    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

              H.R. 3402, THE CALLING CARD CONSUMER PROTECTION ACT

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON COMMERCE, TRADE,
                            AND CONSUMER PROTECTION

                                     OF THE

                        COMMITTEE ON ENERGY AND COMMERCE
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               SEPTEMBER 16, 2008

                                   __________

                               Serial No. 110-147

          Printed for the use of the Committee on Energy and Commerce

                            energycommerce.house.gov

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                        COMMITTEE ON ENERGY AND COMMERCE

                      JOHN D. DINGELL, Michigan, Chairman

    HENRY A. WAXMAN, California          JOE BARTON, Texas
    EDWARD J. MARKEY, Massachusetts          Ranking Member
    RICK BOUCHER, Virginia               RALPH M. HALL, Texas
    EDOLPHUS TOWNS, New York             J. DENNIS HASTERT, Illinois
    FRANK PALLONE, Jr., New Jersey       FRED UPTON, Michigan
    BART GORDON, Tennessee               CLIFF STEARNS, Florida
    BOBBY L. RUSH, Illinois              NATHAN DEAL, Georgia
    ANNA G. ESHOO, California            ED WHITFIELD, Kentucky
    BART STUPAK, Michigan                BARBARA CUBIN, Wyoming
    ELIOT L. ENGEL, New York             JOHN SHIMKUS, Illinois
    GENE GREEN, Texas                    HEATHER WILSON, New Mexico
    DIANA DeGETTE, Colorado              JOHN B. SHADEGG, Arizona
        Vice Chair                       CHARLES W. ``CHIP'' PICKERING,
    LOIS CAPPS, California               Mississippi
    MIKE DOYLE, Pennsylvania             VITO FOSSELLA, New York
    JANE HARMAN, California              ROY BLUNT, Missouri
    TOM ALLEN, Maine                     STEVE BUYER, Indiana
    JAN SCHAKOWSKY, Illinois             GEORGE RADANOVICH, California
    HILDA L. SOLIS, California           JOSEPH R. PITTS, Pennsylvania
    CHARLES A. GONZALEZ, Texas           MARY BONO MACK, California
    JAY INSLEE, Washington               GREG WALDEN, Oregon
    TAMMY BALDWIN, Wisconsin             LEE TERRY, Nebraska
    MIKE ROSS, Arkansas                  MIKE FERGUSON, New Jersey
    DARLENE HOOLEY, Oregon               MIKE ROGERS, Michigan
    ANTHONY D. WEINER, New York          SUE WILKINS MYRICK, North Carolina
    JIM MATHESON, Utah                   JOHN SULLIVAN, Oklahoma
    G.K. BUTTERFIELD, North Carolina     TIM MURPHY, Pennsylvania
    CHARLIE MELANCON, Louisiana          MICHAEL C. BURGESS, Texas
    JOHN BARROW, Georgia                 MARSHA BLACKBURN, Tennessee
    BARON P. HILL, Indiana
    DORIS O. MATSUI, California

                                     ______

                               Professional Staff

                      Dennis B. Fitzgibbons, Chief of Staff

                       Gregg A. Rothschild, Chief Counsel

                           Sharon E. Davis, Chief Clerk

                    David L. Cavicke, Minority Staff Director

                                      (ii)
            Subcommittee on Commerce, Trade, and Consumer Protection

                       BOBBY L. RUSH, Illinois, Chairman
    JAN SCHAKOWSKY, Illinois             ED WHITFIELD, Kentucky
        Vice Chair                            Ranking Member
    G.K. BUTTERFIELD, North Carolina     CLIFF STEARNS, Florida
    JOHN BARROW, Georgia                 CHARLES W. ``CHIP'' PICKERING,
    BARON P. HILL, Indiana                   Mississippi
    EDWARD J. MARKEY, Massachusetts      VITO FOSSELLA, New York
    RICK BOUCHER, Virginia               GEORGE RADANOVICH, California
    EDOLPHUS TOWNS, New York             JOSEPH R. PITTS, Pennsylvania
    DIANA DeGETTE, Colorado              MARY BONO MACK, California
    CHARLES A. GONZALEZ, Texas           LEE TERRY, Nebraska
    MIKE ROSS, Arkansas                  SUE WILKINS MYRICK, North Carolina
    DARLENE HOOLEY, Oregon               JOHN SULLIVAN, Oklahoma
    ANTHONY D. WEINER, New York          MICHAEL C. BURGESS, Texas
    JIM MATHESON, Utah                   MARSHA BLACKBURN, Tennessee
    CHARLIE MELANCON, Louisiana          JOE BARTON, Texas (ex officio)
    JOHN D. DINGELL, Michigan (ex
        officio)

                                 C O N T E N T S

                                  ----------
                                                                       Page
    Hon. Bobby L. Rush, a Representative in Congress from the State
      of Illinois, opening statement.................................     1
    Hon. Ed Whitfield, a Representative in Congress from the
      Commonwealth of Kentucky, opening statement....................     2
    Hon. Joe Barton, a Representative in Congress from the State of
      Texas, opening statement.......................................     4
    Hon. George Radanovich, a Representative in Congress from the
      State of California, opening statement.........................     4
    Hon. Eliot L. Engel, a Representative in Congress from the State
      of New York, opening statement.................................    31
    Hon. Edolphus Towns, a Representative in Congress from the State
      of New York, prepared statement................................    70
    Hon. Marsha Blackburn, a Representative in Congress from the
      State of Tennessee, prepared statement.........................    70

                                   Witnesses

    William E. Kovacic, Chairman, Federal Trade Commission...........     5
        Prepared statement...........................................     8
    Sally Greenberg, Executive Director, National Consumers League...    34
        Prepared statement...........................................    36
    Yvette Zaragoza, Small Business Program Manager, Latino Economic
      Development Corporation........................................    49
        Prepared statement...........................................    50
    Julia Marlowe, Professor Emeritus, Department of Housing and
      Consumer Economics, University of Georgia......................    51
        Prepared statement...........................................    54
    John Eichberger, Vice-President, Government Relations, National
      Association of Convenience Stores..............................    60
        Prepared statement...........................................    62

              H.R. 3402, THE CALLING CARD CONSUMER PROTECTION ACT

                                  ----------

                          TUESDAY, SEPTEMBER 16, 2008

                House of Representatives,
               Subcommittee on Commerce, Trade,
                               and Consumer Protection,
                              Committee on Energy and Commerce,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 10:07 a.m., in
    room 2322 of the Rayburn House Office Building, Hon. Bobby Rush
    (chairman) presiding.
        Members present: Representatives Rush, Schakowsky, Barrow,
    Whitfield, Radanovich, and Barton (ex officio).
        Also present: Representative Engel.
        Staff present: Consuela Washington, Judith Bailey,
    Christian Tanotsu Fjeld, Valerie Baron, Shannon Weinberg, and
    Chad Grant.

     OPENING STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF ILLINOIS

        Mr. Rush. The hearing will come to order. The chairman will
    recognize himself for 5 minutes for opening statements and then
    will recognize other members including my friend, the ranking
    member, for 5 minutes of opening statement.
        In this advanced age of telecommunications, many Americans
    might be surprised to find out that pre-paid calling cards is
    an estimated $6 million a year business, and this business is
    still growing. Calling cards offer consumers an informal means
    of long-distance communications and play a prominent role in
    the telecommunications sector, particularly with immigrant
    populations and those who need to place phone calls overseas.
        Unfortunately, the waters of the calling card business are
    infested with sharks, meaning calling card companies, whether
    they are distributors or telecommunications carriers, practice
    outright fraud on unsuspecting consumers by deceiving them with
    false information. These bogus cards are sold at gas stations,
    bowling alleys, or out of boxes on the streets; and some are
    also sold in prominent retail chains.
        No matter which population is served or where they are
    sold, these fraudulent calling cards have all one common theme:
    they misrepresent an outright lie to consumers about the rates,
    charges, and terms that apply to their products. Consumers too
    often buy cards that are advertised as having 500 minutes only
    to discover that they really only have 200 minutes or that they
    face a battery of hidden fees and connection charges that
    significantly reduce their minutes. Unfortunately, these
    fraudulent practices are widespread and have a disproportionate
    impact, mostly on poor and immigrant communities, as well as
    the elderly.
        To combat this plague on communities, my friend from New
    York, Mr. Engel, introduced H.R. 3402, the Calling Card
    Consumer Protection Act. H.R. 3402 will require providers and
    distributors of calling cards to accurately and fully disclose
    all the rates, all the charges, and all the terms to consumers
    at the point of purchase. Calling card companies that do not
    comply with these disclosure requirements shall be in violation
    of a deceptive act or practice as prohibited by rule under
    Section 18 of the Federal Trade Commission Act.
        Lastly, in addition to the FTC, the bill empowers the
    States' Attorneys General with the authority to enforce this
    new federal law. Today's legislative hearing will deliberate on
    the merits of H.R. 3402. It is my intention to hold a
    subcommittee markup on this bill later on this afternoon. I
    hope members of the subcommittee will be informed by our panel,
    including the distinguished chairman of the FTC, for the
    purpose of us all working together in a bipartisan fashion to
    report effective legislation. As I have stated in other
    hearings and markups, this subcommittee has a proud tradition
    of producing quality, bipartisan bills, and I hope to continue
    that trend this afternoon. With that, I yield back the balance
    of my time.
        It is now my pleasure and privilege and honor to recognize
    the ranking member of this subcommittee for 5 minutes for
    opening statement.

      OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN
               CONGRESS FROM THE COMMONWEALTH OF KENTUCKY

        Mr. Whitfield. Chairman Rush, thank you very much, and we
    appreciate this hearing today on the Calling Card Consumer
    Protection Act; and as you stated, this is a large industry in
    this country: $4 to $6 billion a year. And the appalling thing
    is that it is estimated that up to $2 billion of that revenue
    is obtained by fraud each year, and unfortunately, over the
    last few years, more and more companies it appears have been
    selling cards that actually do not contain the number of
    minutes for which the card buyer has paid. This practice has
    become so common that consumers of these cards now expect to
    get much less for their money than advertised, and that is
    simply unacceptable.
        While we all agree that something must be done to stop such
    blatant fraud, I know that many of us have reservations about
    this bill. First thing is that the FTC does not currently have
    jurisdiction over common carriers, and I know that they have
    suggested maybe a carve out to take care of a part of that
    problem; but I myself am concerned about that because we have
    not had a deliberation of the consequences of doing that,
    either in this subcommittee or jointly with our colleagues on
    the Telecommunications and Internet Subcommittee.
        I am also very much concerned about how the requirements of
    this bill will function in the real world. We require a number
    of disclosures which is certainly a good thing. We need
    transparency on the packaging of the card. The problem with
    packaging is that it is typically thrown away as consumers walk
    away from the retail store, and then the problem with the card
    is the size. There is simply not enough room to list all of the
    fees and rates as they apply to each country for which a single
    card is valid.
        And that leads me to a third issue, and that relates to
    preemption. Without preemption, the disclosure requirements
    will only become, in my view, less manageable. We have
    essentially no preemption on the bill as it was introduced. I
    think it is essential that we require a strong federal
    preemption standard, and unless we have that, states are going
    to be free to go beyond the minimum standards set by the
    Federal Government and in doing so, we are going to have
    potentially 50 different disclosure statements, perhaps
    required in multiple languages on each card. On top of that,
    these disclosure statements will likely need to change on a
    monthly basis due to changing fees and rates as is the nature
    of this market.
        Finally, Mr. Chairman, I am curious to find out whether
    legislative action is really necessary. The FTC has taken
    action against a number of distributors in this arena under
    their current jurisdiction, and while the FTC may not currently
    pursue actions against common carriers, it is my understanding
    that the FCC, the Federal Communications Commission, has all
    the jurisdiction necessary to proceed against any allegations
    of wrongdoing. Why that agency has not acted in this arena, it
    seems to me it is an issue ripe for the subcommittee of
    jurisdiction to investigate, and I would encourage Chairman
    Markey and Ranking Member Stearns to look at that.
        Beyond that, Mr. Chairman, I would say that we stand behind
    you 100 percent in your efforts to stem the tide of fraud,
    particularly when directed at vulnerable populations and
    undeserved communications; and as always, we appreciate your
    strong leadership in all these issues. I yield back the balance
    of my time.
        Mr. Rush. The gentleman would just like to acknowledge that
    with friends like that, I don't need enemies.
        The chair now recognizes the gentleman from the great State
    of Georgia, my home State, Mr. Barrow, for 5 minutes of opening
    statement.
        Mr. Barrow. I thank the chair, and I thank him for
    acknowledging our home State. It just goes to show that many
    fine things claimed by others were first conceived of in
    Georgia.
        I don't want to take any time. I want to get to the
    witnesses, but I do want to acknowledge the presence of a
    representative of my alma mater, Dr. Julia Marlowe, who is a
    leader in this field who will be a part of the second panel. I
    want to thank you for being here and bringing your expertise to
    bear on this.
        Mr. Chairman, thank you for your acknowledgment, thank you
    for your leadership in calling this hearing, and I yield the
    balance of my time.
        Mr. Rush. The chair thanks the gentleman for the brevity of
    his comments.
        The chair now recognizes the ranking member of the full
    subcommittee, my friend from the great State of Texas, Mr.
    Barton, for 5 minutes of opening statement.

       OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN
                    CONGRESS FROM THE STATE OF TEXAS

        Mr. Barton. First of all, Mr. Chairman, it is good to see
    you back in the chair.
        Mr. Rush. Thank you.
        Mr. Barton. Secondly, as Mr. Whitfield said, the
    Republicans are behind you. The question is, how far behind
    you? We do support the basic purpose of the bill. We certainly
    want to prevent fraud. We think you and Mr. Engel have put
    together a good bill. We do need to perfect it. We need to work
    together between now and whenever you mark it up on preemption
    and the scope of the bill. To be really effective, it is going
    to have to apply to common carriers, and you and your staff
    know that. So we have got several outstanding issues, but if we
    can resolve those as Mr. Whitfield said, we know that you have
    addressed an issue that needs to be addressed, and you have
    been a great chairman in looking some of these issues straight
    up and trying to address them. So hopefully we will have some
    bipartisan staff agreements and member agreements before we go
    to markup so we can be not only behind you but standing beside
    you in moving the bill.
        Mr. Rush. Thank you very much. Now, the chair recognizes
    the gentleman from the great State of California, Mr.
    Radanovich for 5 minutes for opening statement.

     OPENING STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE
                IN CONGRESS FROM THE STATE OF CALIFORNIA

        Mr. Radanovich. Thank you very much, Mr. Chairman, Mr.
    Ranking Member. I do want to thank you, Mr. Chairman, and also
    Mr. Engel for introducing this legislation and bringing
    attention to this important issue.
        The abuse of pre-paid calling cards harms consumers across
    the Nation. Consumers have a right to receive the services and
    calling card minutes for which they pay, and fly-by-night
    companies seeking to make a quick buck must not be allowed to
    rip them off.
        The federal regime governing pre-paid calling cards and
    services would provide clarity and consistency and would be the
    most effective method to address the problems and confusion
    surrounding pre-paid calling cards. These calling cards are
    primarily used for domestic long distance, international
    calling, completely transcending state boundaries and
    jurisdictions. So ensuring that disclosure requirements are the
    same for one state to another not only makes sense from an
    enforcement perspective but will also be most beneficial to the
    consumers who utilize these products. states should be able to
    enforce a federal regime, but inconsistent state laws or rules
    on pre-paid calling cards and services would undermine the very
    purpose of having a federal standard.
        As a member of the Telecommunications Subcommittee, I have
    reviewed this issue extensively in the context of regulation on
    the wireless phone industry, and I have learned that with a
    product that so clearly exceeds any state boundaries, the most
    sensible and consumer-friendly approach is to create a single
    federal standard. As is, the legislation before us simply adds
    another layer of regulation at the federal level without
    addressing the need to create and ensure consistency.
        We need one set of rules governing disclosures for these
    credit card services, and if Congress permits, multiple
    jurisdictions to create rules, law-abiding pre-paid calling
    card service providers and distributors would spend countless
    resources just trying to figure out what rules apply in every
    state, rather than focusing on improving services to consumers.
    The unnecessary costs stemming from the compliance with
    potentially 50 regimes instead of one would undoubtedly be pass
    onto consumers, and we should be trying to make these credit
    cards more accessible.
        I am also concerned about how a pre-paid calling card
    company would provide all the disclosure forms on an item the
    size of a credit card and avoid creating even more confusion.
    This would be completely contrary to the authors' worthwhile
    goal with this bill.
        I strongly believe that there is a need for this
    legislation. I just want to make sure that in addressing that
    problem that we create the most effective system possible that
    will both protect and benefit users of pre-paid calling cards.
    I commend the author of the bill and the subcommittee for
    bringing this up and look forward to working with my colleagues
    on both sides to address these concerns and create a bill that
    we can all support because it utilizes a federal standard for
    disclosures that will ensure that calling cards are as safe,
    affordable, and user-friendly as possible.
        Thank you so much, Mr. Chairman, Mr. Ranking Member. I
    yield back.
        Mr. Rush. Thank you so very much. Now it is time for us to
    hear from the chairman of the Federal Trade Commission, the
    Honorable William E. Kovacic. Chairman Kovacic was sworn in as
    Commissioner of the Federal Trade Commission in January of
    2006, and President Bush designated him as chairman on March
    30, 2008. This is his first time testifying in front of this
    subcommittee as chairman.
        Mr. Chairman, we certainly want to welcome you to this
    subcommittee. We know that you will be very informative and
    enlightening to the subcommittee in your testimony, and we look
    forward to hearing from you. We promise to be on the best of
    behavior during this, your first testimony as chairman. Can't
    promise you the second one, now, but the first one we will be
    nice to you. You are recognized, Mr. Chairman, for 5 minutes of
    opening statement.

       STATEMENT OF WILLIAM E. KOVACIC, CHAIRMAN, FEDERAL TRADE
                               COMMISSION

        Mr. Kovacic. Thank you, Chairman Rush, Ranking Member
    Whitfield, and members of the subcommittee. I am not only
    enormously grateful to be here for the first time for what I
    hope is one of many conversations with this subcommittee but
    also to talk about a matter that all of you have described this
    morning as being a matter of great pressing concern.
        We are concerned with the phenomenon you have described for
    two reasons. First, serious instances of deceit and
    misrepresentation are among the greatest offenses in our
    commercial system. If consumers cannot have confidence in the
    fairness and truthfulness of representations that suppliers of
    goods and services make, that is a serious blow to our system
    of commerce, and misrepresentations with respect to the number
    of minutes that a card provides or the charges that will be
    imposed are extremely serious limitations on the operation of
    the pre-paid calling card system.
        The second reason is one that several of you have mentioned
    as well, and that is the victims of the misconduct in this
    instance I think overwhelmingly are individuals who might be
    characterized as being beset by serious economic disadvantage.
    I regard a special responsibility of our agency is to deal with
    victims who fall in exactly that classification. These are
    individuals who frequently are not able to identify what their
    rights are in advance, and for a variety of historical and
    social reasons might not feel inclined to report to public
    agencies of any type the fact of wrongdoing. So our efforts in
    this area are part of a larger program at this agency to ensure
    that victims of serious economic disadvantage are not exploited
    in the marketplace.
        For both of those reasons, this is a high priority. I would
    like to shortly describe for you what our program now entails
    and to comment briefly on the bill that you will be
    considering.
        The first element of our program is litigation. For
    basically over a period of a decade now, we have been bringing
    cases to deal with this phenomenon. Earlier this year, we
    brought two cases, the Clifton Telecard Alliance case and
    Alternatel, which deal with major distributors of pre-paid
    calling cards dealing with precisely the forms of misconduct we
    allege and that you have been describing at the hearing today.
    It is our hope that if we are successful in these matters that
    this will have a significant effect beyond the distributors
    involved and will demonstrate to the industry as a whole
    standards that ought to be abided by by service providers in
    this field.
        The second element of our program is to deepen cooperation
    with other public authorities that have responsibility in this
    field. We established last year a Federal-State task force that
    engages the energies of my agency, the Federal Communications
    Commission, State Attorneys General, state Public Utilities
    Commissions, and other government bodies. The reason for doing
    this is the realization that individually, if we do not
    collaborate effectively with other public instrumentalities, we
    will not solve the problem. This is a series of problems that
    has great cross-border features, across jurisdictions, within
    our own republic and outside of the United States; and the only
    way to achieve a truly effective resolution to this problem and
    related forms of misconduct is to have an effective form of
    cooperation.
        And I would add that the two matters that I described a
    moment ago profited enormously from a measure that this
    committee was deeply involved in promoting and that is the
    SAFEWEB legislation that was adopted in December of 2006. We
    were able to develop our cases because we could work with
    foreign consumer protection authorities in countries such as
    Panama, Peru, Mexico, and others to identify the fact of the
    misconduct and to formulate specific allegations to challenge
    it.
        So I want to thank this committee for their efforts less
    than 2 years ago to give us a platform on which we could build
    a more effective program.
        The last element is education. We have been working to
    improve outreach materials, both in English and Spanish, for
    users of calling cards to educate them to be wiser consumers,
    and, very importantly, to tell them what they can do if they
    think they are the victims of fraud and to inform us or other
    public institutions about the fact of fraud. If we can be
    alerted to instances of misconduct by reason of a variety of
    reforms that this committee has sponsored well over the past
    decade, we now have the capacity to respond almost in real time
    to instances of misconduct. So encouraging victims of fraud to
    tell us about fraud is an extremely important element of our
    program and we use consumer education as a means to do it.
        Last, I want to thank the Committee for its proposal, H.R.
    3402. We think there are a number of very useful measures that
    will improve enforcement in this area. We do have specific
    improvements which we welcome the opportunity to discuss with
    you and your staff in any form that you wish involving the
    jurisdictional limits involving common carriage where we think
    it would be very useful to be permitted to enforce the law
    against the complete range of actors in this area.
        Other measures dealing with pre-paid wireless services, the
    knowledge requirement for obtaining injunctions, there are a
    variety of areas in which again we would be quite happy to work
    with your staff and continue the discussion we have had with
    the Committee about areas of possible improvement.
        We look forward to working with you as this measure
    advances through the Congress, and I welcome your comments and
    your questions. And again, I thank you very much for the chance
    to be part of the hearing today.
        [The prepared statement of Mr. Kovacic follows:]

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        Mr. Rush. Thank you very much, Chairman Kovacic. The chair
    recognizes himself now for 5 minutes for questioning.
        Mr. Kovacic, H.R. 3402 as introduced leaves the FTC's
    jurisdiction as is currently stated in the FTC Act, which
    exempts common carriers from FTC jurisdiction. How effective
    would the bill be in cleaning up industry if the FTC can't
    enforce violations against common carriers? I have two
    questions. Secondly, is there a precedent given the FTC
    jurisdiction to enforce and screen consumer protection laws
    against common carriers?
        Mr. Kovacic. Chairman Rush, there are of course a number of
    other public institutions that would be able to enforce the law
    if we were not involved. We think of ourselves because we have
    unsurpassed experience in identifying and challenging unfair
    deceptive practices--to leave us off the field is to leave
    someone with a good batting average and a lot of production on
    the bench. We think that would be a serious limitation, and we
    do urge you and your colleagues to consider the possibility
    that if we are engaged in the enforcement process, the
    enforcement of these measures will be greatly enhanced by
    reason of this larger body of experience that we would bring to
    the process.
        There are specific instances in which the Congress has
    given us specific ability to work in areas involving common
    carriage. A number of specific statutes that Congress has
    adopted have allowed us for specific purposes to address the
    behavior of common carriers. For example, in the area of
    unauthorized billing. If the billing for non-common carrier
    services is included on a consumer's bill, even if the bill is
    provided by a common carrier, Congress many years ago
    recognized that it would be useful for us to address
    unauthorized billing in that context. I would be happy to
    provide for the Committee a full description of the specific
    areas in which Congress has permitted us to be active.
        So I think there are good illustrations where this has
    worked, and again, I think to allow us with our experience, and
    I would say our good batting average, to come off the bench and
    be in the lineup, I think the team would be a lot stronger.
        Mr. Rush. I have a few more moments on my time. Should
    wireless services be included on the bill for required
    disclosures or is that service somehow different because of the
    disclosures, when the consumer signs up for that service
    initially?
        Mr. Kovacic. Our serious concern is that if wireless is
    excluded, that that will become an attractive avenue to which
    wrongdoers migrate over time. We are seeing already in the
    course of our law enforcement that firms engaged in misconduct
    have identified this as a promising possibility and that that
    is where they will move their business in the future. My
    concern would be that this would be a seam through which the
    misconduct that the Committee is so wisely seeking to address
    would ultimately flow so that to eliminate that possible carve-
    out from the bill we think would be a useful thing for the
    Committee to consider and adopt.
        Mr. Rush. We have heard concerns that Federal law and State
    law could require different and even inconsistent disclosures
    on these pre-paid phone cards, all to fit on, as was indicated
    earlier, a small wallet-sized card. This could cause confusion
    for the industry and, even worse, for the consumer. Should we
    consider a narrow preemption of state requirements on specific
    disclosures for these cards?
        Mr. Kovacic. I think, as you and your colleagues have
    pointed out already this morning, the question of preemption is
    a difficult matter. There are unmistakably costs for business
    operators to have to respond to an array of different commands
    from both national and state regulators. At the same time, the
    states have often been a stimulus for providing ideas that I
    think have given great vitality to our system. It has often
    been the states that have provided the ideas that have moved us
    ahead, and in my conversations with my colleagues, I would say
    that my view, though I speak for myself in this capacity in
    speaking with our staff, I am not sure that we know enough
    about the likely effect of preemption in this specific instance
    to suggest that Congress adopt a measure that would achieve
    preemption. I would say that in approaching specific preemption
    measures, it would be very useful to study carefully how
    states, through their own policymaking, have contributed to the
    formulation and development of ideas that we now accept as
    being useful. To freeze in place any single solution runs the
    risk that the innovation that the states have provided would be
    forestalled. We would see this as a very important measure to
    be pursued, and of course, the bill itself does continue to
    provide dual enforcement at the state level and the federal
    level. That seems to be a consensus position within the
    Committee. We certainly endorse that part of the enforcement
    regime in the bill, too.
        Mr. Rush. Thank you. My time is up. The chair now
    recognizes the ranking member, Mr. Whitfield, for 5 minutes for
    questioning.
        Mr. Whitfield. Thank you, Chairman Rush.
        Mr. Chairman, you had mentioned that the FTC has engaged in
    litigation on this issue in at least a few cases. I was just
    curious. What is the maximum penalty that you can impose on a
    company that is found to have violated these fraudulent
    practices?
        Mr. Kovacic. We can achieve injunctive relief which tells
    firms to stop the misconduct. The other existing monetary
    penalty for most purposes that we can obtain is to seek the
    disgorgement of ill-gotten profits and, where possible, to
    return ill-gotten gains to consumers. In many instances, that
    is very difficult to do. It is hard to recover the funds. In
    some instances, it is hard to identify the precise amount of
    the funds that ought to be surrendered. We think that a very
    useful part of H.R. 3402 is that it would give us the ability
    to obtain civil penalties for each offense. It would allow us
    to achieve a much more powerful deterrent for individual
    offenses so that rather than being pressed to go through the
    expense of identifying the specific harm attributable to each
    specific violation, it would permit us, as Congress has allowed
    us in a number of other settings, to obtain civil penalties for
    individual offenses. I think that would be a very useful
    addition to the injunctive relief and the equitable relief in
    the form of disgorgement and restitution that we can now seek
    to pursue.
        Mr. Whitfield. But as of this time, you have not been able
    to obtain disgorgement profits from any of these firms?
        Mr. Kovacic. We are seeking them in the matters that we
    have before us now. I would like to consult my memory better,
    if you permit, in our previous cases, to see if we actually
    obtained funds that have been recovered for consumers. This is
    something we typically seek. We are seeking them in the cases
    that we have now.
        Mr. Whitfield. One of the concerns expressed about this
    bill is the inability to go after a common carrier because you
    all do not have that jurisdiction. You did point out where
    unauthorized billing, you have been able to do that an so
    forth. But has the FCC been vigorous in trying to address this
    issue from your knowledge?
        Mr. Kovacic. I would say that they have an interest in this
    area. We have been the one who has been bringing the cases.
        Mr. Whitfield. OK.
        Mr. Kovacic. That is, I think that whatever the combination
    of effort that would be provided, we are the ones who have had
    the most experience in the field. A difficulty I would mention
    in the two cases that I have referred to before is that already
    the defendants in those cases have raised the argument that the
    cases cannot be tried unless telecommunications carriers are
    joined in the action, that they are indispensable parties. We
    believe we will prevail in those arguments. We think their
    arguments are incorrect. They are being urged against us. Even
    in areas where we think we are not dealing with true common
    carrier exemptions, we have to spend a lot of resources in the
    routine execution of our business trying to deal with these
    specific matters.
        So I would say even for the things where we think we are
    clearly on side, but as well for other areas where telecom
    services providers are involved, we think we have the wealth of
    experience. Unashamedly, we would say we are the experts in
    litigating these cases and devising the remedial scheme. That
    is why we would urge that we would be a useful addition to the
    mix, and in doing it, we would use all of the cooperation
    approaches we have used with other federal and state agencies
    in which we share jurisdiction to make sure we are not crossing
    wires.
        Mr. Whitfield. So you support this legislation? You think
    the Federal Government should take steps in this area?
        Mr. Kovacic. Yes, sir.
        Mr. Whitfield. But would you just quickly elaborate some
    suggested changes that you would make to this bill to make it
    more effective from your perspective?
        Mr. Kovacic. Very specifically, we would eliminate any
    indication in the bill that the FTC cannot enforce its
    provisions against common carriers.
        Mr. Whitfield. OK.
        Mr. Kovacic. That is, we would seek to make absolutely
    clear that the Federal Trade Commission has authority to
    enforce the provisions of the bill with respect to any actor,
    be it a common carrier, be it a non-common carrier. That is our
    first recommendation. The second is that the bill now includes
    a knowledge standard that would require the FTC to show that
    alleged wrongdoers had actual knowledge of misconduct as a
    precondition for obtaining injunctive relief. I am only talking
    about relief that says stop the practice. And we would suggest
    that for injunctive relief that this provision be eliminated.
    The whole body of law that we enforce now dealing with
    deceitful advertising does not require us to show actual
    knowledge in order to get an injunction and say stop it. We
    have to show knowledge when it comes to getting money. That's a
    different issue. But with respect to obtaining injunctive
    relief, telling the firm whether you knew it was wrong or not--
    you have to stop the behavior because we can show that it
    involves misrepresentation--that requirement I think would
    hopefully be withdrawn from the bill.
        The third is the matter that the chairman asked me about
    before and that is the treatment of prepaid wireless services.
    We think it is not healthy for the bill to leave that out. Why?
    That will become a gap through which those bent on misconduct
    will travel, that is, it will create an inviting opportunity
    for firms to move their business in the direction of wireless
    services so that we think to create the fence that we think the
    Committee is trying to build around the bad practices, that
    would be a hole in the fence and we suggest that you consider
    eliminating it.
        Mr. Whitfield. My time has expired, Chairman.
        Mr. Rush. The chair thanks the gentleman. The chair
    recognizes the fine gentleman from Georgia, Mr. Barrow, for 5
    minutes for questions.
        Mr. Barrow. I thank the chair, and thank you, Mr. Chairman,
    for coming and testifying today. I certainly understand your
    point about wanting to eliminate the knowledge requirement as a
    precondition for getting injunctive relief. You know, where I
    come from we know that even a dog knows the difference between
    being kicked and being tripped over. So intent is important for
    some purposes.
        Mr. Kovacic. It certainly is.
        Mr. Barrow. But if you are constantly getting tripped over,
    constantly, over and over and over again, you want to do
    something about that, too. It is not a matter of no consequence
    whatsoever. It seems to me also that if you bring the action,
    the knowledge requirement ought to be satisfied at least from
    that point forward. So I want to explore that issue a little
    bit further when circumstances permit. You might want to
    address that later on because while knowledge before you bring
    the action might be something that might be difficult to prove
    or might be missing. Once you bring the action, it seems to me
    that you have brought notice of the conduct to the fore and it
    is certainly out in the record now. So certainly there ought to
    be a basis for injunctive relief from that point forward at
    least.
        But I want to return to the subject you made about trying
    to assess the situation the way things are working currently
    right now because in order to assess where we ought to go, we
    have to have a better understanding of how we are actually
    doing things. In other testimony, both today and elsewhere, you
    have made the point that your agency is working with the FCC,
    with Attorneys General, with other state agencies to try and
    divvy up responsibility for working with the patchwork of
    regulations and laws we have in place right now. I want to
    know, how are you all doing that? How are you dividing up these
    responsibilities in a way to avoid duplication of effort? How
    actually are you working with the existing patchwork of
    regulators and regulations? How do you all do that?
        Mr. Kovacic. If I can start, Congressman Barrow, just with
    a comment about the knowledge requirement. I think you and I
    agree completely that if you have this recurring type of
    behavior and there is some notice from an enforcement agency or
    from some other source that this is considered to be improper,
    you can't smack yourself on the forehead afterwards and say,
    oh, my goodness, I had no idea.
        Mr. Barrow. More importantly, you can't say from that point
    on, I don't know about it now so therefore there is no basis
    for a court telling me I can't continue to do this.
        Mr. Kovacic. Exactly right, and I think if we were to pull
    out the first year tort law framework of knowledge, reckless
    disregard, and lack of knowledge, we would say that this would
    easily be called reckless disregard and we would put it in the
    knowledge basket. We are also interested in cases in which
    people innocently transgress and those happen. But they have
    transgressed. They weren't aware of it, but they did. We would
    like in those instances as well to be able to go to a court and
    say, tell them to stop.
        Mr. Whitfield. What I am saying, when you bring the action,
    though, you are serving them with notice----
        Mr. Kovacic. Yes.
        Mr. Whitfield [continuing]. So they can argue they did not
    know about it before, but they can't say they don't know what's
    in the pleading.
        Mr. Kovacic. Quite so. Quite so. Just a----
        Mr. Whitfield. The fact that they didn't know before is not
    a safe harbor for continuing to engage in this after you bring
    notice.
        Mr. Kovacic. No question. A couple of comments about the
    cooperation effort.
        Mr. Whitfield. Right.
        Mr. Kovacic. One thing we do through the task force is to
    make sure that we are all aware of what the other party is
    doing so that in the first instance, we don't take action that
    would in some way frustrate or impede the completion of a
    useful investigation or enforcement matter that is now in
    progress. Second, where we can combine efforts, sometimes we
    carry out programs called sweeps where on a single day we will
    announce a bundle of enforcement matters that all of our
    agencies have pursued. We had one of these earlier this year
    involving telemarketing. The collective announcement of those
    matters can make a much bigger impact in imprinting on the
    minds of the public but in providing deterrents to wrongdoers,
    that a certain form of conduct will not be tolerated.
        A third thing we can do and we pursue through this process
    is to see how we can improve any single enforcement action by
    sharing information, by reformulating the specific allegations
    that any one of us might have pursued so that we can identify
    instances in which a particular case or matter can be brought
    more effectively; and last, by sharing information that comes
    from our investigations we are able to identify patterns of
    conduct. It goes back to the point we were touching upon before
    about the importance of being able to identify complaints and
    patterns of misconduct as fast as we possibly can. If we pull
    the body of complaints that we all have and encourage the
    sharing of information, we are likely to be in the courtroom
    much faster than we would have been otherwise.
        Mr. Whitfield. Do you rely on a consensus model within the
    task force to decide who is going to bring what action where?
    And are there any instances where that consensus model is
    broken down? Were there turf disputes or disagreements about
    how best to proceed?
        Mr. Kovacic. I think there are always some instances in
    which tensions associated with organizations that have a great
    deal of pride in what they do, a great deal of confidence in
    their abilities that those tensions arise. We haven't seen them
    arise in a significant way in this instance, that is, this has
    been a very healthy form of collaboration. I think in many ways
    it is coming from the fact that we all see, given the resources
    that we have, that if we want to stand alone and try and
    address the relevant behavior in question, if we want to have
    an archipelago of public institutions that do not have good
    ferry service and that do not connect the individual islands in
    the archipelago, we are going to fail. I think that has created
    a perceived imperative to cooperate in ways that will achieve
    good, collective solutions. That is a very heartening side of a
    force that will perhaps overcome the impediments you described
    before.
        Mr. Whitfield. Thank you, Mr. Chairman. Mr. Chairman, I
    yield back.
        Mr. Rush. The chair thanks the gentleman. The chair now
    recognizes the gentlelady from the great State of Illinois, the
    vice-chair of this subcommittee, Ms. Schakowsky, for 5 minutes
    of questioning.
        Ms. Schakowsky. Thank you, Mr. Chairman. I am proud to
    represent a district that is incredibly diverse. In fact,
    almost a third of my constituents speak a language other than
    English. I think it is actually even more. At home, about 40
    percent of the districts speak another language other than
    English. So all of them are calling to their home countries,
    and it is not just Spanish we are talking about, at my high
    schools, maybe 60 languages that are spoken.
        So there is a very short section in your written testimony
    about consumer education and media outreach. So if you could
    tell me what the FCC has done and is doing and if it is
    realistic to think that these immigrant communities under
    current law at least are going to actually protest the problem.
        Mr. Kovacic. Let me mention a couple of things we are doing
    right now and a couple of things we are working on to deal with
    this phenomenon. We have taken in the case of Spanish language
    material, Spanish language speakers to begin producing our
    materials in Spanish as well as English. So we have begun to
    develop and we have now electronic and print versions of our
    brochures and our consumer alerts that are now in Spanish as
    well as English. This is part of the Spanish language
    initiative that we started about 5 years ago. Another is to
    make sure that our materials reach media that are most likely
    to reach the affected populations, that is----
        Ms. Schakowsky. And what is the remedy that you are
    suggesting to them?
        Mr. Kovacic. First and foremost to be wise shoppers when
    they use the services. Second----
        Ms. Schakowsky. What does that mean?
        Mr. Kovacic. To be very careful about representations, to
    look at what the merchants are saying they will do; and if they
    don't do what they are supposed to do, to make readily
    accessible complaint communications links to us or to our
    counterparts. We have an excellent consumer response center
    where by phone and by Internet individuals can complain to us.
    The more complaints we get----
        Ms. Schakowsky. But before purchasing, how does a consumer
    beware? If the card says 250 minutes, how do you beware before
    you purchase a card that it is going to do what it says it
    does?
        Mr. Kovacic. Some of the cards contain--in what is
    admittedly fine print that would probably defeat my
    prescription--some disclosures. And one step that we recommend
    is to go through the difficult and laborious process of
    actually looking at that card because if one has the patience
    to do it, and I am not saying that the disclosures they provide
    are adequate, by any means, Madam Vice-Chairman, but if one
    looks at the disclosures, one identifies that these cards have
    charges that will be imposed that dramatically diminish the
    value of the card. So one thing that we suggest is that people
    have the patience to look and see exactly what they are saying
    they will do. But because we regard those disclosures as being
    inadequate because they are often provided in fine print, one
    cannot reasonably be expected in the ordinary course to see
    them. What we regard as a critical strategy now is for
    consumers to tell us when they have been cheated, because we
    have greatly increased our ability from the time of the first
    complaint to the day we are in the courtroom to do something
    about it and again, by working with our counterparts at the
    state and local level, to learn what they are learning about
    patterns of misconduct as well and perhaps to formulate better
    education programs. Again, a thing we are doing looking ahead
    is we are expanding our program to work with community groups
    that work with especially disadvantaged communities, non-
    English speakers, immigrant communities, that ordinarily are
    not going to pay a great deal of attention----
        Ms. Schakowsky. How many complaints do you get and have you
    seen them increase as a result of your educational outreach
    efforts?
        Mr. Kovacic. It is hard for me to link them to the outreach
    efforts themselves, but something we are asking as part of this
    effort is how do we measure the effectiveness of the outreach
    programs.
        Ms. Schakowsky. Well, how many complaints do you get?
        Mr. Kovacic. I would say this year, and I can check this
    for the record, I think in this calendar year we received
    several hundred, probably on the order of 500 or 600
    complaints. I can get you a more specific accounting of that
    but that is something we regard as a lot of complaints.
        Ms. Schakowsky. And how many were from Spanish language as
    a result of your Spanish language outreach?
        Mr. Kovacic. I don't know offhand but I can check that for
    you.
        Ms. Schakowsky. I would be interested in that, and
    certainly would encourage that you do outreach in other
    languages as well. I can't see the time. Am I out of time? OK.
    Thank you.
        Mr. Kovacic. And I think that is an excellent suggestion
    for us, and I think to take the Hispanic language program and
    to use that as a template for building out in other directions
    would be very helpful.
        Ms. Schakowsky. Well, make sure that it is working, too.
        Mr. Kovacic. Absolutely. I think the assessment of actual
    effects is very important. My general impression of the
    Hispanic language program is that when we look in all areas in
    which we have been active, many of the cases we have been
    bringing are directly related to the pursuit of that program.
        Mr. Rush. The chair asks for unanimous consent to recognize
    the author of the legislation, who is a member of the full
    committee but not a member of the subcommittee, Mr. Engel. The
    specific unanimous consent request is that Mr. Engel be allowed
    5 minutes for questioning. Is there any objection? Hearing
    none, Mr. Engel is recognized for 5 minutes of questioning.

     OPENING STATEMENT OF HON. ELIOT L. ENGEL, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF NEW YORK

        Mr. Engel. Thank you very much, Mr. Chairman, and I want to
    just say how very happy I am to see you back here leading this
    panel. It is good to see you, and we are delighted you are
    feeling so much better. Thank you for holding this hearing on
    my legislation, H.R. 3402 which for all the reasons that
    everyone has said on both sides of the aisle is important
    legislation. I want to also say hello to my friend, the
    chairman of the FTC. He and I testified before the Senate
    Committee on this bill last week, and I think it is fair to say
    that we are really in sync.
        I just want to tell you that the suggestions that you have
    made for changing the bill I have no real objections to. My
    concern would be passing this bill identically in both houses
    and get it signed by the end of the session which is only
    obviously 2 weeks more. And my only concern would be that if we
    start complicating it by changing it, it may imperil the
    passage of it and the signing of it because I wouldn't want it
    to wait another year until the new Congress and then we are
    just way behind. So I was just wondering if you could comment
    on that because that is a major concern of mine. And again, not
    that I objected to anything that you said because I think you
    want to strengthen the bill and so do I, and the bill is not
    identical with the Senate bill, although it is very, very
    similar. And I do agree with Senator Nelson, who is the sponsor
    of the bill in the Senate. We all want the same thing. I just
    don't want it to get embroiled in what always happens in
    Congress and we wind up not getting it done because we have
    been too busy crossing every T and dotting every I.
        Mr. Kovacic. I think you know better than I that some of
    our greatest legislative achievements have come from
    incremental improvements and that waiting for the perfect
    complete bill is sometimes the equivalent of waiting forever.
    So I would never discourage you from--I would respect your
    judgments about the appropriate balance between pursuing the
    greater complexity and making the changes and having the
    simpler text that could be adopted. I would only suggest,
    Congressman Engel, and thank you for your question on this,
    that with respect to the specific matters that I had in mind
    that those involve very modest drafting adjustments and that
    those could be accomplished with I think a great measure of
    simplicity. Those who think my ideas are wrong-headed would
    probably say they could only be achieved with enormous
    complexity, impossible complexity. But I think they do involve,
    a slogan I will use, precise surgical adjustments that would
    not damage the healthy tissue at all but would leave the body
    of the bill in much better shape.
        Mr. Engel. Well, thank you. I am glad to hear you say that
    because I think that is certainly something with which we all
    agree. Mr. Chairman, I would like to ask unanimous consent to
    have my opening statement entered into the record.
        Mr. Rush. Granted.
        Mr. Engel. Thank you. And I just want to highlight some of
    the things I know that has been said here. But I introduced
    this bill because some of my constituents had been complaining
    to me, and then I went and purchased my own card and found that
    everything they said was true. If a company advertises that
    they give 60 minutes of time for calls, the consumer has a
    right to believe when he or she purchases the card that they
    are getting the full 60 minutes. When they don't, because there
    are so many hidden clauses where it can take away three or four
    units just for a connection fee, even if the line is busy or
    somebody hangs up or the card expires 2 months after it is used
    or there is more charging for peak hours and the only hours
    that are not peak are from 2:00 a.m. to 4:00 a.m., or as Ms.
    Schakowsky points out, things are done in a language--they may
    be marketed, for instance, in Spanish but then clauses on the
    card are in English and the person obviously cannot understand
    it and it is marketed in poor communities, this should not
    happen. And the other point I want to raise as well is that it
    undermines legitimate companies who are legitimately issuing
    these cards and legitimately give 30 or 60 minutes of time
    because the card of the dishonest company appears to be cheaper
    and the consumer will buy that card thinking they can save a
    dollar or two when in reality that card is much more expensive
    because if you are paying $1 less but you are getting only half
    the time, it is actually a more expensive card.
        So these are the things that we have found from time to
    time, and I just hope we can pass this in this Congress, have
    the Senate do it as well, and have the President sign it. Thank
    you very much, Mr. Chairman, for letting me speak at this
    subcommittee.
        Mr. Rush. The gentleman is quite welcome. The chair is
    going to entertain the unanimous consent request from the
    ranking member for one additional question. Are there any
    objections? Hearing none, the chair recognizes the ranking
    member for an additional question.
        Mr. Whitfield. Mr. Chairman, thank you very much and this
    won't take but a minute. Mr. Chairman, in the technical
    comments of the Federal Trade Commission to this legislation,
    you specifically asked for rule-making authority, provide more
    flexibility, and so forth. My question would be with that rule-
    making authority, would that reduce your concern about a strong
    federal preemption standard because you are dealing with the
    states on a regular basis anyway, and if they come forth with
    some way to better protect against consumer fraud, wouldn't
    this rulemaking authority diminish your objection to a federal
    preemption standard?
        Mr. Kovacic. I think it does help, Representative
    Whitfield. I think it does help because that interaction is
    likely to continue. I would say that one thing that is also
    often informative to us in the rulemaking process is to see
    that an experiment has been tested and has worked elsewhere.
    And the experiment often involves a state measure to actually
    apply a specific standard and come back to us and say, you
    don't have to take the idea on faith alone. We have got some
    data to show that it works. I would certainly count on the
    states to be bringing us their ideas. But I would also say that
    some of the best ideas they bring us comes from actually having
    tested something on their own, which is why I hesitate to jump
    in the direction of thinking complete preemption would be
    right. It is a consideration that I ask you to consider.
        Mr. Whitfield. Thank you.
        Mr. Rush. Thank you. The chair thanks the chairman, Mr.
    Kovacic, for your fine testimony. We certainly will take your
    statements to heart in the markup this afternoon, and if you
    have any additional insights or any additions to your
    testimony, would you please provide them to the chair as
    quickly as you can? We intend to go to markup this afternoon.
    Thank you very much, and you are dismissed.
        Mr. Kovacic. Thank you very much again for the opportunity
    to be here, and I look forward to many, many more. Thank you,
    Mr. Chairman.
        Mr. Rush. I think excused is a better word. The chair now
    invites the second panel to appear to take a seat at the
    witness table. The witnesses on the second panel, we welcome
    you before this subcommittee.
        I am going to introduce the witnesses from my left to
    right, and the first witness is Ms. Sally Greenberg. She is
    Executive Director of the National Consumers League. She has
    testified before this committee before in a different capacity,
    so I hope this is a promotion that you received, and welcome
    again. The National Consumers League is the oldest consumer
    organization in the United States. It is active in the area of
    consumer financial fraud and operates a national fraud center.
        Our second witness is Ms. Yvette Zaragoza, Small Business
    Manager for the Latino Economic Development Corporation. Ms.
    Zaragoza has personal knowledge of the pre-paid calling
    business, both as an active user of the cards and as a former
    business manager for a phone card wholesaler. Ms. Zaragoza
    should not be under the burden of identifying the company that
    she used to work for, and I admonish all members to not try to
    pinpoint through her testimony the name of the company that she
    worked for.
        Next witness is Dr. Julia Marlowe, who is Professor
    Emeritus for the University of Georgia, another fine Georgian.
    Dr. Marlowe is an academic with a background in consumer
    economics and has done research and published articles on
    deceptive marketing of pre-paid calling cards.
        And last but not least, Mr. John Eichberger, who is the
    Vice-President of Government Relations for the National
    Association of Convenience Stores. The National Association of
    Convenience Stores is an international trade organization
    representing the convenience store industry. Many retail
    outlets are major sellers of pre-paid calling cards worth $350
    million in sales of the cards in the year 2007.
        Again, we welcome you. We will ask that you restrict your
    opening statements to 5 minutes, and we will begin the opening
    statements with Ms. Greenberg. Ms. Greenberg, you have 5
    minutes.

      STATEMENT OF SALLY GREENBERG, EXECUTIVE DIRECTOR, NATIONAL
                            CONSUMERS LEAGUE

        Ms. Greenberg. Thank you, Mr. Chairman, and I really
    appreciate the opportunity to be here today representing the
    National Consumers League.
        This area of pre-paid calling cards is what we have
    described in testimony as a really wild west of sellers and
    merchants who too often prey upon the most vulnerable
    consumers, consumers who are promised minutes that are not
    redelivered. They are loaded with hidden fees and charges,
    undisclosed charges, that not even a savvy consumer--I consider
    myself one of them, a savvy consumer. I use these cards, and I
    have no idea what kind of value I am going to get from them. I
    picked up a few from my gas station yesterday, and I know that
    when I use those cards I am not going to get the value that I
    expect, and I think many consumers have gotten accustomed to
    not getting the value that they expect.
        I want to commend Congressman Engel and other sponsors of
    the bill for the leadership in offering H.R. 3402, the Calling
    Card Protection Act of 2008. Consumers rely on all of you as
    outspoken defenders of consumers' rights and protections to
    look out for their interests.
        This is an industry that is notorious for shady practices,
    so much so that the writers of The Sopranos, the HBO series,
    had Tony Soprano discussing how to defraud consumers through
    the sale of pre-paid calling cards. In episode 26, Tony Soprano
    says, so, telecommunications once again fails to disappoint.
    What is this thing? Telephone calling cards. You find a front
    man who can get a line of credit, you buy a couple million
    units of calling time from a carrier. You become Acme Telephone
    Card Company. Then he laughs. Acme. Now you are in the business
    of selling prepaid calling cards. Immigrants especially, no
    offense. They are always calling back home to whoever, word
    deleted, and it is expensive, right? You sell thousands of
    these cards to the, word 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 cardholders but you
    already sold all your cards. That is, word deleted, beautiful,
    laughing. It is a good one.
        Now, we aren't suggesting the pre-paid 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. And that must
    change. This is a $6 billion industry. Those are the projected
    revenues for 2008. The average calling card delivers only 60
    percent of the minutes promised with hang-up fees, periodic
    maintenance fees, destination charges, and high billing
    increments. Lax enforcement and rapid growth from the industry
    has enabled consumer fraud to flourish, and the most frequent
    victims are the most vulnerable consumers, immigrants, the
    working poor, students, military families, and those lower-
    income Americans who either can't afford or obtain regular
    phone service. They rely on these cards to stay in touch with
    family and loved ones.
        Yes, the cards provide users with an alternative means of
    calling home, but they use false and deceptive practices in the
    process. Fraud is fraud. If a car is sold with the promise of a
    sun roof and chrome wheels, it better have a sun roof and
    chrome wheels. If a phone card promises 500 minutes to call El
    Salvador, it should deliver those 500 minutes.
        So we support H.R. 3402's requirement that pre-paid calling
    card providers and distributors disclose the terms and
    conditions of the cards, including per-minute rates, preferred
    international destinations, and any fees or surcharges in its
    advertising.
        Transparency and full disclosure would help to level the
    playing field. With all these rules in place, I think we would
    have a minimum floor of requirements stating what practices
    won't be permitted. But we also support strongly H.R. 3402's
    preservation of the right of individual states to provide
    further protection for their residents. That provision
    acknowledges that states have been the incubators for
    groundbreaking legislation. NCL recommends that once this
    legislation is enacted, and I do hope it will be marked up by
    the House and passed before Congress goes out, within some
    period of time, perhaps a year, we recommend that the FTC
    report to Congress whether full disclosure is actually working
    or more needs to be done to protect consumers.
        Many of the fees and charges on these cards we believe are
    unconscionable. The text and the fine print on the back of my
    Africa Sky card says, all the following fees will reduce the
    number of available minutes: use of a toll-free number from a
    pay phone, incur 99 cents per calling fee. Some of these cards
    are $2 cards. You take a 99 cent fee out, it is gone, and I use
    them, as I said, myself all the time and find that I don't get
    the value that I am looking for.
        I have also had the experience of using these cards in
    other countries. I lived in Australia for a year. The cards
    there actually deliver the value. They don't have connection
    fees, they are not loaded on with a bunch of other fees.
    Consumers have no real way of predicting. So we like the bill,
    I think there is a lot in here that will be really useful to
    consumers. I think certainly we should extend the additional
    jurisdiction to the FTC, but I am just not convinced that
    disclosure is enough. It is a minefield out there. I think we
    really have to crack down on this industry, and I, even what I
    regard as quite a savvy consumer, I have no idea what I am
    getting from any of these cards. So this industry needs to be
    cleaned up. Thank you very much, Mr. Chairman. I appreciate
    being here.
        [The prepared statement of Ms. Greenberg follows:]

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        Mr. Rush. Ms. Zaragoza, you have 5 minutes.

     STATEMENT OF YVETTE ZARAGOZA, SMALL BUSINESS PROGRAM MANAGER,
                LATINO ECONOMIC DEVELOPMENT CORPORATION

        Ms. Zaragoza. Good morning, Mr. Chairman, and thank you
    very much for the opportunity to support this bill.
        In my previous place of employment I was a business
    manager, and we bought pre-paid cards from distributors and
    sold them to more than 100 convenience stores, retail stores,
    Laundromats, music places. Ninety percent of them, more than 90
    percent of them, were owned by Latino or immigrants; and the
    majority of them that were located in what you would consider
    lower-income neighborhoods. So I am here to provide an insight
    on the field, the reality of the field, which is very complex
    and pretty different from any other industry.
        So part of my duties as a business manager was to handle
    complaints from end consumers and from the small businesses
    every month. I would visit stores, maybe 10 to 15 stores every
    week. And part of our role was to educate end consumers and
    also business owners on the rules of the game, so to speak,
    because there are several good companies in the industry, and
    we know specifically who those companies are. But there are
    other bad companies. As Mrs. Greenberg said, they tend to
    appear and disappear without any notice. So the way it works
    basically is that a card will be launched with the introductory
    fees. It would be heavily advertised in Latino or Spanish-
    speaking TV or radio shows and also posters, the big posters.
    And after a while, this is a word-of-mouth business. People
    tend to speak to each other and they recommend each other the
    cards. So at the beginning they offer what they promise, but
    then when they are at the peak of their demand, basically, then
    we know that that is when the cards will start having hidden
    fees. They will lower their minutes. So that is when they
    really make all their money, the distributors.
        So most of the consumers can't really keep up with that,
    even savvy consumers. They sort of wait and some of them know
    what is the process, but most of them really don't and they get
    ripped off. And many times just the channel for complaint is so
    burdensome because for a $2 card, for example, the convenience
    store probably was sold the card at 1.56 and then probably the
    wholesaler was sold the card at 1.52. So sometimes it is not
    even worth claiming or putting a claim on the calling card.
    Some retail stores would take the card and some of them
    wouldn't, but then the end result is that the distributors
    never lose. They never lose the money. They never give credit.
        So I think I outlined in my written testimony some of the
    suggestions which included stop the use of deceptive marketing
    practices, disclosure of terms and fees, and then use of the
    Spanish language for the fine print. Why? Because from the 200
    or 300 cards that the wholesaler would manage at any given
    moment, which could be up to 500, they are all different. They
    all have their own cycle. And you know exactly which ones are
    for Africa, which ones are for Latin American countries. So I
    think the issue that was brought up about languages, I think
    you can really do it because some of them would be specially in
    French, some of them would be specifically in Spanish.
        Then of course, compliance with advertised minutes and stop
    using the hidden fees. But then one thing that I think would
    work pretty well is to register each brand of pre-paid calling
    card and have that company be accountable. Some of them
    sometimes don't even print the name of the company.
        So that would be all, and thank you very much for your
    attention.
        [The prepared statement of Ms. Zaragoza follows:]

                          Statement of Yvette Zaragoza

        Good Morning, Mr. Chairman.
        My name is Yvette Zaragoza and I am a Small Business
    Program Manager at the Latino Economic Development Corporation.
    I would like to thank you for the opportunity to give testimony
    in favor of more regulation of the calling card industry before
    the House subcommittee on Commerce, Trade and Consumer
    Protection, because this is a real problem affecting the Latino
    community in the Washington, DC metropolitan area. My testimony
    will be based on my inside knowledge of the industry through my
    previous job as well as my personal experience.
        In my previous place of employment, I was a Business
    Manager for a phone card wholesale company in the metropolitan
    area. We bought prepaid phone cards from distributors and sold
    them to more than 100 mini-markets, neighborhood stores, and
    convenience stores in Maryland, District of Columbia, and
    Virginia. At least 95% of the businesses were owned by Latinos
    and other minority groups; the majority of them were located in
    low-income neighborhoods and their customers represented a wide
    range of nationalities, mostly recent immigrants.
        The reality in the field is very complex and pretty
    different from any other industry. The target market for
    prepaid calling cards is composed by some of the most
    vulnerable consumer groups, including low-income workers and
    non-English speakers. The marketing efforts are directed to
    this target market in Spanish but vital information, such as
    the terms and conditions of use, are disclosed in English. When
    using the calling cards, customers face hidden fees, rounding
    the time up to four minutes, and a lower number of minutes than
    those advertised or even mentioned by the phone card operator
    system before making the connection. Roughly half of the cards
    sold have a face value of $2, making it almost worthless for
    the customer to spend 10 to 15 minutes to talk to a customer
    representative of the company, if they can reach them. Even if
    it was worth the time, there are no clear channels to place
    formal complaints and no reason for the customer to believe
    their complaint will be heard.
        As a Business Manager of the wholesale company, I received
    numerous complaints from end customers and business owners
    every month. Part of our role as responsible wholesalers was to
    give small business owners an insight on the ``rules of the
    game'' in the industry, and educate the end customers on the
    ``good'' and ``bad'' cards in the industry, which changed from
    month to month, or sometimes from week to week.
        On one hand, there are several ``good'' companies in the
    business. They launch prepaid calling cards that offer a
    reasonable number of minutes for the money. They charge small
    or no connection fees and when the customer makes the phone
    call, the connection is pretty good, and therefore, they can
    talk for the time that was advertised. Most of these companies
    have been in the industry for many years.
        On the other hand, the ``bad'' companies usually offer
    ``introductory fees.'' These are outrageous amount of minutes
    for very little money with no connection fees when they are
    launched, and these terms are heavily advertised, usually in
    Spanish TV, radio shows and posters. The ``introductory fees''
    hold true usually for a certain period of time and then, at the
    peak of their demand and without notice, the number of minutes
    decreases and the connection fees increase. Some cards might
    even disappear completely from circulation leaving the
    customer, the convenience stores and the wholesalers with
    ``invalid'' or disconnected cards and therefore bearing the
    loss.
        Some retail stores would give their customers credit and
    pass the ``bad'' calling cards to the wholesaler. When the
    wholesaler tries to pass the credit to the distributor, at
    least 40% of the time, it wouldn't work. The wholesaler
    wouldn't get credit for those cards and consequently take the
    loss.
        Most of the customers can't keep track of the change of
    terms on the new cards. They purchase the most popular cards
    that either give them much fewer minutes than advertised or no
    minutes at all because the connection is so bad that they have
    to hang up after a couple of minutes, and when they call again,
    they are charged a connection fee. These customers are
    frustrated and helpless because there is no clear way to get
    their money back or a channel to make a formal complaint, and
    no certainty that the complaint would even be heard. In
    addition to that there are language barriers and lack of
    knowledge of the US system.
        A very small portion of the consumers are knowledgeable of
    the prepaid calling card scams and call the same country
    frequently so they have a good idea of how many minutes $2
    should give them for their call. They complain about specific
    cards but know how the ``system'' works, so they take the time
    to inquire about the ``good'' cards at the moment for their
    country. These consumers try different cards until they find
    one that works for their country, at least for some time. When
    they realize the conditions change, they look for a new card.
    The general perception of this small group of consumers is
    that, at the end of the day, they got their money's worth in
    minutes.
        As a native Peruvian, for years I used to communicate with
    my family using prepaid calling cards and I have been a victim
    of the scams. Every Spanish speaking relative, neighbor, friend
    and client that I had the opportunity to talk to about the
    subject has had the same experience. This is especially true
    not only for low-income families who cannot afford a land line
    and standard international rates; it is also true for other
    groups such as military families and ex-Peace Corps volunteers.
    Personally, once I stopped working in the calling card
    industry, it was very hard for me to keep up with the new cards
    and their reputation and I finally opted for the international
    services of a reputable firm such as Nextel.
        In summary, prepaid calling cards are an invaluable
    resource for the immigrant community and low-income workers to
    communicate with their loved ones. However, based on my
    personal and professional experience with the Latino community,
    the industry needs to be regulated, especially in the following
    aspects:
         Use of deceptive marketing practices
         Disclosure of terms and fees charged to the
    consumer and their expiration date (if that is the case)
         Use of the Spanish language for the fine print
         Compliance with the advertised minutes
         Use of hidden fees
         Registration of each prepaid calling card (issuing
    company, customer service line and address) and expected time
    of circulation in the market
        Thank you, Mr. Chairman for giving me the opportunity to
    speak on behalf of the Latino community and express our strong
    support of the Prepaid Calling Card Consumer Protection Act of
    2008.
                                  ----------

        Mr. Rush. Thank you so very much. Dr. Marlowe, you are
    recognized for 5 minutes.

     STATEMENT OF JULIA MARLOWE, PROFESSOR EMERITUS, DEPARTMENT OF
         HOUSING AND CONSUMER ECONOMICS, UNIVERSITY OF GEORGIA

        Ms. Marlowe. Thank you very much, and I appreciate this
    opportunity to address the Committee on the subject of pre-paid
    telephone cards.
        In my role as professor at the University of Georgia in the
    Department of Housing and Consumer Economics, my most recent
    research has been with pre-paid telephone cards. In our
    investigation, we used over 250 cards in two different funded
    studies, and that information has been published in a number of
    scholarly and lay publications.
        The cards are convenient. They are a low-cost way to call,
    but there are problems. And I just want to say that we found in
    using these cards many of the things that Mrs. Zaragoza
    mentioned to be the case.
        The biggest problem has to do with these fees. They often
    are unclear. They may be deceptive. There is no standardization
    of terminology. One of the most common practices is for a card,
    such as this one, to say no connection fee. However, the back
    of this card says--this card is in English and Spanish, the
    fine print is also in English and Spanish--it says a post-call
    fee applies after each call. What is the difference between a
    connection fee and a post-call fee? It is really the same
    thing.
        So what they do is they have these per-call fees. They may
    call them connection fees, post-call fees, hang-up fees, long-
    talking fees, communication fees. They have all kinds of
    things.
        The other fee that is often given is some kind of periodic
    fee, and these can be assessed daily, weekly, semimonthly,
    monthly, sometimes a combination. This much for the first few
    days and this much for the next month, and whatever.
        The periodic fees have a lot of different terminology, too.
    The most common one is a maintenance fee. But they may call it
    a maintenance fee, they may call them administration fees, they
    may call them a tax, they may call it a service fee. And I
    didn't mention, some cards have a service fee per call and then
    a service fee per month. So some of them have numbers of
    these--they will have a maintenance fee and an administrative
    fee and so forth. So that is a problem.
        Standardization of terms would help to alleviate some of
    the confusion. We have been talking a lot about having fees
    disclosed. We actually found a lot of the fees disclosed, and
    even when fees are disclosed, problems persist. Now, let me
    give you one example we encountered in our study. It is also in
    my written testimony.
        A card was advertised as providing 1.9 cents a minute. It
    cost $5. The consumer expects to receive 263 minutes. In the
    fine print on the same poster where the 1.9 cents a minute was
    advertised, the fine print says there will be a 49-cent monthly
    maintenance fee, a 69-cent connection fee. We made two calls
    with the card. The second call 5 weeks after the first one.
    Deducting the 26 minutes for the maintenance fee and the 36
    minutes twice for the connection fee, we would expect to get
    163 minutes. That is what we got. The fees were disclosed. They
    were accurate. However, our actual cost was 3.1 cents a minute,
    not 1.9 cents a minute which was advertised.
        How many consumers would do all these calculations? Should
    these consumers have to do these calculations? Why do these
    fees exist? Some cards don't have fees. We used several cards
    that say, no hidden surcharges, no monthly fees, and we found
    that in fact you got all the minutes they said you were going
    to get.
        So my basic point is it is impossible to say how much the
    cost per minute is, it is impossible to say how many minutes
    you are going to get as long as you have the fees because the
    cost depends upon the way the consumer uses the cards. And in
    our second study, we purchased three cards of each brand. We
    used three different methodologies, and when we used the card
    all at once for one call, we were more likely to get all the
    minutes. But if you don't, then all these things happen. So I
    don't see any need for the fees.
        I think I have said enough.
        [The prepared statement of Ms. Marlowe follows:]

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        Mr. Rush. Mr. Eichberger, you are recognized now for 5
    minutes.

       STATEMENT OF JOHN EICHBERGER, VICE-PRESIDENT, GOVERNMENT
         RELATIONS, NATIONAL ASSOCIATION OF CONVENIENCE STORES

        Mr. Eichberger. Thank you very much, Mr. Chairman, members
    of the subcommittee. As the chairman said, I am John Eichberger
    with the National Association of Convenience Stores. We are an
    international trade association representing the convenience
    petroleum retailing industry. In the United States, our
    industry operates about 145,000 locations, 60 percent of which
    are owned by single-store operators, which means we are a very
    small, business-dominated industry but we have a significant
    impact. In fact, in 2007, we employed about 1.7 million workers
    and generated more than half a trillion dollars in sales
    through our channel of trade.
        I want to begin this morning by commending the sponsors of
    H.R. 3402 for their efforts in protecting the rights of
    consumers to have their reasonable expectations fulfilled when
    they purchase pre-paid calling cards. We strongly support
    efforts that promote consumer confidence by reducing deceptive
    and fraudulent practices with respect to the sale of any
    product, pre-paid calling cards or whatever else may sell
    through our stores.
        Over the past decade, calling cards have become a much more
    significant part of our industry. In 2007, our industry sold
    more than $350 million worth of these products. It is important
    for our members that the products they sell fulfill the promise
    to the customers, especially since the bulk of our customers
    are repeat customers. We have a relationship with them that we
    depend upon for our survival. These relationships can be
    damaged if a customer believes she has been ripped off by
    buying a product that did not live up to its advertised value.
    This is why NACS supports efforts to ensure that the calling
    cards we sell meet the customers' reasonable expectations.
        It is important to note that neither NACS nor its members
    are in a position to understand the intricacies of the
    telecommunications industry. My purpose today, however, is to
    simply explain how our industry is involved in the business and
    to support the efforts of the bill's sponsors to eliminate
    consumer deception and fraud. We applaud the provisions in the
    bill to protect honest retailers from liability associated from
    any deceptive practice employed by the card issuers. This is an
    appropriate and welcome component. As the Committee prepares
    for the consideration of the bill, we ask that you would
    consider a couple other minor modifications that will build
    upon these provisions that are currently in place for the
    retailers.
        In our industry, many convenience stores are supplied by
    multi-product distributors, and we use the term distributors as
    the wholesale deliveries. I believe some of the terminology
    using distributors may have a slightly different connotation,
    so I apologize if there is any confusion. I hope to clarify it
    here. These companies to which I am referring may deliver
    products as diverse as potato chips, candy bars, car
    fresheners, or pre-paid calling cards at the same time to their
    retail customers. These third-party distributors are not the
    companies who issue the cards. They do not provide the service,
    nor do they produce the accompanying materials that come with
    those cards. They simply act as middle men between the service
    provider and the retailer. NACS believes that these individuals
    should not be held liable for practices over which they have no
    control, similar to where the bill already protects retailers.
    We also suggest there be a clarification of liability in the
    Advertising and Other Promotional Materials section of the
    bill.
        We fully support the requirement that all terms and
    conditions be properly and clearly disclosed on all promotional
    materials. My colleagues on the panel pointed out several
    different components. We agree with that. The consumer should
    know exactly what they are buying and have no concerns or
    confusion about what product and value they are getting for
    their purchase. However, it is important that the legislation
    recognize the fact that neither retailers nor third-party
    distributors should be held liable for violations of these
    disclosure requirements on point-of-sale materials unless they
    themselves produced the material. Keep in mind, retailers do
    not have the ability to read the promotional material they have
    and assure that it satisfies statutory requirements, neither do
    the third-party distributors. Therefore, unless they are
    altering the materials, we do not believe they should be held
    liable for those provisions. We have provided staff with some
    suggested language for the bill that we believe would address
    these areas of concern. We hope the Committee will see fit to
    include these modifications as the bill moves forward.
        Mr. Chairman, the victims of deceptive practices in this
    business are frequently those who can least afford it and have
    the smallest ability to protect themselves or obtain remedy.
    NACS applauds the interest of this subcommittee on this topic,
    and I appreciate the opportunity to share our views and I look
    forward to your questions. Thank you.
        [The prepared statement of Mr. Eichberger follows:]

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        Mr. Rush. I thank the gentleman, and I thank all the
    witnesses for their fine testimony. The chair recognizes
    himself now for 5 minutes for questioning.
        Ms. Greenberg, you referred to a ``floor'' for disclosure
    requirements on these pre-paid calling cards. But could it be
    the case here that conflicting or inconsistent state and
    federal requirements all which is designed to fit on a wallet-
    sized card could cause consumer confusion? Is this is an area
    where one set of tough but extreme line and economical
    disclosure requirements might make more sense?
        Ms. Greenberg. Mr. Chairman, I do think certainly when
    there are states taking action, there can be some confusion
    within the industry, but I think it would be a terrible mistake
    to preempt state activity. And I think this is a classic case
    where the States were ahead of the Federal Government. States
    have been working on this, passing legislation, Attorneys
    General across the states. I think there are 18 states at this
    point who have taken action. They have taken it upon themselves
    early on, including in your State of Illinois, where the
    Attorney General likened the industry to if there were Olympic
    awards for fraud, this industry would be right up there.
        In 2004, the State of Illinois took very strong steps to
    curtail the abuses of this industry. So what we believe is that
    it is really important that the Federal Government set some
    basic standards, both for disclosure and then as I said in my
    statement, come back and look at whether disclosure is working
    because as we can see, sure, you can disclose some terrible
    terms but in my view they are unconscionable terms and they rip
    consumers off. So disclosure only takes you so far in
    protecting consumers.
        So the States just have been a great engine for consumer
    protection, and it is always our policy to ask the Federal
    Government to set a minimum standard so all states have to
    comply with that, and then let states who are interested in
    providing more protections for their citizens have the
    opportunity to do that.
        Mr. Rush. You stated that until recently there has been lax
    enforcement against pre-paid calling cards at both the federal
    and state level. Can you explain to us what changed to improve
    enforcement and are there still roadblocks to robust
    enforcement and will this bill fix it?
        Ms. Greenberg. Well, I think this bill has many important
    provisions in it. It does give the FTC the ability to go
    forward in some areas and give the federal agency jurisdiction
    that it doesn't now have. It would also call attention to the
    fact that the Federal Government and Congress is taking this
    area of consumer fraud very seriously.
        So I think that is a very good start. You have a patchwork
    of enforcement. That has already been referred to. You have
    some States that have acted, other States haven't. You have the
    FTC, they have taken some good stands. There has been a very
    good class action suit which has resulted in a $20 million
    settlement. So it is patchwork. There are some consumers that
    have absolutely no protection. So I think we are going in the
    right direction with this bill. I do think it will set a floor,
    and I hope that answers your question. Thank you, Mr. Chairman.
        Mr. Rush. Thank you. Dr. Marlowe, do you have any sense of
    how abuse in the marketing of these cards affects the Latino
    community in particular?
        Ms. Marlowe. Yes, I do. The first study we did, we only
    purchased cards that were in the Spanish language. They may
    have been in English and Spanish, but we purchased over 250
    cards and we were actually able to use 236 of them. Some of the
    abuses were, I have a card that says cargos no de conexion, no
    connection fee. But the fine print on the back in Spanish says
    los cargos conexion applicara, connection fees apply. So I
    suppose they could read the fine print and know that there is
    some discrepancy here, but obviously those kinds of things were
    happening.
        The other thing that we did is we called the customer
    service number for every single card. Our data collectors were
    fluent in English and Spanish, and they called and talked in
    Spanish. In some cases, the person that answered the number
    couldn't speak Spanish. One-third of the time customer service
    was not there. I can document. In fact, it is in the
    publications that there are some abuses.
        Mr. Rush. Thank you. The chairman's time is up. The chair
    now recognizes the ranking member for 5 minutes.
        Mr. Whitfield. Thank you, Mr. Chairman, and thank you all
    for your testimony this morning. Could you tell us which states
    have the most effective laws or regulations relating to this
    issue to protect the public from the fraudulent sale of these
    phone cards?
        Ms. Greenberg. Yes, I can speak to some of that. I know
    that Texas and Florida in particular, the Attorneys General in
    both states have taken pre-paid calling card companies to court
    and assessed a number of penalties and arranged for various
    injunctive relief to stop certain activities to do much better
    in forward disclosure. But the last time we checked, it was
    about 18 states who had taken some action. The State of
    Illinois, 2004, passed legislation. The governor signed it. And
    they require certification of calling card companies which is
    an important consumer protection. I got a couple of more----
        Mr. Whitfield. So 32 states have not acted----
        Ms. Greenberg. Something along those lines, yes.
        Mr. Whitfield. Dr. Marlowe?
        Ms. Marlowe. My colleagues, Mark Budnitz, who is a consumer
    law professor, and Martina Rojo who is also a consumer law
    professor, did a review of state legislation and administrative
    regulations and it is in this publication and I will leave this
    for the Committee. There is a review of all states.
        Mr. Whitfield. And for those of you familiar with the
    action taken by the 18 states, how does our bill that we are
    considering today compare with the provisions in those laws? Is
    there a glaring weakness in this bill or is it stronger than
    those or is it about the same or do any of you----
        Ms. Marlowe. I can't comment on that. My colleagues
    probably could, but I can't.
        Mr. Whitfield. Ms. Greenberg?
        Ms. Greenberg. Yes, one of the features that you see in
    some of the state settlements and bills is a requirement for
    certification or a licensing requirement for some of these
    operators.
        Mr. Whitfield. In order to sell these cards you have to be
    licensed?
        Ms. Greenberg. Yes, and the toll-free numbers have to be
    available. That is included in this legislation, too. And of
    course, this has the other feature of giving the Federal Trade
    Commission additional jurisdiction. But there are some
    similarities and there is very specific focus on disclosure in
    this bill, and that is also required in the state laws.
        Mr. Whitfield. Now, you mentioned in your testimony I
    believe the $20 million class action.
        Ms. Greenberg. There was class action brought by attorneys
    in New York City that resulted in a settlement. It was a $20
    million settlement with some money set aside for compensating--
    and some other provisions. And I don't know if that has been
    finalized, but it certainly appears in the news.
        Mr. Whitfield. I take it there must be thousands of
    companies that are distributing these cards. Would that be
    correct?
        Ms. Greenberg. I don't know if it is thousands.
        Ms. Marlowe. I met with Howard Segermark who was head of,
    for a while, a now-defunct trade association for pre-paid
    cards. That was about 8 years ago or so. And he estimated over
    500 companies at that time. Given that the industry has grown,
    there may be more than that now.
        Mr. Whitfield. Over 500? OK. Now, Ms. Zaragoza, what are
    some reasons that people are using these cards? So many people
    have cell phones today but why would they use these cards?
        Ms. Zaragoza. Well, most of these people, they really
    don't--some of them can access the Internet and buy cards from
    the Internet. They are not computer savvy, they don't have
    Internet at home, they don't have a land line, they don't have
    cell phones, or if they do, their minutes are very limited. So
    one of the features of these cards is that you can call from a
    phone booth, so you are not wasting your minutes.
        Mr. Whitfield. Yes. OK. And Mr. Eichberger, would you just
    mention once again the two issues that you are concerned about,
    you recommended some changes in this legislation about?
        Mr. Eichberger. Specifically I can summarize it in one main
    point. If you are not responsible for issuing the cards,
    servicing the cards, or printing the promotional materials, you
    should not be held liable for complying with the statute. If
    you have any culpability in it, then you stand the test of the
    law. But you should have the protection of the law so that you
    can go about your business the way you usually do.
        Mr. Whitfield. OK. Mr. Chairman, my time is expired.
        Mr. Rush. The chair will recognize himself through
    unanimous consent for one additional question. Ms. Zaragoza, I
    just want to know, in your experiences working in this
    industry, can you think of one time that a consumer has been
    repaid, gotten their money back, because of either they weren't
    given the minutes advertised or their minutes hadn't been used
    up or the money hasn't been used up by hidden fees? Can you
    think of one instance where they would have returned the money?
        Ms. Zaragoza. From the distributor, no, but some retail
    stores would, to preserve the relationship with the customer,
    they would give credit to the customer; and then they will pass
    on that credit to the wholesaler which, if they wanted to
    preserve their account, they will have to give them the credit.
    But then when they go to the distributor, they, more than 40
    percent of the time because I used to do that, too, like they
    wouldn't grant you the credit, so it is very difficult.
        Mr. Rush. Thank you very much. The chair really thanks the
    witnesses for taking the time out of their busy schedule to
    appear before this committee. Your testimony has been very
    helpful to us, and we intend to take the heart of your
    testimony into account as we proceed this afternoon in the
    markup of this bill. We really want to thank you so much, and
    you are now excused. Thank you again for your participation.
        [Whereupon, at 11:20 a.m., the subcommittee was adjourned.]
        [Material submitted for inclusion in the record follows:]

                   Prepared statement of Hon. Edolphus Towns

        Thank you Chairman Rush and Ranking Member Whitfield for
    holding this important hearing today on the Calling Card
    Consumer Protection Act. I look forward to the testimony of
    both panels of witnesses. They all have long records of service
    in their fields and will offer important insights for us to
    consider.
        The Calling Card Consumer Protection Act would be an
    important step in protecting some of our most vulnerable
    citizens from unscrupulous practices. In New York City and all
    over the country, calling cards are vital lifelines to
    immigrant communities and their families back home. There is a
    great deal of trust that goes into buying one of these cards.
    You have to trust that it will have the proper amount of
    minutes and that you are actually getting what you thought you
    paid for. There are major opportunities for fraud and abuse and
    that is why I cosponsored this bill. I hope this hearing can
    illuminate some of the ways this bill can improve. I look
    forward to working with my colleagues and commend Congressman
    Engel on his dedication to this issue.
        Thank you and I yield back the balance of my time.
                                  ----------

                  Prepared statement of Hon. Marsha Blackburn

        I thank the chairman for holding this important hearing
    today, and for scheduling an open markup on H.R. 3402 this
    afternoon. Every member of this subcommittee will agree that
    calling-card fraud is a heinous act perpetrated often against
    vulnerable populations throughout the United States.
        In tests conducted by the FTC, prepaid calling cards
    delivered only 50% of the average advertised time in 87
    separate tests. The Commission also found cost-per minute rates
    can skyrocket up to 87% higher than a customer might expect.
        Worse still, many cards marketed directly towards non-
    English speaking customers offer strikingly poor performance,
    leading to an estimated $1 million in everyday loss for
    Hispanic customers.
        ``Bad actors'' peddling fraudulent cards to vulnerable
    communities not only damage the families they seek to rip off,
    they also limit market share for corporate citizens who play by
    the rules and respect the rule of law. These companies pay
    taxes, employ working Americans, and produce a service millions
    depend on to communicate internationally. They deserve market
    protection no less than the customers seeking a quality product
    in exchange for an honest buck.
        H.R. 3402 takes a well-intentioned step to ensure customers
    receive the service they paid for. The FTC clearly needs
    additional regulatory authority to enforce appropriate market
    standards. I don't say that very often, but in this case basic
    statutory language can vastly improve consumer protection.
        The FTC should, for example, be able to promulgate limited
    regulations to require card distributors to disclose agreement
    terms on the back of a calling card. This is a common sense
    tool that will empower consumers to make sound decisions, and
    will prevent bad actors from ``hiding the ball'' and
    withholding critical information.
        However, new regulatory power at the FTC may not solve
    anything if a patchwork system of state regulations competes
    with a Federal standard. H.R. 3402 would therefore benefit from
    a federal preemption amendment to streamline existing
    regulations in eleven states. While no doubt well-meaning, each
    regulatory system creates additional and potentially
    unnecessary costs for calling-card distributors.
        A strong Federal standard need not weaken state standards.
    In fact, it is likely to improve state standards lacking
    appropriate consumer protections.
        Mr. Chairman I applaud your willingness to tackle this
    important issue, and respectfully yield back the balance of my
    time.