The
FCC recently proposed to levy forfeiture
penalties totaling over $3.5 million against
various telecommunications providers which
failed to remit Universal Service Fund (USF)
contributions and other FCC regulatory
assessments. The FCC’s July 25, 2005 and
August 12, 2005 enforcement actions signal a
heightened resolve to penalize
telecommunications providers which fail to
pay USF and other assessments.
The FCC issued five notices of apparent
liability (NALs) to several interstate
telecommunications providers based on, among
other things, either failure to pay USF
contributions or pay such contributions on a
timely basis. In addition to proposing
forfeitures for failure to pay USF, the
agency also proposed forfeitures for failure
to: a) pay regulatory fees; b) register with
the FCC; c) submit Telecommunications
Reporting Worksheets (i.e., FCC Form 499-A
and 499-Q); d) pay Telecommunications Relay
Service (TRS) fund contributions; and e) pay
contributions to the North American
Numbering Plan Administration (NANPA).
Background
Section 254(d) of the Communications Act of
1934 (the Act) requires the FCC to collect
USF contributions from all
telecommunications providers offering
interstate telecommunications services. The
funds collected are used to support
telecommunications services in rural and
high cost areas as well as the rural health
care and schools and libraries (E-rate)
programs. The FCC has appointed an
administrator of the USF to perform this
collection and distribution function, the
Universal Service Administrative Company (USAC).
Providers of interstate telecommunications
services are required to complete and submit
FCC Form 499-A to both register with the FCC
(in order to begin offering interstate
service) and provide annual revenue
information to USAC for purposes of
determining USF contributions. In addition,
providers are required to complete and
submit interim reports on a quarterly basis
by means of an FCC Form 499-Q. Providers
are allowed to recover USF contributions
from their end-user customers.
In a February 23, 2005 Order and Notice of
Proposed Rulemaking, the FCC made clear in
addressing the appropriate regulatory regime
for AT&T’s “enhanced” prepaid cards, that
prepaid calling card providers, to the
extent their cards are used to make
interstate calls, are covered and required
to contribute under the USF program. In
that decision, the FCC ruled that AT&T had
unlawfully avoided paying over $500 million
in USF contributions and intrastate access
charges. While none of the recent NALs
issued by the FCC involved prepaid calling
card providers, the AT&T ruling underscores
the FCC’s view that prepaid providers are
required to remit USF contributions and
other regulatory assessments.
Penalties for Failure to Make USF
Contributions
Authorized and maximum forfeitures under the
Act were adjusted as of September 7, 2004.
The Act authorizes, for violations occurring
before that date, forfeitures of up to
$120,000 per violation or each day of
continuing violation, with a statutory
maximum of $1.2 million. For violations
occurring after September 7, 2004, the Act
authorizes forfeitures of up to $130,000 for
each violation or each day of continuing
violation, with a statutory maximum of
$1.325 million.
While there is no base forfeiture
established in the FCC’s Rules for failure
to make USF contributions, the FCC has
developed a formula that it now uses
consistently to assess these penalties. If
the FCC initiates enforcement proceedings
against a provider, it can only impose
penalties for violations that occurred
within one year of the NAL. However, the
agency can consider conduct prior to that
time for purposes of assessing the total
forfeiture amount, including the upward
adjustment in the base forfeiture. The FCC
will impose a base forfeiture of $20,000 for
each month in which the provider has failed
to make the required contribution. The base
forfeiture is then subject to an upward
adjustment of one-half of the provider’s
unpaid contributions. This formula was
applied in each of the five NALs recently
issued by the FCC.
In addition to monetary forfeitures,
providers failing to make USF contributions
can be subject to more serious enforcement
actions. Continuing violations can result
in higher monetary forfeitures (as
authorized by the Act), holds on or
dismissal of pending applications before the
FCC, or possible revocation of operating
authority.
Recent FCC Notices of Apparent Liability
The NALs released on July 25, 2005 and
August 12, 2005 signal the FCC’s increased
enforcement resolve with respect to unpaid
USF contributions. Of the approximately
$3.5 million total assessed for violations
of the Act and FCC Rules, the FCC assessed
more than $2.6 million in back payments and
penalties (among five providers) for failure
to make USF contributions during the
previous year. The providers each exhibited
a history of either failing to make any
contributions or timely contributions, a
fact relied upon in setting the ultimate
forfeiture amounts.
Instead of summarizing each of the five NALs,
the following addresses the more common
deficiency patterns and how they were
treated by the FCC in several of the NALs.
Lump Sum Late Payments:
Simply paying off outstanding contributions
in response to an FCC letter of inquiry (LOI)
will not release a provider from liability
for penalties based on failure to make USF
payments, including the upward adjustment.
As an example, the NAL issued to InPhonic,
Inc. (InPhonic) (a provider of mobile
virtual network operator service, wireless
information services, and activation and
data services) assessed a forfeiture of
$598,626 for failure to make USF
contributions for seven out of the previous
twelve months (recall that the FCC can only
impose forfeitures for the year preceding
the NAL). This penalty was issued even
though InPhonic made a payment of over
$800,000 for USF contributions it owed from
2002 to 2004 in response to an FCC LOI.
InPhonic was still subject to an upward
adjustment penalty of one-half of the amount
it paid for outstanding contributions, even
though it had remitted a lump sum late
payment. The penalties were imposed despite
such late payment because InPhonic had
failed to make USF contributions to USAC for
a period of over two years after the company
began offering interstate service (recall
that the FCC can consider conduct prior to
the previous year for purposes of
determining the appropriate total forfeiture
amount).
Partial Payments:
Partial payment will result in a penalty of
$10,000 for each month of partial payment as
well as the upward adjustment of one-half of
the violator’s unpaid contributions. As an
example, OCMC, Inc. (OCMC) (a provider of
operator and interexchange carrier services)
was assessed a forfeiture of $1.133 million
for failure to make USF contributions for
nine months in the previous year. However,
it made partial payments for seven of those
months. The FCC imposed a $10,000 base
forfeiture for each month in which OCMC made
partial USF contributions to USAC. The
upward adjustment formula remained the same,
one-half the unpaid contributions. This
assessment was made because OCMC had made
irregular and unsatisfactory payments to the
USF for several years (again recall that the
FCC can consider behavior prior to the
previous year for purposes of the total
forfeiture). The FCC found particularly
egregious those months in which OCMC made
partial contributions that were not only
insufficient to pay off its balance, but
insufficient even to cover the company’s
current monthly charges.
Failure to Register and Provide Revenue
Information:
Perhaps the most egregious violations, as
determined by the FCC, are failure to
register with the FCC and failure to provide
revenue information to USAC (by filing FCC
Forms 499-A and 499-Q), which both include
separate forfeitures, but also can increase
forfeitures for failure to pay USF
contributions. Failure to register and
failure to provide revenue information is so
egregious because it makes implementation of
several FCC programs, including USF, TRS,
and NANPA, more difficult or impossible and
hampers efficient FCC enforcement of its
Rules.
As an example, Teletronics, Inc. (Teletronics)
(a long distance reseller) was assessed a
forfeiture of $100,000 for failure to
register with the FCC, $250,000 for failure
to file annual FCC Form 499-A and quarterly
FCC Form 499-Q, and $308,000 for failure to
make USF contributions for the previous
twelve months. Because the company had
failed to even register or provide any
revenue information, in order to calculate
the upward adjustment, the FCC had to use
revenue information obtained during its
investigation to estimate the amount of its
outstanding contributions owed since it
began operations. Therefore, failure to
register will not only subject a provider to
a separate forfeiture penalty, but will also
likely lead to higher USF penalties because,
in order to assess the USF violation
penalty, the FCC must estimate revenue
information to determine USF liabilities.
Telecommunications providers of all types
should closely examine their USF and federal
regulatory fee compliance status in light of
the FCC’s increasing determination to impose
heavy fines and penalties against
non-compliant companies.
Please feel free to
contact us if you have any questions or if
we can be of any assistance to you.
Gregory E. Kunkle,
Staff Attorney
Law Offices of Thomas K. Crowe, P.C.
1250 24th Street, N.W.
Suite 300
Washington, D.C. 20037
(202) 263-3640 (voice)
(202) 263-3641 (fax)
www.tkcrowe.com