa Qattous.\23\
------------------------------------------------------------------------
May 8, 2008 Senator Bill Nelson (D-FL) introduces
S. 2998 ``Prepaid Calling Card
Consumer Protection Act of 2008.''
\24\
------------------------------------------------------------------------
May 23, 2008 Texas Attorney General Greg Abbott
announces filing of legal
enforcement action against prepaid
calling card company Next-G
Communications, Inc. over allegedly
deceptive marketing practices
employed by the company.\25\
------------------------------------------------------------------------
Endnotes
\1\ ``THI Praises FTC for Standing Against Calling Card Fraud,''
The Hispanic Institute. 2007. Retrieved on July 24, 2008.
\2\ ``Prepaid Calling Cards: Market Dynamics and Forecast 2003-
2008,'' ATLANTIC-ACM. February 2003. Retrieved on July 25, 2008.
\3\ Ibid.
\4\ ``Facts and Figures,'' The Hispanic Institute. Retrieved on
July 24, 2008.
\5\ Office of the Attorney General of Florida (June 11, 2008).
``McCollum Announces Prepaid Calling Card Settlements, Industry-Wide
Reform''. Press release. Retrieved on July 24, 2008.
\6\ Holden, Diana. ``Calling Out Prepaid Phone Cards,''
BusinessWeek. July 9, 2008. Retrieved July 24, 2008.
\7\ ``Facts and Figures,'' The Hispanic Institute. Retrieved on
July 24, 2008.
\8\ Dang, Dan Thanh. ``Avoid These Prepaid Calling Cards, FTC
says,'' Baltimore Sun. June 6, 2008. Retrieved July 24, 2008.
\9\ Horton, Denise. ``Prepaid Phone Cards: Caller Beware,''
University of Georgia Research Magazine. Fall 2005. Retrieved on July
24, 2008.
\10\ Ibid.
\11\ ``Calling Card Questions & Answers,'' The Hispanic Institute.
Retrieved on July 25, 2008.
\12\ Marshalian, Jonathan. ``You've Come a Long Way, Baby,'' The
Prepaid Press. September 17, 2007. Retrieved July 25, 2008.
\13\ ``Facts and Figures,'' The Hispanic Institute. Retrieved on
July 24, 2008.
\14\ Federal Trade Commission (March 26, 2008). ``FTC Asks Court to
Halt Prepaid Calling Card Scam; Alleges Consumers Receive Fewer Calling
Minutes Than Advertised and Pay Hidden Fees''. Press release. Retrieved
on July 24, 2008.
\15\ Frost and Sullivan. ``North American Prepaid Calling Cards
Market,'' August 10, 2006. Retrieved on July 25, 2008.
\16\ ``Prepaid Phone Cards: The Facts,'' State of New York Attorney
General. Retrieved on July 25, 2008.
\17\ Office of the New York State Attorney General (April 11,
2001). ``Prepaid Phone Card Sweep Cleans Up Deceptive Posters''. Press
release. Retrieved on July 25, 2008.
\18\ ``Talk Isn't So Cheap,'' BusinessWeek. July 23, 2007.
Retrieved on July 25, 2008.
\19\ IDT Corporation (January 25, 2007). ``IDT Reaches a Settlement
in Calling Card Class Action Lawsuit''. Press release. Retrieved on
July 25, 2008.
\20\ Hatcher, Monica. ``McCollum probes calling card deceptions,''
The Miami Herald. July 24, 2007.
\21\ Hatcher, Monica. ``McCollum probes calling card deceptions,''
The Miami Herald. July 24, 2007.
\22\ U.S. House. 110th Congress, 1st session. H.R. 3402, Calling
Card Consumer Protection Act. Online. Thomas.gov. Available at http://
www.thomas.gov/cgi-bin/bdquery/z?d110:HR03402
:@@@L&summ2=m& [Retrieved on July 25, 2008].
\23\ Federal Trade Commission (March 26, 2008). ``FTC Asks Court to
Halt Prepaid Calling Card Scam; Alleges Consumers Receive Fewer Calling
Minutes Than Advertised and Pay Hidden Fees''. Press release. Retrieved
on July 25, 2008.
\24\ U.S. Senate. 110th Congress, 2nd session. S. 2998, Prepaid
Calling Card Consumer Protection Act of 2008. Online. Thomas.gov.
Available at http://www.thomas.gov/cgi-bin/query/F?c110:1:./temp/
c110YZkszS:e930: [Retrieved on July 25, 2008].
\25\ Attorney General of Texas (May 23, 2008). ``Attorney General
Abbott Takes Legal Action Against Prepaid Calling Card Company''. Press
Release. Retrieved on July 25, 2008.
Senator Nelson. Mr. West?
STATEMENT OF GUS K. WEST, PRESIDENT AND CHAIRMAN OF THE BOARD,
THE HISPANIC INSTITUTE
Mr. West. Mr. Chairman, I do not know that we necessarily
at The Hispanic Institute would want to make it harder to do
business. We sort of believe that the problem really lies in
the enforcement. It seems that these fraudulent practices are
illegal at the Federal, State, and local level already, and it
just needs to be enforced. Feedback that we have gotten from a
few of the companies is that they were not going to change
their practice until the enforcement was stepped up, until they
were forced to deliver what they are promising.
[The prepared statement of Mr. West follows:]
Prepared Statement of Gus K. West, President and Chairman of the Board,
The Hispanic Institute
Mr. Chairman and distinguished Senators of the Commerce Committee,
my name is Gus West, President and Board Chair of The Hispanic
Institute, a Washington D.C. based non-profit. Thank you for inviting
us here today to give testimony regarding international prepaid calling
cards. These calling cards are an economical way to make international
phone calls. In the United States, Latinos purchase and use these cards
more frequently than any other group. The cards are used primarily to
talk with family, friends, and relations.
These cards are sold in neighborhood stores/tiendas/bodegas. We all
have seen posters in the windows of these stores, advertising the cost
of a certain number of minutes to a particular country. The cards are
normally in boxes behind the cashier and the customer is able to select
the card they wish to purchase. On the back of each card is an 800-
number and a PIN number assigned to the card. One calls the 800-number,
enters the PIN number, the international phone number desired, and then
receives a message telling the caller how many minutes he has for a
phone call.
We have tested hundreds of these cards and have found that on
average these cards deliver about half the minutes promised. In an
effort to have the most objective analysis we hired a private firm,
Washington-based Network Analytics, to conduct testing of international
prepaid calling cards sold in the Florida, New York and the Washington
D.C. markets. I have a copy of our study here today and it is posted on
our website at www.thehispanicinstitute.net. The conclusions of the
independent study mirror the results of the internal testing that we
conducted at The Hispanic Institute.
I have been using these cards myself, and been cheated out of
minutes. In my current role as Chairman of The Hispanic Institute, I
have often been asked by reporters if we could put them in contact with
other victims of this fraud. I ask them to go to anyone of these
neighborhood stores where these cards are sold, and ask anyone you see
buying these cards, if they have been cheated out of call minutes. You
will find that 100 percent of the people who use these cards will tell
you that they have been cheated out of minutes.
The most popular cards, the ones that are purchased most often, are
the $2 and $5 cards. While losing money on a $2 or $5 card may seem
minimal to some, it can be significant to a low wage earning family.
For reasons such as language, income, and lack of familiarity with
regulations the users of these cards have had little recourse to
address this fraud by a billion dollar industry.
This is false advertising and it is illegal under existing Federal,
state, and local laws. Moreover, we believe that other industries
intentionally prey on Hispanics when advertising in Spanish as the
majority of advertising for prepaid calling cards is done.
THI has been highlighting this issue for well over a year now.
While several State Attorneys General, State Legislatures, and the
Federal Trade Commission have begun to take action against calling card
fraud we have not seen any measurable improvement in this situation. We
look forward to the day when consumers in the United States can be
protected against this kind of fraud. Thank you.
______
Hispanic Institute
Calling Card Verification Test Plan
Provided by: Network Analytics Corporation
Objective
The purpose of this testing is to determine if calls to certain
destinations using commercially available prepaid calling cards are
providing the amount of minutes specified by the card providers.
Methodology
Call generators will be used to place the calls via the calling
card and complete the call to the destination call generators. Every
attempt will be made to use all the available time in a single call. If
this is not successful, most commonly due to quality of the line and
drops, additional calls will be made to the same destination until all
the remaining balance in the cards is used. Each call is recorded by
the units in order to interpret the amount of minutes announced by the
calling card platform.
Units
The testing will be performed using Call Generators (CallWave) in
the U.S. (Washington, D.C. and New York lines) and terminating to Call
Generators (CallWave) with Mexico and Guatemala numbers.
Cards
The following calling cards will be used:
Florida ($5)--Telmex Companero, STI Florida, Touch-Tel
Hondurena, Touch-Tel Guatemalteca, Touch-Tel Salvadorena,
Dollar Phone Coffee Time, Dollar Phone Rey, MPTA Florida Idol,
MPTA Nine, PCI Pilot, PCI Prima and TST Si Pues.
New York ($2)--Diamond Bingo, Diamond Arenque, SDI I Love NY,
Lycatel Success, Lycatel Call Me, STI World, RTG Martini, RTG
Cocktail and IDT Play Ball.
Washington, D.C. ($2)--IDT Boss
Toll Free ($5)--GEO Florida
Two cards of each are provided in order to attempt to test to each
destination with each card.
Test Deployment
The following are the numbers for the lines used:
Washington Originated calls: (202) 609-9875 and (202) 244-1066
New York Originated calls: (917) 779-8197
Mexico Termination: +525585256265
Guatemala Termination: +50222630419
Test Scope
The testing will provide the following data for each call:
------------------------------------------------------------------------
------------------------------------------------------------------------
Seq. Number Disconnect Reason
Date Call Duration Recording (Sec)
Time Call Duration Trace
Card Vendor Call Duration Destination carrier CDR
(Sec)
Card Name Call Duration Minutes
Card Denomination PAMS Score LQ
Card Code PAMS Score LE
Originating Number Area Code Per call Extra Charge (Using Next
(City) Call's announced balance)
Originating Number Next Call Announced Balance
Access Number Dialed Card indicated connection fee
Destination Country Card indicated Rounding Increments
Destination Number Card indicated maintenance fee
Destination Cell or Landline Toll-Free use surcharge
From Number shown at destination Calculated p/min charge based on 1st
call announcements
Announced Balance $ CCR
Announced Balance (minutes) AVE PDD
Rate Per Minute AVE Extra Charge
Minutes Not Provided (If call AVE PAMS LQ
used all balance)
Recording file name AVE PAMS LE
End of Dial Time Total Minutes provided
Call Progress detection time Completed Calls
Post Dial Delay Actual p/minute rate experienced
Call Disposition Total Minutes announced
Call Answer Time Percentage provided vs. announced
Call End Time Minutes Not Provided (If call used
all balance)
Warning Provided Percentage provided vs. announced
(last call)
------------------------------------------------------------------------
This information is provided from:
The originating carrier's Call Detail Record
Terminating Carrier's Call Detail Record
Call Generator (CallWave) Trace files
Listening to the Recordings created for each call
Terms written on each card
Results
Test calls were placed between November 12 and December 08,
2007.
From a total of 45 cards tested, 7 encountered completion
rate of 0 percent and could never reach the intended
destination while another 8 encountered 50 percent or less of
CCR.
Only 15 cards achieved the goal of utilizing the entire time
balance provided in a single call. Out of those, only 4 (27
percent) provided the entire balance announced to the customer
and 6 others (40 percent) provided 50 percent or less of the
time announced.
The following chart provides information about the Call Completion
Rate provided by each of the cards, sorted by highest (better) to
lowest (worst).
Call Completion Rate (CCR%)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The following chart provides information about the Average Post
Dial Delay provided by each of the cards, sorted by lowest (better) to
highest (worst).
Post Dial Delay (PDD Seconds)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The following chart provides information about the Average
Listening Quality provided by each of the cards, sorted by highest
(better) to lowest (worst).
PAMS Listening Quality
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The following chart provides information about the Percentage of
minutes provided versus minutes announced by each of the cards when all
minutes were used in a single call, sorted by highest (better) to
lowest (worst).
Percentage Provided vs. Announced (1 call)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The following chart provides information about the Percentage of
minutes provided versus minutes announced by each of the cards when
considering only the last call placed in which the last remaining
announced balance was used, sorted by highest (better) to lowest
(worst).
Percentage Provided vs. Announced (last call)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. Ms. O'Brien, you were nodding your head.
STATEMENT OF ROSEMARY G. O'BRIEN, PRESIDENT,
MILITARY MARKETING LLC
Ms. O'Brien. Yes, sir. I agree with Mr. West that
enforcement is key here. You already have lots of legislation
and rulemaking around this. What is critically important is
that the bad actors are brought to a competent body to account
for their actions. Generally speaking, I think the vast
majority of the prepaid industry is considerably reputable and
makes full disclosure. But I think that there are populations
that are disproportionately affected by the bad actors. And we
know where to find them. Let us find them and do what we need
to do. Enforcement is key.
[The prepared statement of Ms. O'Brien follows:]
Prepared Statement of Rosemary G. O'Brien, President,
Military Marketing LLC
Thank you for your invitation to speak to the Committee about the
military and the prepaid card industry. My name is Rosemary Grace
O'Brien. I have a Military Marketing practice located in New York City.
I would like to briefly summarize my background which qualifies me
to speak with you today. My professional career is deeply rooted in
telecommunications. It began back in 1981 with work performed for NY
Telephone. It continued uninterrupted with major and on-going
assignments from NYNEX, Southern New England Telephone, Southwestern
Bell, and a handful of telecom start-ups made possible by divestiture
in 1984. Eventually in 1997 I joined AT&T for a period of 7.5 years.
That experience is most relevant to your agenda today.
My work at AT&T was as General Manager of their worldwide Military
business. To be clear, not mission critical communications, rather my
team and I had the responsibility of providing Personal
Telecommunications Services--in-room phone service in barracks,
dedicated public payphones on military installations in 18 countries,
on larger U.S. Navy and Coast Guard ships, and in Forward-Deployed
locations, such as Bosnia and Kuwait, and eventually Iraq and
Afghanistan.
My job was to make sure Soldiers, Sailors, Airmen, Marines, and
Coastguardsmen were aware of the special plans and programs AT&T built
just for the military, how they could access them, and the best methods
to pay for them. My mission was to be sure that servicemembers always
had a way to call home, to reach family and friends no matter where
they lived or served our country. At its peak, the business comprised
11 ``platforms'' with prepaid cards representing just one of them. AT&T
secured the right and obligation to provide these services through
contracts it won in several competitive bidding processes conducted by
the Military Exchanges. It spent millions of dollars of capital
building out infrastructure, and millions more educating the military
community through informative advertising, in-person briefings, and
other methods to build awareness of all products and services.
You probably already know that servicemembers are intense
communicators. They spend more on communications than the average
American. Much more . . . The ability to talk to loved ones is a
critically important quality of life issue, to their sense of well-
being and the peace of mind of their families. Let's face it, military
life can be lonely, and dangerous. Separations from family and friends
are especially difficult. So while it is still possible to write
letters, and today, to send and receive e-mails, there is just no
substitute for the human voice. Communications is essential and that
fact will never change. That's the key reason why prepaid cards are so
essential in the military.
The second reason, is equally as important, but completely
practical. First, think back if you can, to when there were no prepaid
cards or cell phones, how did you pay for a call when you were away
from your home or office? Either you deposited change into the
payphone, or if you were lucky enough to have home phone service, you
could get a special calling card--a subscriber card--that allowed you
to charge payphone calls to your home phone bill. If you were desperate
or didn't care what it cost, you paid with a credit card.
Well cash is impractical for long distance calls, especially from
foreign countries. Credit cards are not an affordable option.
Subscriber calling cards are helpful, but they come with some
limitations.
First, you need to have a home phone to get one. Soldiers who live
in tents, in barracks, on ships, or overseas, do not necessarily have a
U.S. home phone.
Second, the cost of aggregating the call data related to your card,
so the carrier can render and collect a bill, needs to be built into
the cost of each call.
Third, a calling card does not have a mechanism that allows the
user to understand how much he is spending, or has already spent this
month.
Prepaid cards became popular in the military, and remain so today,
because prepaid cards effectively address all of these issues. Anyone
can buy a prepaid card. Prepaid cards makes calls cheaper than calling
cards. And prepaid cards enable the service member to budget himself.
In the military, service members mostly buy cards at their military
exchanges. Troops have a fairly sophisticated understanding of how to
use the card so that they get the most from it. For example, generally
speaking, when a card is used to call back to the United States from a
foreign country, multiple units, or minutes are deducted for each
minute of talk time. No surprise, international calls are more
expensive. Multiple minutes is a way to recover the true cost of the
call. Troops know this. Servicemembers recognize that, whenever
possible, they should use the Defense Secure Network when calling the
U.S. from a foreign country, because this enables them to a get a
``free ride'' back to the U.S., where a domestic operator helps them
place a call and their minutes are deducted one for one, as if the call
originated in the U.S.
The Military Exchanges recognized the need for prepaid cards and
have done an excellent job of procuring cards for service members.
That's why the cards that the Exchanges sell have the lowest rates from
the countries that military people call from the most--Iraq,
Afghanistan, Germany, Italy, Japan, etc. And their high value cards
offer a better rate to servicemembers than the big box retailers who
dwarf them in size. I believe the cost of a payphone call from Iraq to
the U.S. is about 16 cents per minute. I cannot make a call from one
side of Manhattan to the other for that little money, using a card I
bought at Sam's Club or Wal-Mart, or another big box retailer.
Every retailer, when he buys the prepaid cards that will be sold in
his store, considers his customer base; and as prepaid cards are
typically custom-built, he builds his prepaid cards to satisfy his
audience. And he sets the retail price for the cards he sells. That is
sometimes where the trouble comes in. If a card that is built to be
optimal (lowest) for calls from the U.S. to Mexico, is used to make a
call from the U.S. to Korea, chances are good the call to Korea will be
unexpectedly expensive. Or when a patriotic-minded American goes to his
favorite big box retailer, buys a card made by a reputable carrier, and
sends it to his grandson in Iraq, it is important to know that card,
made by a reputable company will never offer as good a deal as the card
that the Military Exchange sells to that soldier. And that soldier may
complain to his wife about how little talk time he received from
grandpa's card compared to his Exchange card. And his wife, frustrated
at her circumstances and missing her husband and the father of her
children, may write you a letter complaining about how that reputable
carrier is ripping off soldiers. But it is just not true . . . because
it is likely that the card that grandpa sent was never meant for
international inbound calls. But that does not stop them from writing
their Congressman, or their local newspaper, or tv consumer advocate. I
handled many of these complaints in my tenure with AT&T. Those kinds of
stories should not ordinarily be a cause for overreaction on your part.
However, I do encourage you to look closely and carefully so you
can distinguish the needs of the reputable carriers who do an excellent
job of making full disclosure, from the bottom feeders in the prepaid
industry who have the ability to give the product or its maker a bad
reputation. They prey on ignorance and inexperience, by deliberately
tricking out their cards with inordinately short expiration dates, or
come-on rates for one country with very high rates for all others, or
very low-advertised rates that come with high, one-time surcharges.
Their goal is to produce a product that allows them to enjoy very
large, gross profits. I, for one, would support your carefully
constructed plans to reign in prepaid chicanery, but would complain
strongly about any Band-Aid attempts that do not fully consider the
underlying elements of the prepaid business.
Thank you.
Senator Nelson. Ms. Acampora, the joint Federal-State
slamming enforcement regime is often mentioned as a good
example of a Federal-State partnership. Do you think that the
model of Federal rules within the joint Federal-State
enforcement regime works in this prepaid calling card scam?
STATEMENT OF HON. PATRICIA L. ACAMPORA,
COMMISSIONER, PUBLIC SERVICE COMMISSION, STATE OF
NEW YORK; MEMBER, COMMITTEE ON CONSUMER AFFAIRS,
NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
Ms. Acampora. I think that, yes, it will work, and your
legislation we believe is very well put together--we added some
thoughts in our testimony that I have given to the Committee on
this--but your bill allows your constituents to continue to use
and exploit existing State enforcement mechanisms. As we know,
State Government is a little bit more convenient to relate to
rather than the Federal Government because of geography and
also time changes between Washington and the various states. As
you know, California usually has a problem with a lot of
complaint litigation because of the time differences.
It also helps, I believe, in times where the economy is so
stretched. It enables the Federal Government and the State
government to leverage scarce resources and join together to be
able to do that.
And of course, it is always nice to leave our State
``cops'' on the beat which can only maximize the odds that the
bad actors will be punished and will be caught expeditiously.
And I think that in the future, with your bill, the bad actors
will face more enforcement--because of this state cooperation,
and your constituents will get their grievances addressed quite
quickly.
And I think that the FCC has and continues to coordinate
well with our national association of regulators which is
called NARUC, and the members of NARUC on these issues. And the
FCC--I'm talking about slamming enforcement--helped coordinate
and it works with NARUC. It has conference calls.
And I think in speaking to the Chairman from the FTC, that
the FTC has set up a similar task force on these issues as was
set up with slamming with the states at the FCC. This will work
quite well. And we really do look forward to working with the
FTC as presently right now, there is more of a coordination
with the Attorneys General, and I think it would help and
assist if NARUC was also reached out to and could participate
as a member of that task force.
Senator Nelson. Is that organization something that could
help us on State registration requirements and bonding
requirements?
Ms. Acampora. Well, we certainly would have--we have the
staff and we have the ability to work with you to let you see
what the various states have on the books. Right now, we have a
few states that do have legislation. California has laws. New
York certainly does, and some other states still do not. So I
think it would be important that NARUC provide you with a lot
of information that would make your job a little bit easier.
Prepared Statement of Hon. Patricia L. Acampora, Commissioner, Public
Service Commission, State of New York; Member, Committee on Consumer
Affairs, National Association of Regulatory Utility Commissioners
Introduction
Chairman Inouye, Vice Chair Hutchison and Members of the Committee,
I appreciate the opportunity to testify today on consumer protection in
the prepaid calling card market. This is an important piece of
legislation for your constituents. I thank you for calling this hearing
and commend Senator Nelson, the sponsors of the bill, and the Members
of this Committee for your leadership on this important consumer issue.
My name is Patricia Acampora. I am a Commissioner of the New York
State Public Service Commission and a member of the National
Association of Regulatory Utility Commissioners' (NARUC) Committee on
Consumer Affairs. NARUC represents the State utility commissioners in
each of your states and the U.S. territories that have oversight
responsibilities over all the critical utility infrastructures--
telecommunications, energy, and water. NARUC has not yet established a
specific position on national standards for prepaid calling card
services, but we do have well-established positions on specific issues
raised by the Prepaid Calling Card Consumer Protection Act of 2008 (S.
2998).
As early as July 31, 2002, the NARUC Board of Directors adopted a
resolution indicating that ``consumers of all telecommunications
services'' should ``receive clear and complete information regarding
rates, terms and conditions for services.'' In July, NARUC's Committee
on Consumer Affairs convened a panel on prepaid cards at our Summer
Meetings in Portland, Oregon, which I moderated. The panel, which
focused on existing State initiatives, was widely attended. You can
expect that NARUC and its members will continue to be active on these
issues. Shortly before that panel discussion, NARUC did an expedited
informal survey finding that 18 of 30 responding NARUC member
commissions handle complaints about calling card services. State
oversight and interest in this industry segment comes at multiple
levels.
Several entities are involved in providing these services.
Telephone companies are responsible for the telephone lines that carry
calls. Resellers buy telephone minutes from the telephone companies and
``resell'' them to end-users. Issuers set the card rates and provide
toll-free customer service and access numbers. Finally, there are the
distributors and retailers. Companies that fall into one or more of the
first three categories frequently require certification from many of
NARUC's member commissions. But even where a State commission lacks
authority, they frequently attempt to resolve complaints informally or
cooperate with other State agencies, e.g., the State Attorneys General,
on enforcement efforts.
Fraud and Abuse in the Prepaid Calling Card Market
Many Americans rely on prepaid calling cards to complete
intrastate, interstate, and international calls. Analysts believe the
main victims of abuse in this market are minorities, immigrants, the
elderly, low-income consumers, members of our Armed Services, and
others either not inclined or not able to adopt other communications
options. It is widely acknowledged that fraud and abuse in this market
is more prevalent than complaint data indicates.
My colleagues on the NARUC Consumer Affairs Committee report
several issues with calling card providers, including: (1) the provider
is either not required to seek Commission registration or certification
or they have chosen to ignore that requirement; (2) the calling time
provided is substantially lower than advertised; (3) the provider
engages in misleading and false advertising by overstating achievable
calling time or understating unit cost/rate; (4) the advertised rates
expire after short ``promotional period''; (5) the provider charges
substantial undisclosed surcharges and fees; and (6) the card expires
within a short period following the completion of the initial call.
Prepaid calling cards present the usual enforcement challenges for
State authorities. As mentioned earlier, frequently providers are
headquartered in another jurisdiction and fail to register or seek
certification from a State commission (in states that require such
certification) or even register an agent for service of process under
so-called State long-arm statutes. Moreover, most often, even in states
where certification is required, the most easily located entity in the
marketing chain--the retail store--is not subject to State Commission
oversight.
New York's Public Service law provides consumer protections which
have allowed my Commission to help assist customers with calling card
complaints. Some of those complaints are related to completion fees
that deplete the card faster than the consumer could have realized.
Another common complaint we receive is from consumers who have a
defective card that does not allow him or her to complete any calls,
and want reimbursement from the card provider, or who are trying to
contact the service provider for general customer service issues.
Consumers also frequently complain of call completion fees they did not
discover until using the card. Both New York's law and S. 2998 require
some information to be printed on the calling card, information on the
rates and fees. This is a logical step; if this information is more
readily available, it can stem the tide of customer dissatisfactions
caused by inadequate disclosures. But there is a problem. Some
disclosures now are often printed on the packaging material--material
which is discarded almost immediately by the consumer.
Although NARUC has no specific position on this problem, I do have
some suggestions. In lieu of printing information related to rates and
fees on the card packaging, I would like to suggest two options. Under
the first, the service provider is required to include all rates and
fees on a piece of card stock included with the calling card when sold.
This card would the same size as the calling card and would have the
phrase ``CONSUMER: DO NOT DISCARD'' printed on both sides in 14pt,
boldface type. Another option, less useful to those without Internet
access and is referenced in Section 3(a) of the bill, is to require the
service provider to print a web address on the calling card which the
consumer could access to confirm the rates and terms preprinted on the
typically discarded packaging. Even if a consumer does not have access
to the Internet or is not Internet savvy, the consumer could provide
the consumer complaint call center with the website which would aid the
investigation and resolution of a complaint by relevant authorities.
State Enforcement of Federal Rules Proposed in S. 2998
The Prepaid Calling Card Consumer Protection Act of 2008 protects
consumers by requiring the accurate and reasonable disclosure of the
terms and conditions of prepaid telephone calling cards and services.
As previously stated, NARUC has not formally taken a position on what
Federal standards should be, but we have urged--albeit in other
contexts--that consumers should receive meaningful disclosures about
such services, and that states must be able to enforce any Federal
standards using existing procedures and penalties.
There are many circumstances that explain why a consumer may not
report a complaint. They may not know who to call or where to file a
complaint. The value of the card may not justify the hassle of trying
to get a refund or assistance. Also language skills and cultural
barriers, particularly for recent immigrants, can make it difficult for
some consumers to file complaints. There needs to be a proactive
outreach effort to ensure consumers know that there are rules that
protect them and how to seek assistance.
Many NARUC member commissions actively address calling card abuses.
Several States, including Texas, California, and my home State of New
York have laws specifying required disclosures, including notice
requirements at the point of sale, verbal disclosures at the beginning
of calls, and a required warning 1 minute before a card is depleted. As
in most consumer service matters, a small number of bad actors create
the bulk of the consumer complaints. What troubles me is the negative
impact those bad actors can have on the industry which is also
comprised of many service providers that deliver quality service at
reasonable prices. The reputable providers make up the heart of the
industry and should embrace the rules proposed in S. 2998.
The fraud and inadequate disclosure problems which are the focus of
this bill cannot be handled by market forces. The partnership
established in Sections Six and Eight of S. 2998 recognizes that, under
State procedures, consumer concerns can be addressed promptly, often
through informal processes. Also, Section Eight effectively
incorporates NARUC's general positions that (a) Federal rules should be
``[a] floor, not a ceiling,'' as ``. . . blanket preemption on consumer
affairs will restrict consumer redress in the future,'' and (b) that
``. . . consumers should not have to wait for Federal rulemaking every
time a new issue arises.''
S. 2998 recognizes that, even in those instances when minimum
Federal consumer protection standards are appropriate, states must be
allowed to enforce those standards and to adopt more specific standards
where needed. This bill also provides states with flexibility in the
method of enforcement. Section Six of the bill empowers a State AG, PUC
or other authorized State consumer protection agency to bring civil
action against a carrier that violates its provisions. This is wholly
appropriate.
States vary on their method of enforcement. In some states consumer
complaints may go to the Attorney General, in others complaints go to
the PUC or another agency. The Federal Government should not dictate
the agency or procedure for State enforcement. Such Federal dictates
would require states to waste taxpayer dollars to shift resources to
different agencies. In addition, such a change could only cause
consumer confusion by changing the current contact State agency.
From an enforcement standpoint S. 2998 is a clear win for consumers
because it not only establishes clear national standards, but it also
couples those standards with coextensive Federal and State enforcement.
NARUC does suggest one minor addition to Section 6(c)(5) to make clear
that states can use existing administrative penalties as well as
procedures to ``enforce the provisions of the law of such state.'' \1\
With this very minor change, the bill clearly ensures multiple ``cops
on the beat'' protecting consumers from bad actors.
---------------------------------------------------------------------------
\1\ Specifically, Section 6(c)(5) should be revised to read: ``to
establish or utilize existing administrative procedures or penalties to
enforce the provisions of the law of such state.''
---------------------------------------------------------------------------
Conclusion
NARUC supports the jurisdictional balance struck in The Prepaid
Calling Card Consumer Protection Act of 2008. As drafted, the bill
provides consumers with increased national disclosure requirements and
ensures strong enforcement of national standards by allowing states to
enforce those standards. It also efficiently preserves existing State
options for consumer relief.
Thanks again for the opportunity to testify. I look forward to your
questions.
Appendix A
Statement by Chairman Barry Smitherman
Public Utility Commission of Texas
July 30, 2008
Executive Summary
On May 23, 2008, the Texas Attorney General filed the state's first
enforcement action against a prepaid calling card company, Next-G
Communications, Inc. The investigation which led to the enforcement
action was done in conjunction with the Public Utility Commission of
Texas, and determined that Next-G's calling cards consistently
delivered only 40 percent of the minutes on international calls claimed
in the advertising for the cards.
The results of the investigation show that Next-G inadequately
disclosed the fees and charges associated with each call, reducing the
number of minutes available for calling. The Texas Attorney General
filed the enforcement action under the Texas Deceptive Trade Practices-
Consumer Protection Act.
History
Beginning in 2004, staff from the Consumer Protection Division of
the Public Utility Commission of Texas investigated whether calling
card companies were following the advertising and disclosure
requirements under the Public Utility Commission Substantive Rule
26.34. The initial investigation revealed that calling card companies
were not following the Commission rule related to accurate disclosure
of rates and charges on the card or at the point of sale. The
Commission rule also requires that enforcement actions for fraudulent,
unfair, misleading, deceptive, or anticompetitive business practices
will be coordinated with the Texas Attorney General in order to ensure
consistent treatment of specific alleged violations. Customer
Protection notified the Texas AG's Office of the issues relating to the
accurate disclosure of information to customers, and during the summer
and fall of 2007, worked with the Texas Attorney General's Office to
test the calling cards from Next-G Communications to determine the
number of minutes that the cards provided.
During the investigation on the Next-G calling cards, Customer
Protection staff made calls to numbers in Honduras and El Salvador
using $5 and $10 calling cards purchased in San Antonio, which are
typical of the calling cards purchased at convenience and grocery
stores. Consumer Protection Staff made several different types of calls
using different calling cards: ``straight line'' calls to the target
phone numbers, where a call is made until it is terminated by the
provider, five-minute calls, and 10-minute calls. When calls were made
using the calling cards, a voice prompt is given at the beginning of
each call stating the number of minutes available for each call. The
minutes stated in the voice prompt were compared to that actual number
of minutes received or to the minutes stated in a subsequent call using
the same card.
The results of the investigation showed that callers often received
less than half of the minutes advertised. For example, when calls were
made to Honduras using the $5 calling cards, the voice prompt indicated
that there was 35 minutes of calling time. Callers received only 12
minutes for these calls. With calls to El Salvador using the $5 cards,
the first five-minute call would use up 18 minutes of calling time, and
the first 10-minute call would use 25 minutes of calling time, as
indicated by comparing the minutes stated on the voice prompt in
subsequent calls.
Based on the results of the investigation, the Texas Attorney
General filed a lawsuit asserting that Next-G engaged in false,
deceptive and misleading acts and practices, specifically, not
providing the minutes offered in the advertisements or voice prompt at
the beginning of phone calls, and using advertising with vague,
misleading, and confusing disclosures about fees and charges. The
Attorney General requested that the defendant disgorge all money
fraudulently taken from individuals and businesses, and requested a
temporary and permanent injunction against Next-G selling cards that do
not give all the minutes advertised or indicated in the voice prompt.
The lawsuit is currently proceeding in State District Court in San
Antonio.
Conclusion
Based on the investigation of the Next-G calling cards, it is
obvious that some calling card companies mislead and confuse customers
by including vague disclosures on charges and rates that dramatically
alter the number of minutes available to a customer. Customers that use
calling cards, especially for international calls, are generally
immigrant or low income individuals attempting to contact families or
friends. Calling card companies should be required to accurately
disclose the fees and charges, rather than use incomplete and
misleading language. By putting these precise terms up front, customers
will be aware of what they are paying for, and can make better
decisions in choosing their telecommunications needs.
Appendix B
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Nelson. Senator Pryor?
STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. Thank you, Mr. Chairman, and thank you for
doing this.
If I may, I would like to direct my first question to Ms.
Greenberg, and that is, out there in the marketplace, out in
the field right now, if someone has a problem with a calling
card, what do they do right now?
Ms. Greenberg. Well, as has been mentioned, there are State
regulators. I think I would probably call my state. I would
tell consumers, as we do, to call their state Attorney
General's Office or whoever runs their consumer protection
division in the State. I would recommend they report a loss of
minutes and money spent on these cards to the FTC as well. We
know the FTC has been involved. And people do call us about the
cards and complain.
I myself use the cards because I have friends. You know, I
lived abroad for a period of time and I have friends who are
abroad. And what I noticed is, when I lived abroad, the calling
cards there actually deliver the minutes that are promised.
Here the series of cards you buy at the five-and-dime typically
are shockingly quick to subtract your minutes.
So I think that there are places that you can call.
I think there are very good possibilities for enforcement.
I do think that the low barriers to entry do militate for a
kind of bonding system that we need to have and some State
legislation calls for that kind of thing.
Senator Pryor. If someone does complain, say, for example,
to their state Attorney General, or whoever does their consumer
work--I think in Florida it is actually the Department of
Agriculture--what remedy is available? Does he get his money
back, or what does he get usually?
Ms. Greenberg. Well, I think the satisfaction comes in
complaining because the likelihood that you are going to get
your money back on a $2 card from state regulators at this
point really has not proven very fruitful.
There are also class action lawsuits brought by attorneys.
That is one way to try to distribute some money. But the money
is going to be pretty negligible. So consumers are really left
holding the bag.
Senator Pryor. Have there been class action lawsuits on
these cards?
Ms. Greenberg. Yes. My understanding is there have been a
couple of class action lawsuits on prepaid calling cards.
Senator Pryor. Commissioner Acampora?
Ms. Acampora. Yes.
Senator Pryor. How many complaints do you all receive in
New York? Do you track those? I mean, how is that working
there?
Ms. Acampora. Well, the complaints that do come in to our
office we can track. We have an Office Of Consumer Services.
But in the State of New York, they could be calling the
Attorney General's Office on their own also. They could be
calling the Consumer Protection Board. If they are in New York
City, they could be using the consumer services in New York
City. So it would be kind of hard to track all the various
entities that consumers could use.
However, when you are dealing with a population that are
immigrants and some do not speak English, I think most of the
time people do not complain. They just suck it up and they lose
the cost of the card. So it would be hard to estimate how many
do not even call.
Senator Pryor. Right. I am sure that is the case. Given the
dollar amounts involved here, I think a lot of people probably
simply do not call.
And let me ask all the panelists, if I may, your thoughts
on whether you believe the Federal Trade Commission is doing
enough and if you think Congressional action is necessary. Do
you want to go ahead, Ms. Greenberg?
Ms. Greenberg. Yes. We are certainly supportive of your
bill, Senator Nelson, and Congressman Engel's bill as well. I
think disclosure is critical, and it will be certainly helpful
in at least, I think, diminishing somewhat the bad actors.
You know, I would go a few steps further in terms of--I
have already talked about I think a bond should be put up. I
also think there is an unconscionability factor here in the
rates because, as we saw with your fantastic posters here,
there is disclosure. It may be fine print, but there is
disclosure. It is not always honest in terms of what you get.
But Black's Law Dictionary defines unconscionability as,
``unconscionability is generally regarded to include an absence
of meaningful choice on the part of one of the parties to a
contract, together with contract terms which are unreasonably
favorable to the other party.'' Boy, is this an example of
that.
So I guess I would push for something a little stronger. I
have talked about that in my written testimony.
And also, you know, the ability to compare rates. That is a
critical tool that consumers use. But these card sellers, the
vendors, come in and out of the market. It is very hard. You
know, you can go 1 week to your local store and buy one of
these, and then the next week, this card is not there anymore.
So we do not know who is behind these cards. I do not have a
good feeling about the reputation of many of these companies.
But I think we really have to get tough with them and start to
learn who they are and allow consumers to compare rates between
cards so then they can pick and choose and use the marketplace
to make their choices.
Senator Pryor. Mr. West, do you feel like we need
legislation?
Mr. West. Yes, sir. We at The Hispanic Institute probably
believe that the FTC has not done enough, and we do need
legislation, sir.
Senator Pryor. Commissioner?
Ms. Acampora. Yes, I definitely think so. Your legislation
is great. In fact, it has made us in New York look at what we
already have, and I think we need to strengthen that.
But the legislation is--definitely you need the
legislation. As a former legislator, I can tell you that.
Senator Pryor. Ms. O'Brien?
Ms. O'Brien. Yes, sir. With regard to the portion of the
market that I will call the bottom-feeding portion of the
market, I think that you do need legislation. I would suggest
strongly to you that you make clear who has the
responsibilities for enforcement. Do not put a little piece
over here and a little piece over there because I think
ultimately that will water everything down.
My own experience, particularly in military, is that
frequently, to sort of harken back to your previous question a
little bit, when people had an issue and they called the
customer service line, the company was always very good about
trying to resolve it. And frequently we found that a lot of
their complaints were, frankly, pure misunderstanding on their
part, with regard to how the system worked or what they were
actually getting. They were very quick to jump the gun and
believe that there was an issue with our company ripping off
service members; but that was clearly not the case, once we
were able to explain it to them. If there was at any point an
irreconciliable beef, and they felt uncomfortable about it, we
would either refund their money or give them an additional card
if that satisfied them.
I think those kinds of issues are always going to be
around. I do not think that legislation should in some way,
shape, or form hinder the companies that are doing a good job,
but for the bottom feeders, yes, I think legislation is
necessary. But again, clear oversight as to who is responsible
for enforcement.
Senator Pryor. Thank you.
Mr. Chairman, thank you again for holding the hearing but
also for your work on this issue because there really is some
bad activity going on out there that we need to address. Thank
you for your leadership on this issue.
Senator Nelson. Thank you.
Senator Thune?
STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Mr. Chairman, and I too want to
thank you for holding the hearing today. And I appreciate all
the witnesses making time to come up and testify. Although I
missed the earlier panel, I know that Representative Engel in
the House has a bill, has a great interest in this issue.
Calling cards are particularly important, I think, for
recent immigrants and low income consumers who may not have
access to other telecommunication services and, at the same
time, may not have a lot of knowledge of the consumer
protection laws, our language in some cases, how to register
complaints against providers when those laws are violated. And
because of this, I believe that violations of consumer
protection laws in the prepaid calling card market are
particularly egregious, and I am pleased to see that the FTC
has recently undertaken actions to enforce those laws.
And I look forward to supporting proposals that ensure that
consumers have the opportunity to acquire the necessary,
relevant information when purchasing prepaid calling cards.
And I want to thank the witnesses for their testimony and
their effort to protect our Nation's consumers.
And I want to just follow up and maybe drill down a little
bit from what Senator Pryor asked with regard to legislation.
First off, I guess I am interested in whether you have seen
any improvements in the prepaid calling card market after the
FTC's recent actions.
Mr. West. We have done testing over the last couple months
and we really have not seen any improvement in what is being
promised and what is being delivered at this point. So we have
no evidence of any improvement even though there is stuff going
on with Attorneys General around the country, State
legislatures, and this legislation being introduced. We have no
scientific data to support that.
Senator Thune. You talked about perhaps Congress acting in
this regard. Is that a preferred approach to having states
enact some sort of legislative framework and accountability at
that level as opposed to having Federal legislation and
oversight and a framework for addressing this? I mean, you said
many of the states are acting----
Mr. West. Well, like what has happened in Florida where
they have settled with some companies, the problem is they have
only settled with 10 companies there. There are many other
companies doing business there. And then that legislation and
those efforts are restricted to Florida only. So you have the
other 49 states still going about their business. So I think
that while we welcome what is happening in the individual
states, it would be a piecemeal effort.
Senator Thune. How many states have taken steps in the form
of a legislative solution?
Mr. West. Somebody here on the panel may have more
information on it than I do.
We know that New Jersey has taken action in the
legislature. We think the Attorney General Brown in California,
Attorney General Cuomo are looking at this now. I know the
District of Columbia is looking at legislation now. So we have
been in contact with the Attorney General in Illinois also. So
there is a lot of activity. We have recently been contacted by
the City of San Francisco. So now it seems like some cities are
getting involved also.
Ms. Greenberg. If I can jump in. I think our preference
from a consumer standpoint, consumer advocacy standpoint, is to
have the Federal legislation require some sort of baseline
disclosure, as S. 2998 does, and then allow the states to focus
on companies that may actually be located there.
One other suggestion I had is that perhaps the industry
needs to set some voluntary standards, which members of the
industry can agree to. We talk about bottom feeders and we
could maybe cast away some of the worst actors and get the
industry to----
Senator Thune. Is there any of that kind of self-policing
going on today? I mean, does the industry have any sort of
baseline voluntary requirements----
Ms. Greenberg. I have not seen any evidence of that, but
maybe others on the panel know.
Mr. West. I think, Senator, there was one company that ran
into some trouble, and now they are trying to get everybody
else onboard to deliver what they are promising. But I do not
think that they did it out of altruistic reasons or anything
like that. So I do not see it happening.
Ms. Acampora. Senator, to your question about how many
states are active. NARUC undertook a quick survey of its
members on this issue; and of 30 respondents, the PUCs in 18
states had rules and handled consumer complaints regarding
prepaid calling cards. Eighteen states have legislation.
Senator Thune. OK. And do the states who have enacted
legislation--are they similar in terms of--is everybody taking
a different approach to this? Is there any agreement, I guess,
on kind of what a formula would be to----
Ms. Acampora. I think that is really why the Federal
legislation would be very helpful, and just going through the
legislation, as I said previously, what we have set up in New
York definitely could be strengthened by some of the ideas and
some of the mechanics set forth in this legislation.
Senator Thune. Is it the consensus pretty much of everybody
on the panel that we do need some sort of Federal legislative
action on this? Is that fair to say?
Ms. Acampora. I think so.
Ms. Greenberg. From our perspective, yes. Like a baseline,
a set of sort of minimum standards for disclosure and other
issues the bill addresses I think would be very helpful.
Ms. O'Brien. If I may, I would also like to add I think
some consumer education would be extremely helpful to many
people. If we make them smarter, they will not make the mistake
of buying a bottom feeder's card is what it comes down to. And
I am sure there has been a lot of that, but speaking for
someone who had responsibility for the military for 8 years, we
spent millions of dollars educating military consumers.
And to your question regarding self-policing, we had a
standard within the company not to produce any form of card for
the military consumer that could in any way, shape, or form be
conceived or construed as deceptive. But nonetheless, when the
Iraq War broke out, I had literally thousands of complaints
that were borne out of, frankly, just plain ignorance of how
prepaid cards work, why the rates are different from card to
card, why a card purchased at the U.S. Post Office was
different than a card purchased at Sam's Club or Wal-Mart or
anywhere else.
So while enforcement is important, I think that we just
cannot dismiss this as a bowl of Jello that is easily
understood. It takes a little understanding. And for that
reason, I would strongly recommend consumer education wherever
we can.
Ms. Acampora. Could I just piggyback on that? We
recommended in our testimony that the packaging be changed
because most people take the packaging, rip it up. I am not an
expert on how you manufacture, but maybe providers could double
the size of the card but allow it to be folded in half which
would make it a little bit thicker. But currently holding onto
that packaging is really key because that is what gives a lot
of the information we in N.Y. need for enforcement to
investigate. And certainly if they were buying it also through
a website, there needs to be information on that website too,
which would be helpful.
Senator Thune. Very good. Thank you, Mr. Chairman.
Thank you all.
Senator Nelson. I want to go back to something that one of
you said about the distribution of the cards through merchants.
What do we do there? And as distribution technology changes and
then eventually you are going to have virtual cards available
on the Internet, it is going to make enforcement harder. Ms.
O'Brien, what do you think about all this?
Ms. O'Brien. You have virtual cards now. AT&T makes a
virtual card available, prepaid cards available, to the
military community through the military exchanges. You need
only go to their website and plunk down your form of payment,
whatever that might be, a credit card, military STAR card, and
as a result, you will get e-mailed back to you the virtual PIN
number that you need to make a call, along with all the terms
and conditions that apply to that particular card.
Yes, it will complicate enforcement, to be sure. Again, I
would come back to the notion of education as being something
to help overcome some of the issues.
Senator Nelson. Does anybody else want to comment on that?
Ms. Acampora. Thank you. I think again that you should
include in the e-mail the terms and conditions to the customers
if they purchased it online. But I think your bill does strike
a very good balance, and you have specified disclosures for
online services. And giving the FTC rulemaking authority with
sufficient flexibility to address some new attempts to bypass
some of those protections--I think you have to kind of work on
that.
Senator Nelson. As we were talking and we had those
examples up here of fine print and information that you really
cannot read, we need to provide more information for the
consumer to beware. But what is the practical way to obtain
this?
Now, the language barrier is clearly a problem that we have
already unveiled here. But rates and conditions are not printed
on the card packaging. So some of you have suggested in your
testimony either attaching a rate card to the calling card or
listing a website address or a toll-free number. Talk about
this.
Ms. O'Brien. Sir, I could tell you that AT&T cards
frequently had, depending on the nature of the card and the
size of the card and how it was going to be sold, and in order
to make full disclosure, a separate leaflet inserted that had
virtually all the terms and conditions on it. And I can tell
you if you walked onto any military base, after service members
bought those cards, what you would see are those leaflets all
over the bottom of the phone booths. People just would not read
them. And so that was when we really determined that we needed
to educate people as to how to use them and how to be smart
consumers when buying them.
I don't know how you get around that need for education
issue with the vast majority of Americans. Still today grandpa
buys a card for his grandson in Iraq, and it does not go the
way he expected. And he bought it from the U.S. Post Office
when he picked up his stamps, and he is angry about it. It is
an issue. It is an issue honestly I am not quite sure you could
address.
More information, of course, is always better, but it has
to be information that is willing to be consumed. It cannot
just be a 5-pound pile of something; it needs to be better than
mice type that people are just going to throw on the floor.
Mr. West. Senator?
Senator Nelson. Mr. West?
Mr. West. One of the things when you buy one of these--we
were talking earlier about the class action suit, and the thing
is you throw the card away. So there is no way of really
reclaiming the money that you have lost. And I think that the
Internet activity will--you know, if there are virtual cards
and so forth, it will be easier to track your loss of money and
compensate people who have been fraudulently dealt with.
But one of the issues is that these companies will--you
know, if a consumer is educated, he will spend 3 months using a
card and getting all the minutes that they want. And what the
company will do is suddenly pull the rug out from under them
and in the fourth month try to recoup a lot of the profits--you
know, increase that profit margin. So if he thought he was
buying a good card for 2 months, in the third, fourth month, he
is not buying a good card.
Senator Nelson. Ms. Greenberg, in your testimony you say
that the FTC ought to appoint a monitor to oversee the
industry. How should that work?
Ms. Greenberg. What we suggested is let us look at how well
disclosure works. Your bill sets out some very good and strong
requirements for disclosure. Give it a year. Let us have the
FTC oversee how the industry is, if it is improving.
You know, I am concerned about the cards that you go in and
get at the--I get them at the gas station. This is a $6 billion
industry. These cards do not deliver what they say they are
going to deliver. The fine print tells you that you are being
ripped off. You read it. You read it out loud. It is a $2 card
and 99 cents comes off the card each time you make a call. You
do not have any money on this card. So we have really got to
get a handle on how we are going to rein in what I think is
really a colossal rip-off for so many consumers.
So what we are recommending is that the FTC come back, take
a look and see how the disclosure has worked. I think
disclosure will have a positive impact. Whether it will rein in
sort of a level of fraud and scamming that is going on,
particularly of folks who do not speak English, who have
relatives overseas, who are not going to take any action, not
going to take any corrective action--they are generally not
going to be part of a class action lawsuit. They are probably
not going to report this to the FTC. These are the people that
I am most concerned about protecting, and I think the FTC could
come back in, take a look at where we are in a year, and see
whether these practices have been reined in.
Senator Nelson. A couple years ago when I got involved in
preventing the fleecing of military members on payday loans
with exorbitant interest that was being charged to service
members--and we were able to pass that legislation--I heard all
the way up to the Chairman of the Joint Chiefs of Staff about
how military members were being hurt.
Now, I have not heard that commentary, which does not mean
that it is not there. And I am curious, Ms. O'Brien. Do you
think the Pentagon is aware of this particular fleecing that is
going on of the military community?
Ms. O'Brien. Yes, sir. I think that they are. I think the
order of magnitude of the problem in the military specifically
may not be as large as you might think it is. Generally
speaking, most cards that military people buy and use
personally are purchased at their exchanges. The exchanges do a
very good job of educating their own consumers about the cards
that they buy, why they are better than the cards they would
buy on the outside, and in point of fact, why in the countries
where military people use cards the most, they are the best
cards you can get, bar none.
I would also add to that, though, that cards that come as
gifts, of course, there will be some complaints about those
cards because frequently those cards were never designed to be
used in the military.
Third, I would add that the military is a very tight
fraternity, and so 1st Sergeants are very, very scrupulous
about making sure that their charges know exactly how to use
cards, exactly what retailers to stay away from, exactly where
they should be doing their purchasing of cards. But that is not
to say that family members of military people are not affected
by this problem because clearly they are. But generally
speaking, the military itself----
Senator Nelson. You gave the example of a grandpa who wants
to buy a card for his grandson who is deployed to Iraq or
Afghanistan.
Ms. O'Brien. Yes. That was based on an actual experience
where a veteran himself, a retired marine, had bought a card at
his local post office for a grandson who was in Iraq, and he
assumed that a card purchased at the post office would be a
good card for that purpose. Of course, he was retired many
years out of the service, not familiar with the current state-
of-the-art. And actually in his time, he was lucky if there
were pay phones, much less cards. So even though he himself was
former military, he did not have the level of education that
most military people have today. And for that reason, he
purchased a card that was not well suited for a call back to
the United States from Iraq.
Senator Nelson. Does anybody on the staff want to ask any
more questions?
OK. Well, this has been most enlightening. Thank you. We
are going to proceed with this legislation. Thank you.
And the meeting is adjourned.
[Whereupon, at 11:19 a.m., the hearing was adjourned.]
A P P E N D I X
Loyola Consumer Law Review, Vol. 19:1--2006
Deceptive Claims for Prepaid Telephone Cards and the Need for
Regulation
Mark E. Budnitz *, Martina Rojo 1, Julia
Marlowe =
I. Introduction
The United States prepaid phone card industry is a multi-billion
dollar industry. In 2002, prepaid long distance cards alone generated
$3.6 billion and the industry is estimated to grow significantly.\1\
Growth in the market for prepaid phone cards is expected to continue,
in part because sales are linked to the increasing use of cellular
phones.\2\ Already the bulk of convenience stores' general merchandise
sales are for prepaid phone cards.\3\ In fact, one industry source
reports that phone cards are the highest profit center in Walgreens
stores after prescriptions.\4\
The cards are often promoted to niche markets consisting of college
students, immigrants and certain businesses.\5\ According to Barry
Catmar, Vice President of Operations for Digitac, ``the large number of
immigrants who call friends and relatives abroad is a perfect market
for phone cards.'' \6\ The increase in the immigrant population in the
United States, especially Latino consumers, has led to the marketing of
some cards specifically to the Spanish-speaking consumer.\7\ As a
result, the market for prepaid telephone cards is segmented and some
groups of consumers are particularly vulnerable.\8\ There is evidence
that consumers in the United States who use cards to call Spanish-
speaking countries face much higher prices than expected due to hidden
fees and confusing, contradictory and inaccurate information.\9\
In most states, there is little or no regulation of prepaid
telephone cards. Thus most states do not require phone card companies
to disclose essential information and substantive rights that ensure
consumers receive satisfactory service. Consequently, information
provided on the cards and by customer service representatives is often
misleading or unavailable.\10\
Consumers have few rights, and even where consumers do have rights
that are violated, it is often difficult for them to obtain a remedy.
Additionally, because each card has a small monetary value, litigation
is not always a viable option, especially if contracts include
arbitration clauses and prohibit class actions.\11\ For example, low-
income consumers are likely to purchase cards that sell for less than
$10, rendering the apparent cost of using prepaid phone cards
insignificant. Because of their low income, however, the cumulative
cost may be significant.\12\ Furthermore, many immigrants have no
alternative if they need the cards in order to communicate by phone
with their families in another country.
Given these conditions, the Federal and the state governments
should consider passing legislation to regulate phone cards. On the
Federal level, both the Federal Trade Commission (FTC) and the Federal
Communications Commission (FCC) have done little to address the
problems other than minimal enforcement of current inadequate
regulations. The FTC has addressed few instances of deceptive
advertising,\13\ and the FCC currently enforces the limited area of
federally required fees on prepaid phone cards.\14\ On the state level,
consumer protection varies greatly. Legislation is warranted unless (1)
the market works and consumers acting reasonably are able to make
efficient choices and protect themselves, (2) the loss to consumers is
small and there are few reported consumer problems, and (3) market
conditions are such that the industry can be counted upon to engage in
effective self-regulation.
This article explores the need for legislation by reviewing a
combination of approaches, including an economic analysis of the market
for prepaid phone cards, findings from an empirical study of Hispanic
phone card usage in calling Spanish-speaking countries, and the current
law on this issue. The results of this investigation demonstrate a need
for national regulation. We recommend that Congress enact a statute
which mandates a minimum standard of protection and authorizes the FTC
to issue regulations. Such a Federal statute would also contain
disclosures, substantive protections, and consumer remedies.
Additionally, states should be permitted to enact requirements that
provide more protection as long as they are not inconsistent with the
Federal law. If Congress decides not to pass a Federal statute, state
legislatures can easily adopt the features of our Model Prepaid
Telephone Card Act.
II. Is Regulation Necessary? The Lessons from Economic Theory
Regulation is not necessary if consumers act reasonably and make
efficient choices in the marketplace. Consumers can only make efficient
choices if they are able to obtain the complete and accurate
information needed prior to purchase without incurring excessive
transaction costs. Such information may be contained in advertisements,
in brochures accompanying the sale of the cards, on the packaging, or
on the cards themselves. Another source of information is experience.
Experience may come from the consumer's prior use of cards or from
others, such as family and friends, who have used the cards. For the
consumer to obtain enough information through experience, significant
information search costs may arise, thereby raising the price of the
product much like transaction costs. A consumer would incur significant
search costs if he repeatedly paid for transportation to a store and
spent money on a card that did not provide many minutes (though the
advertising might state otherwise). Each time he must try a different
card brand in order to find one that is cost-effective. However, he may
be forced to try several cards before discovering a good card. Even
then significant search costs continue if rates on the good card have
changed.\15\
Theoretically, prepaid telephone cards come close to fitting the
perfect competition model. Prepaid telephone cards are a homogenous
product (consumers buy minutes), and there are many buyers and sellers
due to the ease of entry into and exit from the market.\16\ However, in
the perfect competition model, consumers have perfect information.
Perfect information is rarely present, but consumers can typically
search for information and make informed purchase decisions for many
products.
The prepaid telephone card market is one where information could be
made available to allow consumers to make better informed purchase
decisions. Yet, investigations of the market indicate that either
consumers cannot obtain information, or the information is inaccurate,
contradictory or deceptive.\17\ Moreover, information is often not
available from customer service, and consumers also may be misled by
seller misconduct such as card issuers who sell defective cards.\18\
Consumers retain information from past purchase experience, but
information from previous experience is likely to become outdated over
time as terms and conditions of the cards change.
III. Problems Encountered by Consumers and Information Needed:
Findings from an Empirical Study
Even if information is not available prior to purchase and customer
service is inadequate, regulation may be unnecessary if prepaid
telephone cards are inexpensive. In that situation consumers are able
to learn what they need to know in order to avoid problems without
incurring high costs. However, while each card is inexpensive, the unit
price, or cost per minute, may be significant and consumers who rely on
prepaid phone cards for many of their calls end up paying an excessive
amount for telephone service. The prepaid phone card market has grown
into a multi-billion dollar industry, and the cost to consumers as a
group is tremendous, especially for certain segments of the population.
A qualitative study of forty-five Latino immigrants' experiences in
an urban market in Georgia found that 78.7 percent of the immigrants
complained about prepaid telephone cards.\19\ More specifically,
consumers complained that they did not receive the number of minutes
they expected and that customer service personnel could not be reached
during available hours and often could not answer consumers' questions
even when reached.\20\ A follow-up study was conducted to verify these
complaints.\21\ The follow-up study investigated the true costs of the
cards and the information available from customer service.\22\ Minutes
are often deducted for hidden fees, and consequently, consumers do not
receive the number of minutes they are told are available. True cost is
calculated by determining cost per minute using an accurate amount of
minutes received.\23\ In the study, over 250 prepaid telephone cards
costing under eleven dollars were purchased and then used by bilingual
data collectors to call Spanish-speaking countries from January until
May 2004.\24\
Before placing the calls, each data collector called the customer
service number and asked a series of questions from a survey designed
by the researchers.\25\ Customer service personnel were asked about (1)
the number of minutes the customer would have to call a specific city,
(2) various kinds of fees that might be charged, (3) minute rounding,
and (4) hours of customer service availability.\26\ Data collectors
then placed a call, using only one-half of the number of minutes that
the recorded message indicated was on each card.\27\ This was done to
ascertain if maintenance fees, hidden charges, or both were
present.\28\ After at least 1 week, a second call was placed to the
same city.\29\ The date and time were noted at the beginning and end of
each call.\30\ The number of minutes available was also noted.\31\ Each
card was used until all minutes had expired.\32\ Calls were made to
cities in Mexico, Colombia, Argentina, Peru, Spain, Uruguay, Guatemala,
and Nicaragua.\33\
The researchers computed expected cost by dividing the cost of the
card by the initial number of minutes the consumer was told he or she
had.\34\ The actual cost of the card was computed by dividing the cost
of the card by the actual number of minutes that a consumer obtained
when using the card.\35\ Cost was therefore computed as a unit price:
cost per minute.\36\ Findings from this research indicate that there is
wide price dispersion with prepaid telephone cards.\37\ The average
actual cost of the cards was 87 percent higher than the average
expected cost.\38\
Data collectors also made three attempts to reach a customer
service representative.\39\ For two-thirds of the cards, it was
possible to talk to a customer service representative.\40\ The customer
service representative answered on the first attempt for about one-half
of the cards. For one-third of the cards, the consumers were not able
to talk to a customer service representative, either because they were
on hold for more than 5 minutes, no one answered, or there was only a
recording.\41\ Furthermore, talking with a customer service
representative was often not helpful.\42\ Although some customer
service representatives were helpful, many times the customer service
representative was not able to answer questions such as whether minute
usage was rounded up or what fees were charged.\43\
Subsequently, the researchers conducted an additional investigation
of the information available on the cards.\44\ One problem was that for
some cards there was very little if any information about fees.\45\
Another problem was that no standardized wording existed.\46\ For
example, in some instances a ``service'' fee appeared to be assessed
per call much like a connection fee and in other instances what was
called a ``service'' fee was assessed periodically in the same manner
as a maintenance fee.\47\ Additionally, the wording of some information
was vague, such as the use of the terms ``as may apply.'' \48\ Stating
that a maintenance fee ``may apply'' provides a warning for the
consumer but does not tell the consumer if there is a maintenance fee
or not.\49\ Some maintenance periods are assessed after 2 days and
others after 30 or 60 days.\50\ A more serious offense was the use of
contradictory or misleading wording.\51\ Many cards state that there is
no connection fee but the fine print states that ``connection fees may
apply.'' \52\ Some brands of cards have no connection fee but they have
a fee at the end of each call, called a ``post-call'' or ``hang-up''
fee.\53\ Other information is also unclear and perhaps deceptive, such
as information about taxes, pay phone surcharges and warranties.\54\
More accurate information should be given on the number of minutes
available when one places a call. When a consumer places a call, he or
she is told how many minutes are available. However, a consumer
typically does not receive all of those minutes.\55\ Minutes are
deducted for a variety of reasons such as connection costs and minute
rounding penalties.\56\ Determining the true cost per minute is
unnecessarily complex because the consumer does not know how many
minutes are deducted, and for which fees they are deducted.\57\ The
costs include activation fees, connection fees, minute rounding, extra
pay phone fees, additional cell phone fees, charges even if no
connection is made, maintenance fees, and service fees.\58\ It would be
helpful if companies provided information on which fees were
applicable, even if the consumer would not know precise amounts.
Because of the great variation in the kinds of fees assessed, the
difficulty in determining how the fees are assessed, and the lack of
standardized wording, meaningful comparison shopping is impossible.
Uniformity of information, disclosure and standardized names for fees
would help consumers, much in the same way that nutritional labeling
has provided a mechanism for uniform comparison. In some cases,
outright consumer fraud may be present. Customer service
representatives indicated that for some prepaid phone cards there were
charges even if there was no connection. This is illegal in some
states.\59\ However, it was not possible to know if the consumer was
charged for a call that was not connected.
IV. The Likeliness of Self-Regulation: The Nature of the Prepaid Phone
Card Market
The third question addressed is whether the prepaid phone card
industry can be expected to regulate itself. Self-regulation is
probable when there are industry-wide standards available, the industry
standards adequately protect consumers, and the industry is dominated
by strong stable companies that are committed to those standards and
can pressure other companies to comply.
Self-regulation is likely to occur if there are strict industry-
wide standards. The industry's trade association, the International
Prepaid Communication Association (IPCA) has adopted standards for its
members.\60\ One such standard requires that minute rounding be in 1
minute intervals.\61\ The problem is that there is no enforcement of
the industry guidelines and no reason to believe that they are being
followed by the majority of prepaid telephone card providers. According
to Howard Segermark, Executive Director of the IPCA, only about 80
providers of the estimated 500 plus providers are members of the
IPCA.\62\
The IPCA standards are too limited to provide consumers with the
protection that they need.\63\ Even if the standards were satisfactory
they could not serve as an adequate substitute for legal protections.
For example, it is doubtful that the IPCA could pressure non-members of
the association into complying with the standards unless the industry
was dominated by stable companies who supported the IPCA standards. The
prepaid phone card industry involves many different types of businesses
such as: carriers, resellers, distributors, card issuers, and
retailers. Absent rules having the force of law, compliance with
voluntary standards is highly doubtful. Even if current businesses
agreed to comply, someone would have to assume the responsibility to
persuade the constant stream of new entrants who are enticed to enter
the industry because of low start-up costs, and the general lack of
compulsory registration or bonding, to comply with the standards.
Additionally, even if the standards were satisfactory, there is no
guarantee that they would not be changed without any prior notice to or
input from consumer representatives. At the very least, contracts
between issuers and consumers should incorporate the IPCA standards so
consumers can sue in court for breach of contract if the issuers do not
follow the standards.
Whether the industry can regulate itself hinges upon three factors:
whether standards are available, whether they protect consumers, and
whether the industry is dominated by strong stable companies. Although
there are industry standards, they do not provide adequate protection
for consumers because, as the empirical study indicates, the standards
are not followed.\64\ For example, information on minute rounding was
available for less than half of the cards.\65\ Of those for which
information was available, slightly over half of the cards used more
than 1 minute rounding.\66\ Furthermore, the industry is not dominated
by strong stable companies.\67\ The fact that one can enter the market
without incurring great costs means there are many providers. There is
also evidence that the companies more likely to be considered stable,
such as AT&T, MCI and Sprint actually cost more per minute than the
other companies, and they do not give the consumer any better
information than the lesser-known providers.\68\ Our conclusion is that
the industry cannot be expected to regulate itself.
Because of the problems consumers face in the marketplace and the
dim prospects for adequate self-regulation, consumers need legal
protection. The laws now on the books, however, fail to ensure that
consumers receive the information, safeguards and remedies they
require.
V. Adequacy of the Current Law
A review of current law demonstrates it is not adequate. No Federal
law governs prepaid phone cards except the Federal Trade Commission Act
(FTC Act).\69\ It applies generally to all industries subject to FTC
jurisdiction.\70\ The FTC Act simply prohibits deceptive and unfair
acts or practices.\71\ It does not require any disclosures and is not
tailored to the needs of consumers who purchase prepaid phone
cards.\72\ Rather, the Act only protects consumers from the most
egregious conduct.\73\ Because there is no private right of action, it
protects only the customers of those companies against whom the FTC
brings an action.
Most states have no statutes or regulations covering prepaid phone
cards. Among the states that do regulate the cards, there is a great
deal of variation in coverage and regulation ranges from minimal to
comprehensive. However, no state adequately protects consumers.\74\
Most states have laws prohibiting unfair and deceptive acts and
practices in general.\75\ While the laws provide for a private right of
action,\76\ many do not allow class actions,\77\ which are crucial for
cases involving purchases of inexpensive items. Also, the state laws
suffer from the same deficiencies as the FTC Act.
Consumers may be able to attack the agreement between the seller
and the consumer through general contract law avenues. For example, if
the card does not work, or if there is no access number or
authorization code, the consumer can claim failure of consideration. If
the contract is too one-sided, a court may find it is unconscionable,
but the doctrine of unconscionability has limited usefulness.\78\
Contract law is totally inadequate to protect consumers because it only
provides a remedy for rights that the contract grants to consumers.\79\
Such contracts, one-sided agreements presented by the card seller on a
take-it-or-leave-it basis, impose few obligations on card sellers.\80\
VI. Should Phone Cards Be Regulated at the State or Federal Level?
Strong arguments can be made to support both the position that
regulation of phone cards should be through Federal law and the
contrary position that it should be through state law. We recommend a
combination of both state and Federal legislation. A consideration of
the merits of legislation if it were administered either by the states
or by Congress illustrates the issues that inform our proposal.
Despite the fact that most states are not eager to tackle this
problem,\81\ several factors indicate that state regulation might be
superior to Federal regulation. State regulation can be tailored to the
needs of that state's residents. For example, a state with a large
immigrant population may want to enact more protective rules than
others. This would be justified because many card sellers specifically
target low-income, non-English speaking groups that may be especially
vulnerable to unfair practices.\82\ Such a state may want to enact
bilingual disclosure requirements, with special attention given to
international calls. That state may also feel a need for strong
substantive protections, such as rules guaranteeing a right to redeem
unused value and setting a minimum time to use a card before it
expires. Because of the tenuous or non-existent legal status of many
consumers targeted by those who market phone cards, they often refuse
to sue companies that engage in illegal practices or to complain to
government agencies.\83\ Special rules tailored to meet the needs of
particular immigrant populations would have a better chance of being
included in state law than in Federal legislation since lawmakers from
states without large immigrant groups may not recognize or understand
the importance of protecting them.
In addition, states have administrative agencies with expertise in
drafting regulations and enforcing rules related to
telecommunications.\84\ Some states give the agencies crucial
regulatory roles apart from issuing regulations. For example, in
Illinois and Florida, providers of prepaid card services and resellers
must receive a certificate of authority from a state agency.\85\
Retailers selling the cards must have proof that the provider or
reseller has obtained the certificate.\86\ It is unlawful for companies
to fail to comply with these requirements.\87\
On the other hand, Federal legislation has several advantages over
state regulation. The most obvious benefit is complete national
coverage.\88\ Another benefit is uniformity.\89\ Complete and uniform
national coverage helps both the industry and consumers. Many phone
card companies sell cards in many states. Having one set of rules
greatly lessens their regulatory burden. Furthermore, many companies
sell cards on the Internet. A uniform set of rules greatly eases their
regulatory burden since they are selling to consumers nationwide. The
phone card industry may mount less opposition to a Federal law than to
state laws because of the advantages of having to comply with only one
law. They may actually support a Federal law in the belief it would
discourage the majority of states that have not yet regulated phone
cards from enacting their own laws.\90\
In addition, uniform disclosures, standardized terms, and the same
rights help produce educated consumers. This is especially important
given the high mobility rates of people who live in the United
States.\91\ Most will live in several states during their lifetimes.
With a Federal law, they do not have to learn a new set of rules and
definitions every time they move to a new state.
A Federal rule may also lead to more effective enforcement than
state law. An individual state may have great difficulty enforcing its
laws against companies operating from different states, especially
those selling on the Internet. Jurisdictional issues may frustrate
enforcement.\92\ Enforcement by a Federal agency would obviate many of
these difficulties.
Lacking a Congressional mandate, no agency of the Federal
Government has stepped forward to regulate this industry. Prepaid phone
cards are payment devices.\93\ The Federal Reserve Board (FRB) has
substantial experience regulating payment devices, but lacks experience
regulating the telecommunications industry.\94\ Drafting regulations
and enforcing them is better suited for an agency familiar with that
industry. Prepaid phone cards provide access to telephone service. The
agency with the most expertise in telecommunications, the FCC, has no
experience dealing with payment devices. The FCC simply refers consumer
complaints to the FTC, the Better Business Bureau, and state
agencies.\95\ Moreover, any Federal agency to which Congress delegates
the responsibility for regulation would not be as attuned to local
problems as are state agencies.
Although the FTC does not have a great deal of technical expertise
in telecommunications, its Telemarketing Sales Rule indicates it is
able to draft effective regulations related to telephone use.\96\ It
has brought enforcement actions against companies offering prepaid
cards.\97\ If Congress enacts Federal legislation to regulate prepaid
phone cards, we believe the FTC is the most appropriate agency to issue
regulations and enforce the Act.\98\
As the above discussion demonstrates, there are substantial
benefits to enacting legislation, either at the state or the Federal
level. As we discuss in Part XI, we recommend that Congress enact
Federal legislation. The Federal law, however, should not completely
preempt state law. States would still be permitted to enact legislation
tailored to the special needs of their consumers as long as that state
law did not conflict with the Federal statute.\99\
VII. Analysis of the Nature of Phone Cards and Implications for
Drafting Applicable Law
In order to understand current laws regulating phone cards and
draft a Model Act, it is necessary to determine the nature of phone
cards. In part, the card is a payment device. It is a type of stored
value card like a prepaid gift card.\100\ But it is also a device that
accesses a service. In this respect it is analogous to an ATM card that
is used to access the financial services provided by ATMs.\101\ The
prepaid phone card, however, is an integral part of a transaction for
the provision of telecommunications services, a very specific type of
service.\102\
The fact that phone cards can be characterized in a variety of ways
poses difficulties for evaluating current laws and choosing a body of
law that may be appropriate for a Model Act. There is no general body
of law governing stored value cards. Instead states have enacted laws
that are very specific to the type of card regulated (gift card, phone
card, payroll card), and there is great variation among the statutes
governing each type of card. The phone card is used to access a service
and there is no general law governing the sale of services. Those
transactions are subject to the common law of contracts.\103\
Therefore, the ``law'' is determined by what the particular contract
provides. Like an ATM card, the phone card accesses a service that can
result in using the consumer's funds. Because of that similarity, it
may be appropriate to use the Electronic Fund Transfers Act, which
governs ATM cards, as a model.\104\ Indeed, the FRB recently has
subjected another type of stored value card, the payroll card, to the
same laws as ATM cards.\105\ Because phone cards access
telecommunications services, some states incorporate selected aspects
of their rules for those services.\106\
VIII. Analysis of Current Regulation
This section analyzes the current regulation of phone cards. The
analysis illustrates the wide variety of problems some states have
chosen to regulate. It also demonstrates that states have not selected
any uniform approach to regulating the cards. Finally, it shows that
they have not used regulation of other devices, such as gift cards or
ATM cards, as models for their phone card laws.
There is no uniformity in the state law regulating phone cards.
States have taken a wide variety of approaches. Some have imposed
minimal regulation, while others subject the industry to many specific
requirements.\107\ Some have enacted statutes, while others have issued
agency regulations.\108\ However, as Part IX discusses, even the most
comprehensive state laws completely ignore major issues.
Recent studies \109\ demonstrate the need for adequate disclosure
and for clearer explanations of the costs involved in making calls.
Consumers need disclosures before they purchase cards in order to
decide whether to buy a card and to compare prices among cards. The
studies show, however, that cost of the card is a very complex matter.
Consequently, consumers need standard terms that have a universal
meaning and a standard format for presenting information, much like
Truth in Lending. In addition, these studies show that consumers need
access to customer service representatives who can answer specific
questions and explain costs.\110\
The first point of consumer contact and often principal marketing
effort is advertising. Generally, advertisements do not provide as much
information as is already available on the cards. Advertisements
typically state the number of minutes one obtains when calling a
specific city, such as Mexico City. However, advertisements may also be
misleading. For example, they may state that no connection fees are
charged,\111\ when in fact, there are many other hidden fees. Despite
its importance, the Federal Government has not enacted rules regulating
advertisements of prepaid phone card services.\112\ Additionally, the
FTC has not aggressively enforced violations of the FTC Act in this
area.\113\
Consumer economic literature indicates that information from
advertisements is often used by consumers in establishing reference
prices.\114\ These reference prices are then used at the time of
purchase.\115\ Misleading advertisements may negatively affect the
consumer's purchase decisions. The FTC Act and state laws require ads
to be truthful and not misleading, but consumers need more legal
protection than merely a law that provides that an advertisement not be
misleading. Consequently, consumers need advertising provisions similar
to those enacted in California, which is currently the only state with
a statute specifically regulating the advertisement of phone
cards.\116\ California law requires that any such advertisement
``include a disclosure of any geographic limitation to the advertised
price, rate, or unit value, as well as a disclosure of any additional
surcharges, call setup charges, or fees or surcharges applicable to the
advertised price, rate, or unit value.'' \117\
On the other hand, a law requiring advertisements to include
certain information is not sufficient either. Some consumers purchase
cards without seeing an advertisement. Others who see ads also need
information at the point of purchase. Such consumers may not remember
the information in the advertisement, or they may remember it
incorrectly. Furthermore, consumers need much more information than any
advertisement could adequately convey. As a result, many of the states
that regulate phone cards require disclosures at the point of
purchase.\118\
Most states that regulate phone cards require very specific
information to be disclosed on the card itself. One could argue that
these laws are much too detailed, and that consumer choice in this
competitive market should determine what information should be
disclosed. However, the information that states require to be disclosed
at the point of purchase reflects the problems consumers have
encountered using the cards. The seller must print the name of the
company on the phone card.\119\ Consumers need this information in
order to contact the company when necessary, to complain about the
company to law enforcement and to sue if a dispute cannot be resolved.
State laws require the seller to print a toll-free customer service
number on the card as well.\120\ As studies show, consumers of this
product need access to customer service.\121\ They often have
reasonable questions, given the nature of the services provided.
Because of the low cost of each card, requiring the seller to provide a
customer service number that is not toll-free would discourage
consumers from contacting customer service.
Some state laws also require the card seller to disclose a toll-
free network access number if such a number is required in order to
access service.\122\ Fundamental fairness requires the seller to inform
the consumer of that number. For the seller not to disclose it would
amount to fraud as the seller would have the consumer's money, but the
consumer would not have any service. Requiring the number to be toll-
free is justified because the access number merely permits the consumer
to gain access to the system. Charges should not be imposed unless and
until the consumer actually makes a call. The card also must disclose
the authorization code if it is required to access service.\123\ As
with the requirement that the card contain the access number, failure
to disclose the authorization code would be fraudulent since the
consumer would have paid but would then be unable to make any
calls.\124\ Finally, states require the card to include the expiration
date or policy, if any.\125\ In California, Florida, Missouri, and New
York, cards that do not include this information are considered to be
active for at least 1 year from the date of purchase or the date of the
last recharge.\126\ In the State of Washington, if an expiration date
is not disclosed on the card, it is considered ``unexpired
indefinitely.'' \127\
Other disclosures must be made either on the card or the packaging
that comes with the card. It is necessary to give card sellers this
choice because phone cards are small and all the required information
may not fit. The manner of presentation is also important for
disclosure to be meaningful. California, for example, requires the
disclosure to be legible.\128\ In addition, the required information
must be made ``available clearly and conspicuously in a prominent area
immediately proximate to the point of sale of the . . . calling
services.'' \129\ In Florida, if disclosures are not on the card or
packaging, they must be displayed ``visibly in a prominent area at the
point of sale . . . in such a manner that the consumer may make an
informed decision prior to purchase.'' \130\
In California, the required disclosures on the card or packaging
include the ``value of the card'' as well as any surcharges, taxes or
fees.\131\ The California statute provides a list of fees, illustrating
the complexity of the product's pricing, and how sellers use a variety
of different terms, all of which amount to additional cost to the
consumer.\132\ Further, there are different requirements for disclosing
surcharges for international calls.\133\ The seller also must disclose
the minimum charge per call, the billing decrement, the recharge
policy, if any, and the refund policy, if any.\134\
There is no national uniform format for disclosures on phone cards,
unlike disclosure for credit and debit card transactions.\135\
California, however, has tried to impose some uniformity on cards sold
to consumers in its state.\136\ The statute requires the value of the
card and the amount of the charges to be disclosed on the card or its
packaging all in the same format.\137\ Moreover, if the value of the
card is expressed in minutes, those minutes must be designated as
either domestic or international.\138\ Finally, that designation must
be printed on the same line as the value of the card in minutes or on
the line immediately following.\139\
In addition to written disclosures at the point of sale, Texas
requires verbal disclosures at the beginning of each call.\140\ The
consumer must be told the ``domestic minutes, billing increments, or
dollars remaining'' on the prepaid account or card.\141\ In addition,
when the balance on the credit card is almost depleted the company must
provide a verbal announcement of that fact ``at least 1 minute or
billing increment before the time expires.'' \142\
California law recognizes that many sellers target specific ethnic
groups.\143\ It requires that if a language other than English is used
in the advertising or promotion of the card, or is used on the card or
packaging (other than for dialing instructions), the required
information on the card or packaging must also be disclosed in the
language used to advertise or promote the card.\144\ If a language
other than English is used on the card or packaging to provide dialing
instructions for making a call or reaching customer service, the
additional information required on the card or packaging must be
disclosed in the language used to provide the dialing instructions or
to reach customer service.\145\ Similarly, Texas requires that if a
card is marketed in a language other than English, certain disclosures
must be made in the same language.\146\ Bilingual cards are permitted
as long as all of the required information is in both languages.\147\
Laws which require sellers of prepaid telephone cards to provide a
toll-free telephone number for customer service, and which establish
requirements for that service are perhaps unique in the law of payment
systems. If a person pays for goods and services with a check, the
Uniform Commercial Code (UCC) does not require banks to provide any
kind of customer service despite the importance of the financial
services they provide.\148\ If the consumer pays using a credit card or
debit card, Federal law imposes certain error resolution procedures,
but the seller of such cards is not required to provide a phone number
for contacting the seller.\149\ The seller is required only to resolve
disputes, not provide information.\150\ Phone cards are a type of
stored value card. Many states regulate another type of stored value
card, the gift card, but no gift card laws require sellers to provide
consumers access to customer service, much less toll-free access.\151\
Thus, those states having phone card laws requiring the seller to
provide a toll-free customer service number are going beyond what is
normally mandated in consumer protection legislation.\152\
Requiring the seller to disclose a toll-free customer service
number does not help consumers unless informed customer service
representatives are available to answer the consumers' questions. The
studies discussed previously illustrate the difficulties consumers have
obtaining needed information from customer service.\153\ States vary in
the degree to which they impose quality standards for customer service.
California and New York have the most consumer-friendly requirements.
The seller's customer service line must have live operators to answer
calls twenty-four hours a day, 7 days a week.\154\ Other states provide
that the seller must have a live operator available or must record
consumer calls and have a live operator return the call within a
specified period of time.\155\
In some states, phone card laws go further than what is required in
most consumer protection statutes by setting minimum performance
standards for the services that customer service must provide. For
example, California and New York require the operator to permit
consumers to file complaints.\156\ In addition, the operator must be
able to provide consumers with information about rates, surcharges,
fees, policies on recharging cards, refunds, expiration dates, and the
balance of usable minutes still available in the consumer's
account.\157\
A few states have gone beyond disclosure and customer service by
providing substantive protection as well. They impose detailed
requirements on charges and fees.\158\ These include mandating rules
for rounding up to the next minute and prohibiting sellers from
excessive rounding up.\159\ Some laws provide that the value of the
card cannot be reduced by more than the charges printed on the card or
the packaging or display at the point of sale.\160\
State statutes also impose a wide variety of refund requirements.
California and New York require sellers to give the consumer a refund
if the service fails to operate in a ``commercially reasonable
manner.'' \161\ Although this is a vague standard, the statutes at
least establish that consumers are entitled to refunds.\162\ In
Florida, consumers are entitled to a refund if service is ``rendered
unusable for reasons beyond the consumer's control.'' \163\ Missouri
requires a refund if the company ceases operations \164\ or can no
longer provide service.\165\ Alabama requires a refund if service is
suspended.\166\ Texas requires a refund if the company fails to provide
service at the disclosed rates or the service fails to meet technical
standards.\167\ Florida requires companies to have a refund
policy.\168\ At a minimum, such a policy must provide for the consumer
to receive a refund if the prepaid calling service is ``unusable for
reasons beyond the consumer's control'' and the services ``have not
[exceeded] the expiration period.'' \169\ Furthermore, the refund must
be for the same amount as the value still on the card.\170\ Alaska
requires a refund if the card does not work as represented or the
required disclosures are not made to the customer.\171\ In addition,
the Regulatory Commission of Alaska can direct that a refund be paid
``for good cause.'' \172\ In Florida, a company ``may, but shall not be
required to'' provide a refund for lost or stolen cards.\173\ States
also require that the amount of the refund cannot be less than the
value remaining on the card.\174\ The refund must be provided within 60
days from the date the consumer notifies the company.\175\
Some of the states that have enacted prepaid phone card laws have
also imposed performance standards such as a minimum level of
operational capacity for the service being provided. These requirements
are in sharp contrast to the law governing other payment devices \176\
as well as the laws governing the quality of goods and services.\177\
In California, companies must ``maintain access numbers with
sufficient capacity to accommodate a reasonably anticipated number of
calls without incurring a busy signal or undue delay.'' \178\
Apparently, failure to maintain that capacity would trigger
California's requirement that consumers are entitled to a refund if a
company fails to provide service in a commercially reasonable
manner.\179\ Case law from other types of transactions may be useful in
further defining what circumstances may be commercially
unreasonable.\180\ Florida law formerly required that every company
ensure that at least 95 percent of all call attempts to the company's
toll-free customer service number be completed.\181\ Finally, there
must be at least 97 percent accuracy of the length of the conversation.
Another substantive protection relates to expiration policies. For
example, California, Florida, and New York provide that if the card
does not state a specific expiration date or policy, a card is
considered active for at least 1 year from the date of purchase.\182\
In addition, if the card has been recharged, it must be active for 1
year from the date of the last recharge.\183\ Sellers who consider the
1-year minimum onerous can easily avoid its imposition simply by
providing on the card that it expires within a shorter period of
time.\184\ However, if the seller establishes an expiration date that
is too short, for example 1 week, the consumer may be able to convince
a court that the expiration date is unconscionable, in bad faith, or
commercially unreasonable.\185\ Statutes do not impose a minimum period
before a card expires.
State statutes and regulations of phone cards do not include
specific provisions providing that consumers can sue the card companies
for violating these laws. Nevertheless, consumers in some states may be
able to sue under their ``mini-FTC'' acts, alleging that a violation of
the phone card requirements constitutes a deceptive or unfair act or
practice.\186\ In other states, consumers may confront substantial
barriers.\187\ A government agency, such as the state's public service
commission, may be authorized to impose penalties for violation of the
phone card laws,\188\ but consumers have no assurance they will do so,
especially if the commission lacks sufficient resources or strong proof
that violations are widespread.
IX. The Inadequacy of Warranty Law
The UCC includes provisions on express and implied warranties that
may be beneficial to consumers who purchase goods.\189\ The UCC,
however, does not apply to the sale of services, which would include
the sale of telephone services. The Federal Magnuson-Moss Warranty Act
prohibits the disclaimer of implied warranties once a seller provides a
written warranty.\190\ Unfortunately, the Act does not apply to the
sale of services either.\191\
Because neither the UCC nor the Magnuson-Moss Warranty Act applies
to the sale of phone services, general contract law applies. Under
contract law, courts will enforce express warranties. The seller,
however, can avoid that result by carefully drafting the contract so it
does not include any express warranties regarding the quality of the
service provided to the consumer. Some courts have held that service
contracts include implied warranties.\192\ The cases, however, do not
involve provisions of telephone services or comparable services.\193\
Consequently, it is not at all clear how courts would apply those
standards to prepaid phone service. Moreover, sellers most likely can
avoid enforcement of the implied warranties by disclaiming them.\194\
X. Problems Not Addressed in Regulations
As described above, while most states have not regulated phone
cards at all, some which have enacted regulations have gone far beyond
the protection accorded consumers using other types of payment devices.
However, even the states with the most comprehensive regulations have
failed to do anything to protect consumers who confront many serious
problems. In order for our Model to accomplish its objective, it was
necessary to identify the gaps in current law.
For example, regulations include many required disclosures,\195\
but do not require sellers to inform consumers of their policy with
regard to unilaterally changing the terms and conditions of providing
service without prior notice to the consumer.\196\ Statutes do not
require disclosure of the seller's policy on lost, stolen,
unauthorized, or malfunctioning cards.\197\ Finally, statutes do not
require sellers to inform consumers whether they can redeem unused
value on their card, and if they can, how it can be redeemed and what
charges may be imposed.\198\
Statutes also fail to provide consumers with any protection if a
card is lost or stolen.\199\ In addition, consumers may lose the piece
of paper or other record on which they have written their Personal
Identification Number (PIN) and may not have their PIN memorized.\200\
Without the PIN, the card cannot be used and the consumer loses the
value of the balance remaining on the card.\201\ State law is deficient
in not requiring the seller to replace the PIN. At the very least,
statutes should require a warning to consumers about the consequences
of losing their PIN. If the consumer cannot remember the PIN and the
seller refuses to inform the consumer what the PIN is, or issue a new
PIN, the balance of unused value remaining on the card becomes pure
profit for the card issuer.\202\
A card may also be defective. For example, the access number or the
PIN may not work,\203\ or the card may have some other defect making it
impossible to operate as it should.\204\ Consumers will lose the entire
balance on the card if the card issuer refuses to replace the card.
Statutes do not require card issuers to replace cards. Even if the
issuer does replace cards, it may charge such a high fee that it is not
economically advisable for consumers to purchase a replacement.
Additionally, the card issuer may go out of business.\205\ The
issuer may simply close its doors and disappear. Statutes provide
purchasers of phone cards with no satisfactory remedy when this occurs.
Alternatively, the issuer may file for bankruptcy, leaving consumers
with unsecured claims that are unlikely to be satisfied.
States do not regulate the amount of charges and fees. Rather,
states require an issuer who charges fees for various services, to
inform consumers about the fees.\206\ However, the disclosure
requirements of state laws are not adequate. For example, states do not
require sellers to inform consumers of the extra charges they incur if
they use their phone card at a pay phone.\207\
In states that have no laws regulating phone cards, the rights and
obligations of the parties are governed by the contract between the
card issuer and the consumer. In states with phone card laws, the many
matters not regulated are subject to the terms of the contract. The
contracts between issuers and consumers are not the result of a
negotiated bargain between the parties, and, in fact the consumer never
even signs the agreement. Rather, the law deems that consumers agree to
the terms of the take-it-or-leave-it adhesion contracts by paying their
money and using the card. The cards often include unilateral change of
terms provisions under which the issuers can modify the contract's
terms without notice to consumers.\208\ Those changes could deprive
consumers of important rights they had under the contract when they
originally bought the card or impose substantial new charges upon them.
States have not enacted laws specifically governing this problem.
Finally, even states that have enacted strong phone card laws do
not include in those statutes provisions granting consumers explicit
causes of action and meaningful remedies for violation of the law such
as those included in Federal consumer protection statutes.\209\ This is
a serious omission that may make the protections in the laws largely
illusory.
The Model Act described in the following section fills the gaps in
current law by including provisions to deal with the issues identified
above, that statutes do not address.
XI. Model Prepaid Telephone Card Act
Based on the foregoing analysis of the problems consumers of
prepaid telephone cards encounter, the information they need, the
nature of the marketplace, the dismal prospects for self-regulation,
and the inadequacy of the states' responses to date, we propose that
Congress enact a Federal law to regulate phone cards. As discussed
previously,\210\ a Federal statute provides benefits to both the
industry and consumers that state laws cannot offer. Matters not
included in the Federal statute are appropriate for individual states
to adopt if they see fit to do so. Our proposal breaks very little new
ground. Rather we have taken those features of state law that offer
consumers needed protection and recommend that they be incorporated
into a Federal law. Most of our suggestions represent approaches that
states have already adopted. Therefore, it is reasonable to assume that
they pose no significant technological or financial impediments to the
prepaid phone card industry.
Our Model Act covers those matters that should be governed by a
Federal statute. Some matters are not included in our Model Act because
we believe they are best left for the states to consider on an
individual basis. These matters include licensing and registration of
companies selling cards, the needs of residents with special needs, as
well as regulation of rates and fees. If Congress refuses to pass phone
card legislation, our Model Act should be enacted by each state.
The Federal statute should establish a basic framework that ensures
consumers a reasonable level of disclosure and protection. The statute
should delegate to the FTC the task of issuing detailed regulations
pursuant to the statute, filling in the details and responding to
future changes in technology, marketing, and the marketplace.\211\ To
assist card issuers in complying with the law and to reduce compliance
costs, the statute should instruct the FTC to draft model disclosure
forms for issuers to use if they wish.\212\ States would be permitted
to enact their own laws as long as they were not inconsistent with the
Federal statute.\213\
The Federal statute should also regulate disclosures in
advertising. As previously noted,\214\ advertising is important in
inducing consumers to buy a certain brand of card. In addition, a
Federal law is appropriate because a radio or television commercial or
Internet ad can be seen and heard across state borders. The Federal law
should incorporate the provisions of California's law that requires
phone card advertisements to disclose geographic limits to the
advertised price, rate, or unit value, as well as to disclose
additional surcharges, call setup charges, or fees applicable to the
advertised price, rate, or unit value.\215\ The FTC should be
authorized to issue additional disclosures from time to time if it
finds they are needed. This flexibility is appropriate given the new
advertising avenues that emerging technologies continue to make
possible.\216\
The Federal law should require disclosures that are available to
consumers prior to purchasing prepaid phone cards. Disclosure plays a
crucial role in phone card transactions because of the manner in which
consumers become bound by the terms of the contract. As is evident from
the discussion in this article, the purchase and use of phone cards
involves many elements. Some of the features of this service are
complex and confusing, such as the calculation of fees and charges.
Consumers and card issuers do not enter into a formal written contract
that includes the terms of agreement, with consumers expressing their
agreement to be bound in some manner, such as signing the contract.
Instead, the card issuer notifies the consumer of rights, obligations,
restrictions, limitations, and conditions on the card or in the
packaging, and the consumer purchases the card. Therefore, the consumer
does not participate in the negotiation of the terms. Courts uphold the
enforceability of these types of contracts, finding that consumers have
accepted and are bound by any terms of which they have notice if they
use the product after having opportunity to discover those terms.\217\
In order to ensure the fairness and reasonableness of the terms that
bind the parties, it is essential that the law require certain
disclosures that become part of the contract.
The Federal law should require certain disclosures on the card
itself. This includes the name of the company issuing the card and a
toll-free customer service number. The card also should give a toll-
free network access number if that is required in order to access
service. The card must disclose the authorization code if one is
required to access service. Most states that have enacted legislation
include these disclosure requirements.
The Federal statute should require that all cards have an
expiration date, and that the date can be no shorter than 1 year after
activation. This information is vital for the consumer to have.
Therefore, there should be significant consequences if the card does
not include that disclosure. The Federal statute should follow the laws
enacted in Washington and Texas \218\ and provide that if a seller
fails to make that disclosure, the card is active indefinitely.
The Federal statute should follow the pattern of state law by
requiring other disclosures, but permitting the issuer to make them
either on the card or on the packaging that comes with the card.
Additionally, the issuer should be required to make the disclosures
available at the point of sale.\219\ Disclosures should include all
charges, taxes, and fees.\220\ The seller should disclose the minimum
charge per call, extra charges imposed for calls from pay phones, the
billing decrement, the recharge policy, if any, and the refund
policy.\221\ The FTC should have the authority to regulate further in
this area. For example, phone card issuers may impose new types of
charges and conditions. The statute should define charges and
conditions in general terms so the FTC can issue regulations under its
disclosure authority to include these new costs.
Surcharges for international calls deserve special attention. Those
making international calls have a special need for clear and accurate
information. Therefore, it is important that the surcharges for
international calls not be buried in with the other disclosures.
Consequently, the statute should provide that if international calls
are a significant focus of the issuer's marketing or if a substantial
portion of the calls made on its cards are subject to surcharges for
international calls, the issuer must make the disclosure of those
surcharges in a prominent place on the card as well as on the packaging
and at the point of sale. The statute should delegate to the FTC the
responsibility to issue regulations further specifying the
circumstances under which the special rules for international calls
apply.
Consumers also need to know the balance remaining on their cards.
Otherwise, when they have an important call to make, they may
mistakenly believe they have more time than they actually have to make
their call. The Federal law should follow Texas' lead by requiring
verbal disclosures at the beginning of each call informing the consumer
of the minutes, billing increments, or dollars remaining on the
card.\222\ When the balance on the card is nearly exhausted, the issuer
should be required to inform the consumer verbally that the time is
about to expire.\223\
Furthermore, the Federal statute should require several disclosures
not mandated by state statutes. Sellers should have to inform consumers
of their policy with regard to unilaterally changing the terms and
conditions of providing service without prior notice to the
consumer.\224\ Even better would be a provision requiring sellers to
notify consumers beforehand of all proposed changes. Notification could
be given verbally at the beginning of the consumer's call using the
card.\225\ The consumer should be given the option of refusing to agree
to the change. If the consumer refuses, she should be entitled to a
refund of the unused value on the card. Sellers should be prohibited
from charging a fee to obtain the refund.
Sellers should be required to disclose their policy on lost,
stolen, unauthorized, and malfunctioning cards.\226\ In addition, the
Federal statute should require sellers to inform consumers whether they
can redeem unused value on their card, and if they can, how it can be
redeemed and what charges may be imposed.
The statute should mandate the use of standard uniform terms that
would be defined in the statute. This would enable consumers to
comparison shop. Uniform terms would have uniform meanings, regardless
of the state where the consumer purchased the card. In addition to
requiring standard terms, certain terms should be prohibited to prevent
the confusing and contradictory wording that many agreements
contain.\227\ For example, some companies state there is no connection
fee, leading consumers to believe there are no additional fees.\228\
This claim is misleading because instead of that fee they impose a fee
at the conclusion of each call, called a ``post-call'' or ``hang-up''
fee. Sellers should be required to use a standard term that would apply
to all fees imposed per call. Companies impose periodic charges for
maintenance fees.\229\ The statute should require companies to use a
standard term that would apply to all such maintenance fees. Companies
should not be allowed to confuse consumers by using a variety of terms
for such charges such as ``administrative fee'' or ``service fee.'' The
statute should require a standard format for charges imposed for taxes.
Standard uniform terms would benefit card issuers as well as consumers
because the standardization would be easier for issuers to comply with
than various state laws with differing requirements and definitions.
The statute should authorize the FTC to develop a standard format for
disclosures and model forms.
The Federal statute should require that if the issuer uses a
language other than English in advertising or promoting the card, or on
the card or its packaging, then the required disclosures on the card or
packaging must also be in that other language.\230\ If another language
is used to provide dialing instructions for making calls or calling
customer service, the disclosures required to be on the card or its
packaging also must be in that other language.\231\
Disclosure by card companies alone is not sufficient.\232\ The
Federal statute should also require dispute resolution procedures and
substantive rights and protections. The Federal statute should ensure
the effectiveness of customer service or else consumers will be at a
severe disadvantage in learning essential information and seeking
solutions for problems that arise. Issuers should be required to
provide a toll-free telephone number for customer service, with that
number clearly disclosed on the card itself. The issuer should be
required to have an adequate number of trained, live operators
available at least Monday through Friday, 8 hours each day.\233\ The
statute should require that the issuer record all calls made at other
times, and that the recorded calls be returned no later than the end of
the next business day.\234\ Consumers should have the right to file
complaints when they call customer service,\235\ and the issuer should
be required to investigate within ten business days, crediting the
consumer's card or providing a refund if the consumer's complaint is
justified.\236\ Consumers also need information when they call, and the
issuer's customer service operators should have the capacity to provide
information about rates, surcharges, fees, refunds, expiration dates,
recharging cards, and the available balance.\237\
The Federal statute should include rules for rounding charges up to
the next minute and should prohibit excessive upwards rounding.\238\
Federal law should also prohibit the issuer from reducing the value of
the card by more than the charges printed on the card or the packaging
or information displayed at the point of sale.\239\ Moreover, the
seller should be prohibited from imposing a fee if there is no
connection made to the party dialed.
The Federal statute should require the issuer to provide a refund
when the issuer fails to provide service at the disclosed rates or
charges more than disclosed or allowed.\240\ In addition, the consumer
should receive a refund if the phone service fails to meet certain
technical standards.\241\ Refunds are warranted if service is
suspended, terminated,\242\ or unusable.\243\ Consumers should be
entitled to a refund if the service does not work as represented, the
required disclosures are not made,\244\ or the card is defective.
Consumers should also be able to receive a refund of the unused balance
on their card if they report their card as lost or stolen and the
issuer has the capacity to block all future use of the card after
receiving the consumer's notice.\245\
There may be other circumstances under which refunds should be
required. Therefore, the statute should include more general standards
as well. California and New York's models require a refund of at least
the value remaining on the card if the service fails to operate in a
``commercially reasonable manner.'' \246\ Other examples of general
standards are provisions requiring a refund if the issuer fails to
exercise ordinary care, acts in bad faith, or uses a contract that
includes unconscionable terms.\247\
The Federal statute should impose minimum performance standards.
The seller should be required to have the capacity to accommodate a
reasonably anticipated number of calls without consumers encountering a
busy signal or unreasonable delay.\248\ The FTC should set requirements
for what percentage of calls must be completed and the accuracy of the
company's calculation of the conversation time.\249\
The Federal statute should also include a guaranty stating that
both the card and the service provided meet minimum standards.
Accordingly, it should provide that there is an implied warranty of
merchantability in every phone card transaction. This is the law under
the UCC with regard to the sale of goods.\250\ Unlike the UCC, however,
the issuer should not be allowed to disclaim that implied
warranty.\251\
The Federal statute should establish a maximum cap on a consumer's
liability as long as the card issuer has the ability to block access so
the thief cannot continue to use the card.\252\ If the issuer does not
have that ability, the law should require a prominent disclosure on the
card or its packaging that the purchaser will lose the entire balance
on the card if it is lost, stolen, or used in an unauthorized fashion,
if that is the issuer's policy.
Consumers may lose their PINs rendering the card useless and
resulting in the loss to the consumer of the value remaining on the
card.\253\ A seller should be required to supply a new PIN if the
consumer notifies the seller and the seller has the ability to block
access to anyone using the lost PIN. If the seller lacks the ability to
block access and does not want to provide consumers any relief, the
Federal statute should require the seller to clearly warn consumers
either on the card or its packaging that they have no protection if the
PIN is lost.
Additionally, the statute should require sellers to replace
defective cards.\254\ Consumers will lose the entire balance on the
card if the card issuer refuses to replace it. The law should prohibit
sellers from charging more than a reasonable fee for a
replacement.\255\ If sellers can charge exorbitant replacement fees, it
will be economically inadvisable for the consumer to order a
replacement.
Consumers need meaningful remedies otherwise they have no means for
recovering the losses they incur as a result of violations of the law.
The Federal statute should include the remedies contained in Federal
consumer protection laws, providing for actual damages, statutory
damages, costs and attorney's fees.\256\ Class actions should be
expressly permitted, or else litigation will not be feasible, given the
small amount of each individual's damages. Predispute mandatory
arbitration should be prohibited.\257\
The recommendations made thus far should be in a Federal statute or
accompanying FTC regulations. They involve national problems that are
best dealt with on a uniform nationwide basis both to ensure that
consumers can enjoy a basic level of protection wherever they live and
to lower compliance costs for the industry. If Congress fails to enact
a law, however, states should pass their own statutes, using the above
as a model, and delegating regulatory authority to the appropriate
state agency.
Some issues are best dealt with on a state basis rather than
through a Federal law. Examples of this include the licensing and
registration of companies. Some states require this already, and the
rest should be encouraged to consider it. States also should require
companies to post a bond so consumers will have a fund from which they
can be compensated in case a company goes out of business. Some states
require phone card companies to file tariffs listing all of their rates
and fees, with a state agency empowered to reject those rates.\258\ We
believe it best to leave that decision to the states rather than
establish a Federal bureaucracy to oversee rate regulation for all
sellers. While lawmakers generally are reluctant to regulate fees,
regulation of phone card fees is warranted because of the low income
and vulnerable status of many of the consumers who are specifically
targeted by the industry. Consequently, states should consider enacting
laws prohibiting rates above a certain amount, as states already do for
consumer credit. There is a great deal of diversity in the demographic
characteristics of various states. Individual states may find it
necessary to enact special protections for vulnerable groups within
their states, such as immigrants.
Finally, Federal and state laws governing phone cards should
prohibit waiver of the requirements mandated in the laws. Strong
consumer protection laws do not benefit consumers if sellers can
enforce contractual provisions by which consumers agree to waive
provisions in those laws intended to benefit and protect them.
XII. Conclusion
Empirical studies indicate that consumers have difficulty obtaining
necessary information about prepaid telephone cards before purchase.
Information is often unavailable, misleading, and confusing. There is
no Federal regulation of prepaid phone cards. Although numerous states
have statutes or administrative regulations, they vary widely and many
states have no laws regulating phone cards. Both card issuers and
consumers could be better served with Federal legislation.
This article presents a case for Federal legislation and a proposed
model act which would draw upon the best of current state regulations.
The Federal Trade Commission is the suggested avenue for administrative
agency regulations and enforcement of the proposed legislation. The
Federal legislation also must provide a private right of action for
consumers, providing them with meaningful remedies when they are
injured due to a company's failure to comply with the law. However, a
few issues should be left to the states' discretion. If Congress fails
to enact legislation, the states should pass the model act.
Footnotes
* Mark E. Budnitz is a Professor of Law at Georgia State
University College of Law. He holds a B.A. from Dartmouth College and
J.D. from Harvard Law School. Professor Budnitz gratefully acknowledges
the research assistance of Jodi L. Green, a student at GSU College of
Law.
Martina Rojo is a Professor of Law in the
School of Law at the Universidad del Salvador, Argentina. She holds a
J.D. from the Universidad del Salvador, Argentina and L.L.M. from the
University of Georgia. The author has researched and published in the
areas of Consumer Law, Comparative Law and Law and Economics.
= Julia Marlowe is an Associate Professor in the
Department of Housing & Consumer Economics at the University of
Georgia. She holds a B.A. from The University of New Mexico,
Albuquerque, and M.S. and Ph.D. in Consumer Economics from The
University of Tennessee, Knoxville. The author wishes to thank the
University of Georgia President's Venture Fund and the Georgia
Governor's Office of Consumer Affairs for funding the research.
\1\ Mitch Morrison, Paying Dividends: The Prepaid Category
Continues to Grow and it's Not Just Phone Cards Anymore, 39 Convenience
Store News 48 (2003).
\2\ Brian Cook, Thomas K. Crowe & Jo Ann Scott Cullen, Experts
Predict--Prepaid Forecast 2002, Intele-Card News, Jan. 2001, http://
www.intelecard.com/story_home.asp?StoryID=342 (last visited Sept. 11,
2006); Richard Gutwillig, Calling on Savvy, 55 Supermarket Bus. Mag. 89
(2000).
\3\ Michael Browne, Generally Speaking: Selling a Variety of
General Merchandise Draws Customers, High Margins, 40 Convenience Store
News 37, 37 (2004).
\4\ Howard Segermark, Why Market Phone Cards? 30 Nat'l Petroleum
News 30, 30 (June 2002).
\5\ Cook, Crowe and Cullen, supra note 2, at 14; Gutwillig, supra
note 2 (reporting that card sellers are targeting home-based businesses
and traveling salespersons). Military personnel also are major users of
prepaid calling cards. FCC Taps Calling Cards for Access, USF Payments,
Telecom Pol'y Rep., July 10, 2006.
\6\ Gutwillig, supra note 2. Digitac sells computers and computer
services. Id. http://www.digitac.com.aa (last visited Sept. 27, 2006).
\7\ Mary Louise Pickel, Phoning Mexico . . . for profit, Atl. J.-
Const., June 8, 2006; Cook, Crowe and Cullen, supra note 2; Gutwillig,
supra note 2.
\8\ Alan R. Andreasen, Disadvantaged Hispanic Consumers: A Research
Perspective and Agenda, 16 J. of Consumer Aff. 46, 48 (1982); Jinkook
Lee & Horacia Soberon-Ferrer, Consumer Vulnerablity to Fraud:
Influencing Factors, 31 J. of Consumer Aff. 70, 72 (1997).
\9\ Julia Marlowe, Investigation of Pre-Purchase Information on
Prepaid Telephone Cards, Report to the Georgia Governor's Office of
Consumer Affairs 1 (Sept. 2005); Julia Marlowe and Martina Rojo,
Consumer Problems With Prepaid Telephone Cards, 51 Consumer Ints. Ann.
126, 128-30 (2005).
\10\ The Mexico Tri Color card, purchased in 2005, provides an
example of misleading information. The card reads ``sin cargo de
conexion'' on the front in large print, but the small print on the back
reads ``cargos de conexion aplicaran.'' The statement on the front
informs the consumer there are no connection charges, but the statement
on the back says the opposite. Marlowe and Rojo, supra note 9, at 127.
Customer service representatives sometimes provide confusing
information. For example, one told a consumer the phone card had a
``maintenance fee of $0.50 every one or 2 days.'' Id.
\11\ AT&T v. Ting, 182 F. Supp.2d 902, 930 (N.D. Cal. 2002), aff'd
319 F.3d 1126 (9th. Cir. 2003), cert. denied, 124 S. Ct. 53 (2003); see
Jean Sternlight, As Mandatory Binding Arbitration Meets the Class
Action, Will the Class Action Survive? 42 Wm. & Mary L. Rev. 1 (2000).
\12\ According to the U.S. Census Bureau, 37 million people in the
United States live in poverty. Bradley R. Schiller, Fluid Poverty,
Albany Times Union, Sept. 24, 2006 (noting that more than 20 percent of
Hispanics in the United States live in poverty).
\13\ See, e.g., Press Release, FTC, Marketer of Pre-Paid Cards
Agrees to Settle Charges of Failing to Disclose Actual Cost of Using
Card; Additional Charges Per Call Added, Some Cards Incurred Monthly
Maintenance Fee (Mar. 4, 1999).
\14\ Phone Card Issuers Must Pay Access Fees, N.Y. Times, July 4,
2006, at C9 (reporting that the FCC ruled AT&T must make Universal
Service Fund payments on its prepaid calling card transactions).
\15\ See Phillip Nelson, Information and Consumer Behavior, 78 J.
of Pol. Econ. 311, 312 (1970).
\16\ Segermark, supra note 4, at 30.
\17\ Marlowe, supra note 9, at 4-5; Marlowe and Rojo, supra note 9,
at 128.
\18\ Nancy Luna, Phone Card or PhonyCard? Orange County Reg., Aug.
20, 2005 (reporting experience of consumer who was never able to use
her defective card to make a call).
\19\ Julia Marlowe and Jorge H. Atiles, Consumer Fraud and Latino
Immigrant Consumers in the United States, 29 Int'l J. of Consumer Stud.
391, 395-96 (2005).
\20\ Id. at 395-96.
\21\ Marlowe and Rojo, supra note 9, at 130-31.
\22\ Id. at 132-33.
\23\ Id. at 133.
\24\ Id. at 130.
\25\ Id.
\26\ Marlowe and Rojo, supra note 9, at 130.
\27\ Id.
\28\ Id.
\29\ Id.
\30\ Id.
\31\ Marlowe and Rojo, supra note 9, at 130.
\32\ Id.
\33\ Id. at 132.
\34\ Id. at 133.
\35\ Id.
\36\ Marlowe and Rojo, supra note 9, at 133.
\37\ Id.
\38\ Id.
\39\ Id. at 130.
\40\ Id.
\41\ Marlowe and Rojo, supra note 9, at 130.
\42\ Id. at 131.
\43\ Id.
\44\ Marlowe, supra note 9, at 18-19.
\45\ Id. at 4.
\46\ Id.
\47\ Id. at 4-5.
\48\ Id. at 4.
\49\ Julia Marlowe and Francisco Diaz, Verification of Advertised
Claims for Prepaid Phone Cards (Working Paper, 2006).
\50\ Marlowe, supra note 9, at 4.
\51\ Id.
\52\ Id.
\53\ Id.
\54\ Id. at 5.
\55\ Marlowe and Rojo, supra note 9, at 132.
\56\ Id.
\57\ Marlowe, supra note 9, at 4.
\58\ Id. at 4-5.
\59\ Cal. Bus. & Prof. Code 17538.9(12) (West 2006) (a customer
is not considered connected if the customer receives a busy signal or
the call is unanswered); Al. Pub. Serv. Comm'n Rule T-18.1(7) (1997)
(usage rates can be charged only for connected minutes); 16 Tex. Admin.
Code 26.34(e)(2) (2000) (account may be decreased only for completed
calls; busy signals and unanswered calls are not considered completed).
\60\ ITA Phonecard Disclosure Guidelines, The Int'l Telecard Ass'n
Standards Comm., June 5, 2000.
\61\ Id.
\62\ Howard Segermark, Executive Director, International Prepaid
Communications Association, personal interview with Julia Marlowe and
Martina Rojo, at the offices of the Association, 904 Massachusetts
Avenue, Washington, D.C., March 29, 2004. The International Prepaid
Communications Association is the successor organization to the
International Telecard Association.
\63\ Compare ITA Phonecard Disclosure Guidelines, supra note 60,
with the Model Act discussed infra in Part XI. For example, the IPCA
standards do not include any rules on advertising. They do not require
a minimum period before the card expires or redemption of unused value.
Card issuers are not required to replace defective cards.
\64\ Marlowe and Rojo, supra note 9, at 131.
\65\ Id.
\66\ Id.
\67\ Gutwillig, supra note 2.
\68\ Marlowe, supra note 9, at 3.
\69\ 15 U.S.C. 45(a)(1) (2006).
\70\ Id. 45(a).
\71\ Id. 45(a)(1).
\72\ Id.
\73\ The FTC Act merely declares unfair and deceptive acts to be
unlawful. 15 U.S.C. 45(a)(1) (2006). It does not establish any
requirements for disclosure of essential information, levels of
performance, customer service or error resolution.
\74\ See infra Part X discussing problems not dealt with in any
laws.
\75\ Michael M. Greenfield, Consumer Law: A Guide for Those Who
Represent Sellers, Lenders, and Consumers 160, 559 (Little, Brown
1995).
\76\ Courts in some states have made it very difficult for
consumers to bring actions under these laws. See, e.g., Zeeman v.
Black, 273 S.E.2d 910, 915 (Ga. Ct. App. 1980) (imposing a ``public
interest'' requirement that is not included in the statute).
\77\ E.g., Ga. Code Ann. 10-1-399(a) (2006).
\78\ Most courts require consumers to prove both procedural and
substantive unconscionability. Greenfield, supra note 75, at 529-34. To
prove procedural unconscionability the consumer must show the process
under which the consumer entered into the contract was unconscionable.
To prove substantive unconscionability, the consumer must prove the
terms in the contract were unconscionable. Some courts allow the
doctrine to be raised only as a defense, which means consumers can
challenge a contract as unconscionable only if the seller has sued
them. They cannot use it affirmatively as the basis of their own
lawsuit against the seller. Rosboro Lumber Co. v. Employee Benefits
Ins. Co., 672 P.2d 1336, 1338 (Or. Ct. App. 1983), rev'd on other
grounds, 680 P.2d 386 (Or. 1984).
\79\ See generally Official Comment U.C.C. 1-203 (2005). The
Comment provides that ``failure to perform or enforce, in good faith, a
specific duty or obligation under the contract, constitutes a breach of
that contract. . . . [T]he doctrine of good faith merely directs a
court toward interpreting contracts within the commercial context in
which they are created, performed and enforced, and does not create a
separate duty of fairness and reasonableness which can be independently
breached.''
\80\ See generally Discover Bank v. Superior Court, 30 Cal. Rptr.
3d 76, 113 P.3d 1100, 1109-10 (Cal. 2005) (stating that adhesion
contracts are unconscionable, ``at least to the extent they operate to
insulate a party from liability that otherwise would be imposed under
[state] law'').
\81\ This is in contrast to gift cards. Far more states have
enacted laws regulating that type of stored value card. Mark Budnitz &
Margot Saunders, Consumer Banking & Payments Law Credit, Debit & Stored
Value Cards, Checks, Money Orders, E-Sign, Electronic Banking and
Benefit Payments 178-79 (National Consumer Law Center 3rd ed. 2005).
\82\ Prepaid phone cards have been identified as a key problem area
for Hispanics. Federal Trade Commission, Hispanic Outreach Forum & Law
Enforcement Workshop: A Summary of the Proceedings, at 8 (Oct. 2004),
http://www.ftc.gov/reports/hispanicoutreach/hispanic
outreach.pdf. (last visited Sept. 11, 2006). Fraudulent practices
involving the cards are ``likely to be targeted to immigrant
populations.'' Id. at 9. ``Hispanics are noted for their trusting
nature, which means they maybe easier prey for scam artists.'' Id. at.
8. See generally Hoover's In-Depth Company Records, Ace Cash Express,
Inc. Aug. 24, 2005 (reporting that Ace Cash Express, Inc. targets
consumers who do not have bank accounts, selling them prepaid phone
cards, and controversial products such as payday loans).
\83\ Hispanic Outreach Forum & Law Enforcement Workshop: A Summary
of the Proceedings, supra note 82, at 10. ``. . . the concept of the
government protecting consumers may be foreign to many Hispanics.'' Id.
\84\ Administrative agencies in the following states have
regulations pertaining to prepaid phone cards. Al. Pub. Serv. Comm'n
Rule T-18.1 (2000); Fla. Admin. Code Ann. r. 25-24.900-935 (2006); Mo.
Code Regs. Ann. tit. 4, 240-32.160-70 (2006); 16 Tex. Admin. Code
26.34(e)(4) (2000).
\85\ 815 Ill. Comp. Stat. 505/2QQ (2006); Fla. Admin. Code Ann. r.
25-24.910 (2006). Some states require providers of the service to file
tariffs. Fla. Admin. Code Ann. r. 25-24.915 (2006); 16 Tex. Admin. Code
26.34(e)(1) (2000).
\86\ Id.
\87\ Id.
\88\ ``. . . Federal law applies nationally.'' Salt Lake Tribune
Publ'g Co. v. Mgmt. Planning, Inc., 390 F.3d 684, 688 (10th Cir. 2004).
\89\ ``Because Federal law applies nationally,'' courts should
assume ``that Congress desires national uniformity in the application
of its laws.'' Id. See Laura S. Langley, Sperm, Egg, and a Petri Dish,
27 J. Leg. Med. 167, 206 (2006) (proposing Federal legislation because
it would create uniformity among the states).
\90\ See, for example, the industry's response to state laws
requiring companies to notify consumers when there is a security breach
resulting in the possible exposure of personal information about
consumers. Katie Kuehner-Hebert, Data Privacy Now Issue for States, 170
Am. Banker 1, Mar. 28, 2005 (noting how businesses prefer a Federal
statute over a patchwork of state laws).
\91\ Fourteen percent of the people in the United States, totaling
40 million people, move or change their address every year. Stephanie
Fiereck, Focus on Class Action, New Jersey Law., Oct. 31, 2005 (relying
on data from the U.S. Census Bureau's Geographical Mobility Study 2002-
2003).
\92\ E.g., Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d. 883,
887 (6th Cir. 2002); Gator.com Corp. v. L.L. Bean, Inc., 341 F.3d 1072,
1075 (9th Cir. 2003).
\93\ Prepaid phone cards are analogous to payment devices such as
credit cards, that are defined as devices for ``the purpose of
obtaining . . . property . . . or services.'' 15 U.S.C. 1602(k)
(2006).
\94\ The Federal Communications Commission has authority to
regulate interstate telephone service. 47 U.S.C. 201 (2006). See AT&T
Corp. v. Iowa Util. Bd., 525 U.S. 366, 384 (1999) (clarifying the FCC's
rulemaking authority under the Telecommunications Act).
\95\ FCC, Prepaid Phone Cards: What Consumers Should Know, http://
ftp.fcc.gov/cgb/consumerfacts/prepaidcards.html (last visited Sept. 11,
2006).
\96\ FTC Telemarketing Sales Rule, 16 C.F.R. 310 (2006).
\97\ FTC v. PT-1 Commc'ns, Inc., Civ. Action No. 99-1432 (S.D.N.Y.
1999) (stipulating final judgment and order for permanent injunction
and consumer redress against defendant PT-1 Communications, Inc.).
\98\ As discussed infra in Part XI, we propose that states be
allowed to enact their own legislation if it is not inconsistent with
the Federal law. State administrative involvement may be needed if a
state wishes to require sellers to register or follow the example of
some states that require sellers to obtain a certificate of authority
or certificate of public convenience. E.g., Al. Pub. Serv. Comm'n Rule
T-18.1 (2000); Fla. Admin. Code Ann. r. 25-24.910 (2006); Mo. Code
Regs. Ann. tit. 4, 240-32.150(1) (2006); 815 Ill. Comp. Stat. 505/
2QQ(b) (2006).
\99\ Other Federal consumer protection laws demonstrate how
consumers can get the benefit of national coverage as well as
protection for special local needs. These laws establish a national
floor of minimum requirements. Rather than completely preempting state
law, they permit states to enact laws that provide consumers with
greater protection as long as the state's law is not inconsistent with
the Federal law. E.g., Truth in Lending Act, 15 U.S.C. 1666(j)
(2006); Electronic Fund Transfers Act, 15 U.S.C. 1693(q) (2006); Fair
Debt Collection Practices Act, 15 U.S.C. 1692(n) (2006).
\100\ Christopher B. Woods, Stored Value Cards, 59 Cons. Fin. Qtly.
Rep. 211, 211 (2005). One commentator suggests that the card issuer has
special legal duties that arise from the fact that the card is prepaid.
``And a fiduciary responsibility is involved for those who take money
prior to providing service.'' Howard Segermark, Ensuring Fair
Competition Remains Regulatory Challenge for Prepaid, Phone Plus Mag.,
Mar. 2001, available at: http://www.phoneplusmag.com/articles/
131soap.html (last visited Sept. 11, 2006). Segermark is Executive
Director of the International Prepaid Communications Association.
\101\ ATMs can be used to perform a variety of services including
cash deposits, cash withdrawals, balance inquiries, and transfers from
one account to another. Candace Heckman, Getting Money Back After ATM
Theft Proving To Bank You're A Victim Is The Hard Part, Seattle Post
Intelligencer, Aug. 9, 2006 (describing thefts involving ATM balance
inquiries and ATM withdrawals); Citibank Home Page, http://
www.citibank.com (describing ATM features enabling customers to
withdraw cash and make transfers from one account to another) (last
visited Sept. 27, 2006); Bank of America Home Page, http://
www.bankofamerica.com (describing ATM features enabling customers to
make withdrawals, make transfers from one account to another, and make
balance inquiries (last visited Sept. 27, 2006).
\102\ See e.g., 47 U.S.C. 251 (2006) (prescribing the duties of
telecommunications carriers).
\103\ E.g., Cont'l Dredging, Inc. v. De-Kaizered, Inc., 120 S.W.3d
380, 394 (Tex. Ct. App. 2003).
\104\ The applicable law is the Electronic Fund Transfers Act, 15
U.S.C. 1693 et seq.
\105\ 71 Fed. Reg. 51437 (2006) (to be codified at 12 C.F.R. pt.
205) (Final Rule, effective July 1, 2007).
\106\ E.g., in Texas, prepaid calling card services companies are
required to register with the Public Service Commission. 16 Tex. Admin.
Code 26.34 (2000).
\107\ Compare Al. Pub. Serv. Comm'n Rule. T-18.1 (1997) (requiring
only the disclosure of essential information), with Cal. Bus. & Prof.
Code 17538.9(b)(1) (West 2006) (covering advertising, disclosures,
refunds, and customer service).
\108\ Id.
\109\ Marlowe and Rojo, supra note 9, at 134-35; Marlowe, supra
note 9, at 9.
\110\ Id.
\111\ Marlowe, supra note 9, at 4.
\112\ See Federal Trade Commission, http://www.ftc.gov, listing all
the FTC's guides and policy statements on advertising, none related
directly to prepaid phone card services. (last visited Sept. 27, 2006).
\113\ Chester S. Galloway, Herbert Jack Rotfield and Jef I.
Richards, Holding Media Responsibile for Deceptive Weight-Loss
Advertising, 107 W. Va. L. Rev. 353, 383 (2005) (stating that the FTC
does not have the resources to investigate many cases of deceptive
advertising). The FTC, however, has brought at least one action against
a phone card company. See supra text at note 97.
\114\ Edward A. Blair, Judy Harris and Kent B. Monroe, Effects of
Shopping Information on Consumers' Responses to Comparative Price
Claims, 78 J. of Retailing 76 (2002); Larry D. Compeau, Dhruv Grewal
and Rajesh Chandrashedaran, Comparative Price Advertising: Believe it
or Not, 36 J. of Consumer Aff. 287-88 (2002); Valarie A. Zeithaml,
Consumer Perceptions of Price, Quality, and Value: A Means-End Model
and Synthesis of Evidence, 52 J. of Marketing 2-3 (1988).
\115\ Blair, Harris and Monroe, supra note 114, at 76.
\116\ Truth in Lending imposes requirements for ads that mention
specific credit terms. 12 C.F.R. 226.24 (2006).
\117\ Cal. Bus. & Prof. Code 17538.9(b)(1) (West 2006).
\118\ States require disclosures on the card itself. See e.g., Cal
Bus. & Prof. Code 17538.9(b)(2)(A) (West 2006). Some states require
other disclosures on the card or its packaging. See e.g., Id.
17538.9(b)(3).
\119\ Cal. Bus. & Prof. Code 17538.9(b)(2)(A) (West 2006).
California law defines ``company'' as ``an entity providing prepaid
calling services to the public using its own or a resold
telecommunications network.'' Cal. Bus. & Prof. Code at 17538.9(a)(1)
(West 2006). Other states that require the name of the company on the
card include the following: Alaska, see Alaska Admin. Code tit. 3,
52.377(d)(1)(A) (2006); Alabama, see Al. Pub. Serv. Comm'n Rule. T-18.1
(1997); Florida, see Fla. Admin. Code Ann. r. 25-24.920(1)(a) (2006);
Illinois, see 815 Ill. Comp. Stat. 505/2QQ(d)(1)(A) (2006); Missouri,
see Mo. Code Regs. Ann. tit. 4, 240-32.150(2) (2006); New York, see
N.Y. Pub. Serv. Law 92-f(2)(a) (McKinney 2006); Texas, see 16 Tex.
Admin. Code 26.34(f)(1)(B)(ii) (2000); and Washington, see Wash.
Admin. Code 480-120-264(5)(a)(ii) (2006).
\120\ Cal. Bus. & Prof. Code 17538.9(b)(2)(B) (West 2006); Fla.
Admin. Code Ann. r. 25-24.920(1)(b) (2006); Ill. Comp. Stat. 815 505/2
QQ(d)(1)(B) (2006); Mo. Code Regs. Ann. tit. 4, 240-32.160(2)(B)
(2006); N.Y. Pub. Serv. Law 92-f(2)(b) (McKinney 2006); 16 Tex.
Admin. Code 26.34(f)(1)(A)(i) (2000).
\121\ Marlowe and Rojo, supra note 9, at 134-35; Marlowe, supra
note 9, at 9.
\122\ Cal. Bus. & Prof. Code 17538.9(b)(3)(C) (West 2006); Fla.
Admin. Code Ann. r. 25-24.920(1)(c) (2006); 815 Ill. Comp. Stat. 505/2
QQ(d)(1)(C) (2006); Mo. Code Regs. Ann. tit. 4, 240-32.160(2)(C)
(2006); N.Y. Pub. Serv. Law 92-f(2)(c) (McKinney 2006).
\123\ Cal. Bus. & Prof. Code 17538.9(b)(2)(D) (West 2006); Fla.
Admin. Code Ann. r. 25-24.920(1)(d); Mo. Code Regs. Ann. tit. 4, 240-
32.160(2)(D) (2006); N.Y. Pub. Serv. Law 92-f(2)(d) (McKinney 2006).
\124\ The situation is analogous to the person who issues a check
drawn on an account that doesn't exist or that contains no funds,
providing the payee with an action in deceit. See Greenfield, supra
note 75, at 12.
\125\ Cal. Bus. & Prof. Code 17538.9(b)(3)(I) (West 2006); Fla.
Admin. Code Ann. r. 25-24.920(2)(c) (2006); 815 Ill. Comp. Stat. 505/
2 QQ (d)(2)(F) (2006); Mo. Code Regs. Ann. tit. 4, 240-32.160(1)(C)
(2006); N.Y. Pub. Serv. Law 92-f(2)(e) (McKinney 2006); 16 Tex.
Admin. Code 26.34(f)(1)(B)(iv) (2000); Wash. Admin. Code 480-120-
264(5)(a)(v) (2006).
\126\ Cal. Bus. & Prof. Code 17538.9(b)(8) (2006); Fla. Admin.
Code Ann. r. 25-24.920(7) (2006); Mo. Code Regs. Ann. tit. 4, 240-
32.170(8) (2006); N.Y. Pub. Serv. Law 92-f(6) (McKinney 2006).
\127\ Wash. Admin. Code 480-120-264(5)(a)(v) (2006). Texas has the
same policy; if the expiration date or policy is not disclosed, on the
card, it is considered active ``indefinitely.'' 16 Tex. Admin. Code
26.34(f)(1)(B)(iv) (2000).
\128\ Cal. Bus. & Prof. Code 17538.9(b)(3) (West 2006).
\129\ Id.
\130\ Fla. Admin. Code Ann. r. 25-24.920(2) (2006).
\131\ Cal. Bus. & Prof. Code 17538.9(b)(3) (West 2006).
\132\ Fees include ``monthly or other periodic fees, maintenance
fees, per-call access fees, surcharges for calls made on pay
telephones, or surcharges for the first minute or other period of use.
. . .'' Id. 17538.9(b)(3)(A).
\133\ Id. 17538.9(b)(3)(B).
\134\ Id. Illinois' and New York's requirements on disclosure of
fees are similar. 815 Ill. Comp. Stat. 505/2QQ(d)(2) (2005); N.Y.
Pub. Serv. Law 92-f(3) (McKinney 2006).
\135\ 12 C.F.R. 22612 (1994) (regarding credit cards); 12 C.F.R.
205.4 (2001) (regarding debit cards).
\136\ Cal. Bus. & Prof. Code 17538.9(b)(13) (West 2006).
\137\ Id.
\138\ Id.
\139\ Id.
\140\ 16 Tex. Admin. Code 26.34(g)(1) (2000).
\141\ Id.
\142\ Id. 26.34(g)(2) (2000).
\143\ Cal. Bus. & Prof. Code 17538.9(b)(4) (West 2006).
\144\ Id.
\145\ Id.
\146\ 16 Tex. Admin. Code 26.34(f)(1) (2000).
\147\ Id.
\148\ See U.C.C. 4-406 (2002) (requiring customers to report
check forgeries and alterations to the bank, and if timely reported the
non-negligent customer is not liable, but the UCC does not require any
dispute resolution procedure. If the bank refuses to investigate the
customer's claim and recredit the customer's account, the customer's
only recourse is to sue. The bank's refusal to investigate and recredit
does not violate the UCC).
\149\ 12 C.F.R. 226.13 (1994) (regarding credit cards); 12 C.F.R.
205.11 (2001) (regarding debit cards).
\150\ Id.
\151\ Budnitz and Saunders, supra note 81, at 178-79.
\152\ Id.
\153\ Marlowe and Rojo, supra note 9, at 130-31.
\154\ Cal. Bus. & Prof. Code 17538.9(b)(6) (West 2006); N.Y. Pub.
Serv. Law 92-f(4) (McKinney 2000).
\155\ See, e.g., Al. Pub. Serv. Comm'n Rule T-18.1(5) (2000)
(requiring that customer service be manned 8 hours per day, 5 days per
week); Fla. Admin. Code Ann. r. 25-24.920(4) (2006) (requiring live
operator 24/7 or electronically recorded and attempt to contact the
next business day); Mo. Code Regs. Ann. tit. 4, 240-32.140(4) (2001)
(requiring availability 24/7); 16 Tex. Admin. Code 26.34(i) (2000)
(requiring live operator 24/7 or electronically recorded and attempt to
contact the next business day); Wash. Admin. Code 480-120-264(2)(a)
(2003) (requiring ability to respond 24/7).
\156\ Cal. Bus. & Prof. Code 17538.9(b)(6)(B) (West 2006); N.Y.
Pub. Serv. Law 92-f(4) (McKinney 2006).
\157\ N.Y. Pub. Serv. Law 92-f(4) (McKinney 2006). New York also
requires that the operator be able to provide information about the
``terms and conditions of service and monthly service charges.'' Id.
92-f (4)(iv).
\158\ Fla. Admin. Code Ann. r. 25-24.920(9) (2006); Cal. Bus. &
Prof. Code 17538.9(b)(7) (West 2006); N.Y. Pub. Serv. Law 92-f(5)
(McKinney 2006).
\159\ Fla. Admin. Code Ann. r. 25-24.920(9) (2006).
\160\ Cal. Bus. & Prof. Code 17538.9(b)(7) (West 2006); N.Y. Pub.
Serv. Law 92-f(5) (McKinney 2006).
\161\ Id.
\162\ Id.
\163\ Fla. Admin. Code Ann. r. 25-24.925(1)(a) (2006).
\164\ Mo. Code Regs. Ann. tit. 4, 240-32-170(5)(B) (2006).
\165\ Id. 240-32-170(6)(A).
\166\ Al. Pub. Serv. Comm'n Rule T-18.1(4) (1998).
\167\ 16 Tex. Admin. Code 26.34(j) (2000).
\168\ Fla. Admin. Code Ann. r. 25-24.925(1)(a).
\169\ Id.; see also Mo. Code Regs. Ann. tit. 4, 240-32.170(6)
(2006) (requiring a company to refund the unused value remaining on the
card if the ``company is no longer able to provide service.'')
\170\ Fla. Admin. Code Ann. r. 25-24.925(1)(a) (2006). The company
can choose whether to make the refund in cash or by means of a
replacement service. It must be provided within 60 days of when the
consumer notifies the company. Id. r. 25-24.925(1)(b).
\171\ Alaska Admin. Code tit. 3, 52.377(e) (2006).
\172\ Id.
\173\ Fla. Admin. Code Ann. r. 25-24.925(2) (2006). Compare the
rules for lost and stolen credit cards. Under Federal law, a consumer
has a maximum liability of $50. The liability will be less if the
consumer notifies the card issuer before the thief charges less than
$50 prior to the consumer providing the notification. 12 C.F.R.
226.12(b) (2006).
\174\ Cal. Bus. & Prof. Code 17538.9(b)(7) (West 2006); Fla.
Admin. Code Ann. r. 25-24.925(1)(a) (2006); Mo. Code Regs. Ann. tit. 4,
240-32.170(6)(A) (2006); N.Y. Pub. Serv. Law 92-f(5) (McKinney
2006).
\175\ Id.
\176\ Credit card law provides a limited remedy if there is a
failure in the goods or services purchased. Consumers can dispute the
charges and refuse to pay for those goods or services. 12 C.F.R.
226.12(c) (2006). The card issuer will charge the amount back to the
merchant and leave the consumer and merchant to resolve the dispute on
their own. Budnitz & Saunders, supra note 81, at 152. Debit card law
does not provide any remedy. Id. at 82.
\177\ In regard to the sale of goods, the Uniform Commercial Code
includes rules on express and implied warranties, but a merchant can
avoid these by disclaiming them in the contract between the parties.
U.C.C. 2-316 (2003). The Federal Magnuson-Moss Warranty Act provides
limited protection. 15 U.S.C. 2301-2312 (2006). The warranty laws
regarding the provision of services are even more problematic. See
infra at Part IX.
\178\ Cal. Bus. & Prof. Code 17538.9(b)(10) (West 2006).
\179\ Id. 17538.9(b)(7).
\180\ Many laws require parties to act in a commercially reasonable
manner. See, e.g., U.C.C. 3-103(a)(6)-(9) (2002), 9-607(c), 9-
608(a)(3), 9-610 (2000).
\181\ Fla. Admin. Code Ann. r. 25-24.930 (repealed 2005).
\182\ Cal. Bus. & Prof. Code 17538.9(b)(8) (West 2006); N.Y. Pub.
Serv. Law 92-f(6) (McKinney 2006).
\183\ N.Y. Pub. Serv. Law 92-f(6) (McKinney 2006).
\184\ Id.
\185\ See generally Borowski v. Firstar Bank Milwaukee, 579 N.W.2d
247 (Wis. Ct. App. 1998) (upholding a bank's contract requiring a
customer to notify the bank of any unauthorized signature or alteration
of a check within 14 days as reasonable, and rejecting the dissent's
view that such a short time period was contrary to customers'
reasonable expectations and conduct).
\186\ Greenfield, supra note 75, at 160 (describing how legislation
prohibiting deceptive practices has been enacted in every state). See
also, id. at 559 (most states have prohibited unfair practices).
\187\ See, e.g., Taylor v. Jacques, 292 B.R. 434, 434 (Bankr. N.D.
Ga. 2002)(holding that consumer cannot sue under Georgia's Fair
Business Practices Act if the industry is regulated, even if the
regulations do not address the problem the consumer alleges violates
the Act). Consumers also face formidable barriers to obtaining judicial
relief if a company stops doing business. Alternatively the company may
stop doing business in one state, then resume business in another state
under a different name. See generally, Pickel, supra note 7 (reporting
that companies lose consumer loyalty with their unfair and deceptive
practices, but then market the cards with a new brand name, cheating
consumers who do not realize it is the same company).
\188\ 16 Tex. Admin. Code 26.34(m) (2000) (explaining that the
commission can order the company to take corrective action, impose
administrative penalties, and coordinate with the Office of the
Attorney General).
\189\ Once a seller makes an express warranty, it cannot disclaim
that warranty. U.C.C. 2-316(1) (2003). However, the seller is not
required to make any express warranties. Certain implied warranties
arise by operation of law, U.C.C. 2-314 & 2-315 (2003), but the
seller can easily disclaim these. U.C.C. 2-316(2) & (3) (2003).
\190\ 15 U.S.C. 2308(a) (2006).
\191\ 16 C.F.R. 700.1(h) (2006). Even if the Act did apply, the
Act prohibits only the disclaimer of implied warranties that are
created by state law; the Act itself does not create any implied
warranties.
\192\ ``. . . [A] duty is implied in every service, repair or
construction contract to perform it skillfully, carefully, diligently,
and in a workmanlike manner.'' Alco Standard Corp. v. Westinghouse
Elec. Corp., 206 Ga. App. 794, 796, 426 S.E.2d 648, 650 (Ga. Ct. App.
1992).
\193\ Id.
\194\ No cases were found addressing this issue, but since the UCC
permits disclaimers of implied warranties for the sale of goods,
presumably courts also would allow it for the sale of services. See
generally Richard M. Alderman, Warranty Disclaimers and the Texas
Deceptive Practices Act, 29 Hous. Law. 14, 15 (Jan./Feb. 1992)
(discussing express warranty disclaimers in service contracts).
\195\ See Budnitz and Saunders, supra note 81, at 177-178.
\196\ Id.
\197\ Id.
\198\ Id.
\199\ See Fla. Admin. Code Ann. r. 25-24.925(2) (providing that a
company ``may, but shall not be required to, provide a refund'' for
lost or stolen phone cards). Compare credit card and debit card law
that imposes specific caps that limit the consumer's liability if a
thief makes charges on a lost or stolen card. 15 U.S.C. 1643(a)
(2006) (credit cards); Id. 1693(g) (debit cards and other electronic
fund transfers).
\200\ See Cheryl Johnson, Faux Williams makes rounds; Star
impersonator leaves trail of angry victims, Star Trib., Dec. 26, 2004
(reporting consumer's allegations of unauthorized use of phone card
after he lost the piece of paper on which he had written his PIN).
\201\ Id.
\202\ The card issuer may be required to transfer those funds to
the state under abandoned property or escheat laws. Christopher B.
Woods, Stored Value Cards, 59 Consumer Fin. L. Q. Rep. 211, 219 (2005);
Anita Ramasastry, State Escheat Statutes and Possible Treatment of
Stored Value, Electronic Currency, and Other New Payment Mechanisms, 57
Bus. Law. 475, 480-81 (2001) (stating that North Carolina and Arizona
exclude prepaid phone cards from their escheat laws). Even where those
laws apply to prepaid phone balances, the seller has the use of those
funds until they are paid to the state.
\203\ Marlowe & Rojo, supra note 9, at 130.
\204\ Luna, supra note 18 (highlighting an instance where a
consumer reported that her card was cutoff immediately after making her
first call, and the card did not work thereafter). The New York
Attorney General persuaded eighteen retailers to agree to deactivate
and reissue damaged gift cards. Big Retailers Agree to Replace Gift
Cards, Detroit Free Press, Mar. 3, 2003.
\205\ See http://www.ftc.gov/bcp/conline/pubs/products/buytime.htm;
http://www.fcc.gov/cgb/consumerfacts/prepaidcards.html; see also Mark
E. Budnitz, Stored Value Cards and the Consumer: The Need for
Regulation, 46 Am. U. L. Rev. 1027, 1035, n. 54 (1997) (reporting that
issuers of prepaid phone cards have gone out of business after selling
tens of thousands of cards which thereafter became worthless).
\206\ See Getting the Best Value from Prepaid Phone Cards, Consumer
Action (April 1, 2001), available at http://www.consumeraction.org
(last visited Oct. 5, 2006).
\207\ Id.
\208\ Budnitz and Saunders, supra note 81, at 172-173. See infra
text accompanying note 200.
\209\ See, e.g., the Electronic Fund Transfers Act, 15 U.S.C.
1693(m) (2006) (providing actual damages, statutory damages, costs, and
reasonable attorney's fees).
\210\See infra Part VI.
\211\ As discussed above, the FRB and FCC might be appropriate
agencies as well. See supra text accompanying notes 89-94. The FTC,
however, seems best suited. The FRB deals with financial institutions,
and sellers of phone cards are not financial institutions. The FCC's
focus is on the telecommunications industry, not on payment devices
such as phone cards, or the types of problems consumers face when they
use phone cards.
\212\ As provided in other statutes, using the agency-approved form
would be deemed compliance with the disclosure requirements. Electronic
Fund Transfers Act, 15 U.S.C. 1693(m)(d)(2) (2006).
\213\ See Electronic Fund Transfers Act, 15 U.S.C. 1693(q) (2006)
The Act does not annul, alter, or affect state law except to the extent
it is inconsistent with the Act. Furthermore, a state law is not
inconsistent if it affords consumers greater protection than is
provided in the Act.
\214\ See supra text accompanying note 108. See also FTC v. Pt-1
Commc'ns, Civ. Action # 99-1432 (S.D.N.Y. 1999) (stipulated final
judgment and order for permanent injunction and consumer redress;
permanent injunction in connection with phone card company's
advertising). See also Hispanic Outreach Forum & Law Enforcement
Workshop: A Summary of the Proceedings, supra note 82, at 9 (discussing
how phone cards and other various types of media, excluding direct
mail, are sources of deceptive claims targeted at Hispanics).
\215\ Cal. Bus. & Prof. Code 17538.9(b)(1) (West 2006).
\216\ See Federal Trade Commission, Facts for Business: DotCom
Disclosures, available at http://www.ftc.gov/bcp/conline/pubs/buspubs/
dotcom (last visited May 31, 2006).
\217\ See e.g., Boomer v. AT&T Corp., 309 F.3d 404 (7th. Cir. 2002)
(holding that the consumer accepted a contract when using the service
after he received agreement). See generally Ronald J. Mann, Panel One:
Boilerplate In Consumer Contract: ``Contracting'' For Credit, 104 Mich.
L. Rev. 899, 910 (2006) (discussing the credit card issuer's use of
contract terms providing that notice and continued use bind consumers
when issuers unilaterally change contract terms). As Howard Segermark,
the Executive Director of the International Prepaid Communications
Association, has commented regarding the special nature of phone card
contracts, ``handing over a package--a phone card or prepaid cellular--
does not provide an opportunity for a formal contract.'' Segermark,
supra note 100.
\218\ 16 Tex. Admin. Code 26.34(f)(1)(B)(iv) (2006); Wash. Admin.
Code 480-120-264(5)(a)(v).
\219\ Cal. Bus. & Prof. Code 17538.9(b)(3) (West 2006).
\220\ Examples of fees include ``monthly or other periodic fees,
maintenance fees, per-call access fees, surcharges for calls made on
pay telephones, or surcharges for the first minute or other period of
use[.]'' Id. 17538.9(b)(3)(A).
\221\ Id.; Illinois' and New York's requirements on disclosure of
fees are similar. 815 Ill. Comp. Stat. 505/2QQ(d)(2) (2006); N.Y. Pub.
Serv. Law 92-f(3) (McKinney 2006).
\222\ 16 Tex. Admin. Code 26.34(g)(1) (2006).
\223\ Id. 26.34(g)(2).
\224\ See Budnitz and Saunders, supra note 81 at 172-73.
\225\ Notification should not create technical problems. Texas
requires sellers to inform consumers verbally when their balances are
nearly exhausted. 16 Tex. Admin. Code 26.34(g)(2) (2006).
\226\ See supra text accompanying notes 184-186 discussing the
requirements for lost and stolen cards that the Federal statute should
impose.
\227\ See supra text accompanying notes 46-56.
\228\ Marlowe, supra note 9, at 4.
\229\ Id. at 4-5.
\230\ Cal. Bus. & Prof. Code 17538.9(b)(4) (West 2006).
\231\ Id.
\232\ Alan M. White and Cathy Lesser Mansfield, Literacy and
Contract, 13 Stan. L. & Pol'y Rev. 233, 264-65 (2002). ``. . .
disclosure statements . . . may not be able to aid most consumers in
understanding the terms of their agreement.'' Id. at 261.
\233\ California and New York require live operators twenty-four
hours a day and 7 days a week. Cal. Bus. & Prof. Code
17538.9(b)(6)(A) (West 2006); N.Y. Pub. Serv. Law 92-f(4) (McKinney
2006).
\234\ See Fla. Admin. Code Ann. r. 25-24.920(4) (2006); Mo. Code
Regs. Ann. tit. 4, 240-32.160(5) (2006), 16 Tex. Admin. Code
26.34(i) (2000). Alabama requires that the number be manned 8 hours per
day, 5 days per week. Al Pub. Serv. Comm'n Rule 18.1(5) (1997).
\235\ Consumers in New York and California can file complaints with
customer service. Cal. Bus. & Prof. Code 17538.9(b)(6)(C) (West
2006); N.Y. Pub. Serv. Law 92-f(4) (McKinney 2006).
\236\ This scheme is similar to that in the Electronic Fund
Transfers Act, 15 U.S.C. 1693(f) (2006).
\237\ N.Y. Pub. Serv. Law 92-f (4) (McKinney 2006). New York also
requires that the operator be able to provide information about the
``terms and conditions of service and monthly service charges.'' Id.
92-f (4)(iv).
\238\ Fla. Admin. Code Ann. r. 25-24.920(3)(c) (2006).
\239\ Cal. Bus. & Prof Code 17538.9(b)(1) (2006); N.Y. Pub. Serv.
Law 92-f (McKinney 2006).
\240\ Cal. Bus. & Prof Code 17538.9(b)(7) (2006); N.Y. Pub. Serv.
Law 92-f (McKinney 2006).
\241\ Id. The Federal statute should allow the FTC to describe
technical standards because the description requires a high level of
technical expertise and specificity. Moreover, the standards may need
to be adjusted as technology advances over time.
\242\ Al. Pub. Serv. Comm'n Rule T-18.1(4)(1997).
\243\ Fla. Admin. Code Ann. r. 25-24.925(1)(a) (2006). See also
Mo. Code Regs. Ann. tit. 4, 240-32.170(6) (2006) (providing that a
company must refund the unused value remaining on cards when the
``company is no longer able to provide service'').
\244\ Alaska Admin. Code tit. 3, 52.3771(e) (2006).
\245\ Fla. Admin. Code Ann. r. 25-24.925(2) (2006) (permitting,
but not requiring, a refund for lost or stolen cards).
\246\ Cal. Bus & Prof. Code 17538.9(b)(7) (West 2006); N.Y. Pub.
Serv. Law 92-f (McKinney 2006).
\247\ Commercial reasonableness, failure to exercise ordinary care,
good faith, and unconscionability are all standards included in the
Uniform Commercial Code. Consequently, including them in the proposed
statute is not a novel approach. See U.C.C. 3-103(a)(6) & (9)
(2002); U.C.C. 2-302 (2003); U.C.C. 9-610(b) (2000).
\248\ Cal. Bus. & Prof. Code 17538.9 (b)(7) (West 2006).
\249\ Fla. Admin. Code Ann. r. 25-24.930 (repealed 2005).
\250\ U.C.C. 2-314 (2003).
\251\ Id. 2-316 (2003) (allowing sellers to disclaim implied
warranties). See, e.g., Md. Code Ann., Com. Law 2-316.1 (West 2006)
(illustrating that some states prohibit sellers from disclaiming
implied warranties in consumer transactions).
\252\ See Budnitz and Saunders, supra note 81, at 7.7.1.
\253\ David Wood, Tips on Using Prepaid Phone Cards, Military Money
Mag., available at http://www.militarymoney.com/lifestyle/1065704890
(last visited Oct. 5, 2006).
\254\ Examples of defects include access numbers or PINs that do
not work and other defects making it impossible for the card to operate
as it should. A lost PIN may never be found. In that situation the
consumer has paid money for the card and the seller never has to
provide any more value. The card issuer may be required to transfer
those funds to the state under abandoned property or escheat laws. Even
where those laws apply to prepaid phone balances, the seller has the
use of those funds until they are paid to the state. See Luna, supra
note 18; Big Retailers Agree to Replace Gift Cards, supra, note 204.
\255\ The statute should delegate to the FTC the authority to study
the actual costs to sellers of replacing cards in order to establish
more specific guidelines for what would constitute a reasonable fee.
\256\ E.g., Electronic Fund Transfers Act, 15 U.S.C. 1693 (2006).
\257\ A comprehensive critique of mandatory predispute arbitration
in phone card contracts is beyond the scope of this article. See
Symposium, Mandatory Arbitration, 67 Law & Contemp. Probs. 1 (2004)
(showing that mandatory arbitration agreements are a substantial
barrier to consumers' ability to obtain meaningful relief).
\258\ 16 Tex. Admin. Code 26.34(e)(4) (2000) (requiring that
prepaid calling card service companies register with the Public Service
Commission).