[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.

                                 
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