Prepaid Legislation

On August 3, 2007, Congressman Eliot L. Engel (D - N.Y.) introduced a bill in the U.S. House of Representatives (”House”) which proposes to adopt stringent disclosure requirements for prepaid calling card providers and distributors. H.R. 3402, referred to as the “Calling Card Consumer Protection Act,” was introduced the day before the House adjourned for its Summer District Work Period (August 6 - September 3). If enacted into law, the bill would establish a nationwide uniform disclosure standard which would impact the disclosure, advertising, and billing practices of the U.S. prepaid calling card industry.

Disclosures

The bill would apply strict disclosure requirements to both prepaid calling card providers and prepaid calling card distributors (excluding retail level merchants). Specifically, the bill would require providers and distributors to expressly disclose (on the prepaid calling card or its packaging, and on websites): (1) the dollar value or minute value of the card; (2) all terms and conditions including, but not limited to, fees, limitations on the use of minutes, surcharges, refund policies, and expiration; (3) the name of the service provider; and (4) the provider’s customer service number and hours of service. For prepaid service providers (that do not necessarily use a card, but excluding wireless providers) that offer the purchase of services via the Internet, this information would be required to be prominently displayed on the provider’s website. In addition to providing these disclosures on the products and on websites, the same disclosures would also be required on all corresponding advertising and point-of-sale materials. To the extent that a foreign language is used on the card or marketing materials, providers and distributors would be required to provide the same disclosures in that language.

Prohibited Practices

In addition to the required disclosures, the bill also prohibits providers and distributors from assessing any fees or imposing any charges not disclosed as described above. Further, providers would be prohibited from the practice of providing fewer minutes than the number of minutes actually promoted or disclosed (including through the service provider’s voice prompt system) for each prepaid calling card or service. Likewise, distributors would be prohibited from distributing cards from providers known to engage in such practice. Providers would also be prohibited from assessing any fee or charge for unconnected calls. Finally, unless an expiration date is clearly disclosed, prepaid calling cards and services would be prohibited from having expiration dates less than a year from the date of first use, or the date last recharged, as applicable.

Enforcement

The bill would give the Federal Trade Commission authority to enforce violations of the legislation as unfair or deceptive acts or practices. The bill grants state attorneys general the authority to bring civil actions, on behalf of the residents of their state, in order to enjoin practices, enforce compliance with the legislation, and even to obtain compensation and damages.

Status of the Legislation

The House has been adjourned since the bill’s introduction so there have been no recent developments. Similar legislation has not been proposed in the Senate (which is also adjourned at the moment) as of yet, and the bill will not become law until both houses of Congress come to an agreement, and the President has signed it. H.R. 3402 has been referred to the House Committee on Energy and Commerce (”E&C”), and will likely go next to the E&C’s Subcommittee on Commerce, Trade, and Consumer Protection, where a hearing could be held to discuss the merits of the bill, and to propose and make any initial changes before it is referred to the full E&C Committee. Industry experts and representatives may be invited to participate as panelists for the hearing. However, any action on the bill (including whether or not a hearing will even be scheduled) will not move forward until after Congress reconvenes on September 4, 2007.

Legislative Outlook

It appears that the legislative push to further regulate the prepaid industry may be connected to a lawsuit filed this year by IDT Telecom, Inc. (”IDT”) in a federal district court against competing prepaid providers (see our Legal Alert: “IDT Suit Against Prepaid Providers” sent on March 20, 2007). IDT’s complaint alleged that the competitors promised more minutes than they actually delivered to consumers, and that the competitors’ alleged deceptive disclosures and practices were unlawfully drawing customers away from IDT. H.R. 3402 focuses on essentially the same issues addressed in IDT’s complaint. However, as of the date of this email alert, there has been no confirmation that either IDT or any of its competitors is responsible for backing the bill. Whether or not there is any relation to IDT’s lawsuit, the bill adds the looming presence of federal disclosure requirements and restrictions to the growing list of legal and regulatory considerations which prepaid providers and distributors must take into account.

Please do not hesitate to contact us if you are interested in participating in the legislative process regarding H.R. 3402 or have questions about the bill.

August 2007